It has been a year since the closure of the Kirkuk-Ceyhan crude pipeline cut around 470,000 b/d of northern Iraqi crude exports, forcing the semi-autonomous region of Kurdistan to rein in its 400,000 b/d production. A potential solution may be looming as Iraq and Turkey seek to tighten relations. But Iraq's federal government is finding it difficult to strike a balance between repairing its rift with the Kurdistan Regional Government (KRG) in Erbil and complying with its Opec+ quota commitments. It looks likely Baghdad will soon have to sacrifice one move for the other.
Iraq's oil ministry has had to reiterate its commitment to complying with its Opec+ quota multiple times in the past few months, in private and in public. On 18 March, Iraq issued yet another statement, this time mimicking Russia's recent Opec+ measures, saying Baghdad intends to reduce its crude exports to 3.3mn b/d in the coming months to compensate for its lack of compliance with its Opec+ quota for January and February. Iraq's quota for the first half of this year is 4mn b/d. Iraqi exports in January and February stood at 3.34mn b/d and 3.434mn b/d, respectively, according to state-owned oil marketer Somo's data, not much higher than what it is promising. And Opec's secondary sources, including Argus, estimate Iraq is the group's biggest overproducer so far this year, with output at 4.217mn b/d and 4.203mn b/d in the first two months.
It is unclear how long Iraq will maintain this commitment to compensate for its overproduction. And a drop in exports does not necessitate a drop in production, because Baghdad can redirect the crude to domestic refineries that were off line for maintenance in the first two months of the year. Either way, Iraq's challenge goes well beyond the sticking plaster solution it is proposing.
Baghdad is weighing up the idea of asking Opec+ for a reassessment of how it calculates Iraq's production, potentially excluding KRG production. It urged the KRG in January to curb crude output to help the country adhere to its lower Opec+ production quota. But the KRG's foreign operators have figured out ways to ramp up crude production and offload it, whether through local refineries — with an estimated capacity of 120,000 b/d — or the black market. And Baghdad may be in no hurry to negotiate the restoration of KRG exports. "With Iraq's commitment to maintain exports at 3.3mn b/d, it is a bit far-fetched that there will be any serious initiative to restart crude exports from the north," a source tells Argus.
Budget blowout
Baghdad's own revenue needs are more urgent after the government of prime minister Mohammed Shia al-Sudani pushed through record budget spending of $153bn/yr for 2023-25 to unify Iraqi factions behind it. The budget law has also given Baghdad the upper hand over Erbil, with the latter unable to fulfil its obligations of either supplying 400,000 b/d to Iraqi storage at Ceyhan or handing the quantity over to Baghdad for domestic refining. The federal government, in turn, is stalling on payment of the 12.6pc of the budget it owes the KRG.
Funding the budget remains at the top of al-Sudani's priorities, as major spending constitutes the glue holding together the Shia Co-ordination Framework, the main group of political parties and militias backing the government. Higher oil prices this year will be a boon for al-Sudani. The country's fiscal break-even oil price is projected at above $90/bl, the IMF said this month. A worsening in already-strained relations between Erbil and Baghdad could result in a possible exit of the Kurds from the government, which will only complicate matters for al-Sudani. But Baghdad is still likely to choose good relations with Opec and higher oil revenues over trying to mend ties with Erbil.
