Kirkuk’s oil - How big loss is it going to be for Iraq?

The political turmoil of Iraq is getting more complicated, following the event when Mosul fell into the hands of some parties beyond the government’s control, thus leading the Iraqi army to withdraw from Kirkuk and the peshmerga forces of the Kurdistan Regional Government (KRG) to take over — the KRG announced that Kirkuk, which used to be a disputed area between it and the central government in Baghdad, is no longer as such and has irreversibly become part of the KRG.

To the exclusion of the demographic, geographic and political factors supporting the KRG’s demand of Kirkuk’s affiliation, which fall outside the scope of this article, we will only discuss the financial implications of the central government’s loss of Kirkuk, one of Iraq's major oil production and exportation cities.
Iraq’s exports, GDP and general budget revenues are still entirely dependent on oil. In the 2014 budget’s estimates, which have yet to be declared, oil revenues accounted for more than 90% of total revenues.

The International Energy Agency (IEA) announced that Iraq's oil production reached a phenomenal level of 3.6 million barrels per day (bpd) in February 2014 and that if oil production continues to improve this way, Iraq could achieve its sought rate of 3.4 million bpd.

Iraq currently produces 3.5 million bpd and exports 2.8 million bpd, an unprecedented significant increase during the past 25 years. Iraq is now the second-biggest producer in OPEC after Saudi Arabia. It exports 2.2 million bpd from the southern oilfields and 400,000 bpd from the Kirkuk oilfields, which are one of the three giant oilfields in Iraq. Yet, the eastern and southern regions of Iraq are still the wealthiest in terms of oil resources. All giant and mega-giant fields are located in the south and include 70% to 80% of Iraq's proven oil reserves, while 20% of these reserves are in Kirkuk, Mosul and Khanaqin.

According to Article 112 of the new Iraqi constitution, 17% of oil revenues shall be allocated to the Kurdistan region on the basis of the proportion of this region’s population to Iraq’s total population.
Yet, there are major disputes between the KRG and the central government on the distribution of oil resources. While some believe that this large percentage of the proceeds of Iraq's oil significantly contributed in the KRG’s current economic and urban upswing, KRG officials claim that the central government is not fulfilling its obligations in this respect. Ashti Hawrami, the KRG minister of natural resources, stated that when the central government drafted its general budget for 2014, it assumed that the KRG would export at least 400,000 bpd. But this figure was incorrect and was entered in the budget without any discussions with KRG officials. Hawrami said that in accordance with the 2013 budget, the KRG should receive $6 billion, but received only $900 million, which forced it to resort to domestic and foreign borrowing.
On the other hand, the central government officials stated that the region produces and exports oil without referring to it, in violation of the constitution. In the past, the KRG exported produced oil via tankers to Turkey, and the federal government saw this as smuggling. But today, following the construction of a new pipeline from northern Iraq to the port of Ceyhan in Turkey, exportation is made via this pipeline. Turkey signed a 50-year agreement with the KRG to export the region’s oil. The latter has 45 billion barrels of proven oil reserves with a rapid increase in production capacity expected to reach 1 million bpd in 2015 compared with 400,000 bpd in 2014.
A Turkish company managed by the public sector sells oil from the Kurdistan region and deposits oil export proceeds in foreign banks. Baghdad’s government filed a complaint against Turkey before the International Chamber of Commerce in Paris for facilitating the exportation of oil from Kurdistan without any authorization from the federal government in Baghdad as stated in the constitution. Hawrami indicated that after the announcement of the affiliation of Kirkuk to the KRG, the latter is hoping to increase its exports of oil by eightfold by the end of 2015. He stressed that the region is committed to sharing Kirkuk's oil revenues with the federal government.
It is worth mentioning that the oil-related disputes between the federal government and the KRG fall within a wide range of disputes over land, the independence of the Kurdistan Region and political influence. Moreover, the federal government is currently heavily investing in the southern Iraqi oilfields and is hoping these fields will significantly raise Iraq's production capacity in the foreseeable future. Yet, this is not the case. If the control of the peshmerga forces of the city of Kirkuk is not solved through negotiations and if the KRG keeps Kirkuk’s revenues, then the federal government must reconsider the budget and modify its expenses in light of the shortfall caused by the interruption or cessation of Kirkuk's oil export revenues. The federal government may also maintain the same expenses while looking for other sources of revenues; otherwise the budget deficit will increase.