Iraq restarts Kirkuk crude flows through KRG pipeline

Iraq has restarted flows of Kirkuk oil through the Kurdistan Regional Government's (KRG) export pipeline to the Turkish port of Ceyhan.

Initial flows have resumed at a rate of 50,000-100,000 b/d, which state-owned Somo will market, oil ministry spokesman Assem Jihad said. Baghdad agreed a preliminary agreement with the KRG around a week ago, and technical evaluations were subsequently conducted to restart pumping from Kirkuk fields through the pipeline.

As of this morning, no crude had reached Somo facilities in Ceyhan.

The restart was prefigured earlier this week, when Somo surprised the market by lowering December's official formula price for Kirkuk by $1.25/bl for European clients, leaving it unchanged for US customers. This compared with increases for the December prices of Somo's larger Basrah streams to both regions. Kirkuk and Basrah Light and Heavy crude are competing sour grades and typically see price moves in similar directions.

The federal government retook the 275,000 b/d Avanah Dome and Bai Hassan field from KRG control 13 months ago, limiting output and halting exports from these fields through the KRG export pipeline.

Crude from the federally-run Kirkuk fields has been supplying some of the needs of Iraq's 140,000 b/d Daura refinery. Jihad said southern crude would now supply the refinery as it was before October last year.

The export pipeline's pumping rates have averaged 417,000 b/d so far this month, compared with a peak of 600,000-650,000 b/d before the takeover. The KRG recently increased the pipeline's capacity through the addition of a pumping station at Shaikan, to 1mn b/d from 700,000 b/d.

Despite this being the first breakthrough in a political standoff between Erbil and Baghdad in over a year, industry sources remain cautious. Some have described the tentative deal as a way for the new government in Baghdad, including new oil minister Thamir Ghadhban, and the KRG to rebuild relations, rather than a grand agreement.

One of the outstanding issues is Iraq's draft budget for 2019, which has sparked disapproval amongst political parties, including the KRG, over allocations distributed to provincial service sectors.

Iraq's oil revenues so far this year have reached around $71.6bn, excluding KRG earnings, well above the $65.3bn budgeted for the whole country in 2018. And next year's draft budget of $56/bl for total country exports of 3.88mn b/d gives an even higher estimation for oil revenues. The Iraqi parliament said it would increase investment spending and allocate 4 trillion dinars to support a number of regions, which would include the petrodollar projects.

But Kurdish politicians say the region's 12pc budget share is insufficient, especially as it was around 17pc in previous years. The IMF halted payments for a $5.34bn loan to Iraq this year because it deemed transfers to the Kurdistan region to be too low. The KRG sent a delegation to Baghdad yesterday to discuss financial issues.

In addition, Iraq's oil ministry has been under pressure to secure export outlets for the Kirkuk fields, where production resumed at a limited rate earlier this year after having been shut in since October 2017. Iraq had a plan to truck volumes into northern Iran, but trucking and logistical issues hampered exports on this route. And this has been put on ice while Baghdad waited for news on US sanctions. With little progress on government plans to repair a pipeline from Kirkuk to Ceyhan — bypassing the KRG pipeline — Baghdad has little choice but to resume exports through the KRG pipeline.

Federal Iraq last sent Kirkuk crude through the Iraq-Ceyhan pipeline over the September 2016 to June 2017 period, with an average of 43,000 b/d, Argus estimates. Baghdad's Kirkuk crude was largely shipped by pipeline to Turkish refiner Tupras' 113,4000 b/d Kirikkale refinery, and more infrequently shipped by sea. Iraqi state marketer Somo has struck several 2018-long-term supply contracts with Mediterranean buyers that include the option of lifting Kirkuk crude, if and when the supply is available. Some market participants said that the Iraqi company was also offering the option for 2019 loading, although term allocations for next year have yet to be finalised.

The KRG separately ships its own Kurdish Blend Test (KBT) volumes through the Iraq-Ceyhan pipeline. Argus estimates KRG supplies averaged just 300,000 b/d in the first half of the year, before picking up to 379,000 b/d over July-October because of increases in field production. As of last November, the KRG restarted adding heavy sour Shaikan crude to the pipeline to supplement its KBT availabilities. The KRG-marketed crude is primarily lifted and often re-traded by five companies — trading firms Vitol, Trafigura, Glencore, Petraco and Russia's Rosneft.