BAGHDAD—An oil-sales deal between Iraq and the semiautonomous
Kurdistan Regional Government is close to collapse about six months
after it was signed, undermining the country's unity as it
struggles to fight Islamic State and contain an escalating
financial crisis.
Months of acrimony between Baghdad and Erbil, the KRG's capital,
came to a head in June, when the Kurdish side reduced the amount of
oil it sold through Iraq's state-owned Oil Marketing Company, known
as SOMO, and began ramping up its independent sales of oil through
the Turkish port at Ceyhan.
The sales undercut an agreement struck in December that gave
Iraq's central government access to revenue from Kurdish oil, which
accounts for about 15% of the 3.8 million barrels the country pumps
each day on average. In exchange, the Kurds were to get 17% of
federal expenditure—an amount KRG officials say hasn't
materialized.
"The oil deal between Baghdad and KRG has reached a deadlock,"
said Kawa Mohammed, a Kurdish member of the Oil and Energy
Committee in the Iraqi parliament. The accord "was built on
uncertain foundation, very weak foundations, with a lack of trust
on both sides."
If the deal does collapse, it could rupture the fragile unity
that Iraq relies on to fight Islamic State, which took over more
than a quarter of the country in a startling blitz last summer. The
KRG's economy is facing a fiscal crunch that threatens its ability
to support the Kurdish fighters who have taken a leading role in
combating the extremist insurgency.
A failed deal would also thwart one of the signature
achievements of Iraqi Prime Minister Haider al-Abadi, nearly a year
into a premiership that many Iraqi and foreign policy makers had
hoped would usher in a new era of Iraqi unity to confront Islamic
State.
That fight has largely stalled nearly two months after the
extremist insurgent group took over the provincial capital of
Ramadi in a major defeat for Iraqi forces. Without the presence of
U.S. troops, Iraq's government is shouldering most of the ground
fighting, straining a budget that relies heavily on oil
revenue.
The situation underscores the uncertainty surrounding Iraq's oil
industry as it pumps record amounts of crude, in part to pay for
the conflict with Islamic State. With oil trading at prices 45%
below last year's highs, Iraq's government coffers rely on its
ability to fight for buyers in the export market with rivals like
Saudi Arabia and Kuwait.
Under the December agreement, the Kurds were to market 550,000
barrels of oil each day through Iraq's SOMO. The Kurds say they
instead exported most of their oil independently in June, because
Baghdad was giving them less than their share of the budget. They
also cited a need to make good on deals with oil traders who gave
the Kurds cash up front for oil to be delivered later.
Those sales "kept the region financially afloat at a crucial
time for the security and stability of Kurdistan and Iraq," the KRG
said Thursday.
Iraqi Arab policy makers fault the Kurds for failing to provide
their agreed-upon share of the oil.
"Baghdad didn't pay what Kurdistan was asking for because
Kurdistan didn't give Baghdad what it was supposed to," said Jabbar
Abdul Khaliq, an Arab member of parliament's finance committee, who
held out hope that the December 2014 deal might prevail.
Richard Mallinson, geopolitical analyst at Energy Aspects, who
closely follows the Iraqi oil sector, said the oil deal was
"crumbling."
"It feels like it will probably limp along for a while longer,
but in practical terms the deal is probably on its last legs," he
said.
The risk is particularly acute for the Kurds, whose balance
sheets are squeezed by an escalating financial crisis, the influx
of millions of displaced people from Iraq and Syria, and the burden
of fighting Islamic State militants.
The KRG's front line with Islamic State extends for more than
1,000 kilometers (620 miles) and the province hosts more than 2
million displaced people—challenges that add up to a $1.4 billion
burden on the semiautonomous state, said Mr. Mohammed.
Kurdish state employees, who make up a majority of the region's
workforce, haven't been paid since April and many are protesting.
Oil companies such as Genel Energy PLC, Gulf Keystone PLC and
Norway's DNO ASA have gone unpaid for much of the crude oil they
have exported via the pipeline to Ceyhan for the KRG. Last month,
Erbil sought international investors in a proposed bond issue to
mend a nearly $5 billion budget deficit.
"The fight against ISIS...cannot happen if you don't have the
economic means to do it," Ashti Hawrami, the KRG's minister for
natural resources, told a London conference in June.
Selina Williams and Sarah Kent contributed to this article.
Write to Matt Bradley at matt.bradley@wsj.com
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