KRG is on Target with Oil Supply Commitment to the Federal Government as Agreed in the 2015 Federal Budget

deal with the federal government, enabling Iraq to increase oil export and revenue at a critically important time for the stability and unity of the country. In line with its commitment to the terms of the federal budget of 2015, the KRG has until the end of February met almost 97% of its agreed supply of crude oil to SOMO in the Turkish port of Ceyhan (see table at this link). The KRG in turn expects the federal government to honour its obligations under the budget law and to provide the KRG with its legal monthly entitlement to its share of the budget, including the agreed special allocation of funds for the Peshmerga forces. Details of the discussions that led to the 2015 budget are outlined below. Interim agreements in November and December 2014 The oil provisions in the 2015 federal budget came about as the result of a series of initiatives between the KRG and the new federal oil minister. They stem from a mutual desire to end the damaging and protracted dispute over KRG oil export and budgetary allocations caused by the former administration in Baghdad. In November 2014, the KRG reached an interim agreement with Baghdad to supply 150,000 barrels per day of its produced oil to SOMO in Ceyhan. In return, the federal government agreed to send $500 million to the KRG for each of the final three months of 2014. The KRG delivered the oil and Baghdad made payments for October and November, but did not deliver the payment for December. Nevertheless, the KRG persisted with its pragmatic and constructive approach and in December reached an undertaking with the federal government that the KRG would in 2015 supply an average of 250,000 barrels of Kurdistan crude oil per day to SOMO in Ceyhan, and facilitate the export of an additional 300,000 bpd from the fields in Kirkuk operated by the North Oil Company (NOC) - a total average of 550,000 bpd. The KRG agreed to facilitate the flow of stranded oil from the NOC fields though its own pipeline network to Turkey. The main Iraq-Turkey pipeline was damaged by ISIS in early 2014 and has been out of commission since then. It was agreed that this new export arrangement would be finalized in the 2015 federal budget. This was seen as an important first step to build confidence between the two sides and pave the way for comprehensive discussions on all the outstanding issues between the KRG and the federal government relating to oil and gas. January 8 – Understanding of the Parties Another high-level bilateral meeting took place on January 8, 2015, at the Ministry of Oil in Baghdad, to put flesh on the bones of the new cooperation between the KRG and the federal authorities. The meeting, which was attended by the Iraqi Minister of Oil and the Kurdistan Region Minister of Natural Resources, agreed the following: 1. In the first three months of 2015, the KRG to transfer to SOMO, 375,000 bpd as an average daily rate. 2. For the rest of the year, transfers rise to more than 600,000 bpd to complete the average daily rate of 550,000 bpd for the year. 3. The parties agreed a joint presence in “all the places that the parties have their presence,” especially Ceyhan, Fishkhabur (the Iraq-Turkey border metering station) and Avana. 4. Adoption of a joint single-pricing policy by both parties for the sale of crude oil in Ceyhan, commencing Feb 1, 2015, in addition to declaring common specifications of the crude oil. 5. The supply of the raw natural gas from Bai Hassan and Avana fields to the North Gas Complex (for use by the federal government). 6. Cooperation and assistance to the KRG with respect to spare parts and experts to maintain the Avana pumping station (operation of turbines). 7. Provision (by NOC) of the two dismantled cold-gas stripping towers located in Hanjeera and Shuraw, for use by the KRG. 8. Receipt of raw gas from KRG and the treatment of it in the North Gas Complex and the return of the treated dry gas for use by the KRG. 9. Representatives of KRG to participate in the meetings related to production planning for crude oil and the pricing committee and the opening of respective offices of the two ministries (MNR and MoO) for coordination and follow up. 10. After the approval of the federal budget of 2015, discussions to be held at the highest level to solve all pending matters related to oil. January 23 export schedule details At a subsequent meeting on January 22-23, the KRG and federal government agreed a detailed delivery schedule for the transfer of the oil volumes to SOMO in Ceyhan, ie the 250,000 bpd from Kurdistan fields and 300,000 bpd from Kirkuk fields (see table at this link). Passage of federal budget, 2015 Against this background of agreements and understandings, the federal budget, including the provisions on oil and gas and the special payment to the Peshmerga, was passed by the parliament in Baghdad on January 29. The budget made the following clear provisions: Article 1 (B) Calculate revenues from exporting crude oil based on an average price at $56 per barrel and an average export at 3,300,000 bpd including 250,000 bpd from quantities of the Kurdistan Region’s produced crude oil and 300,000 bpd from quantities of Kirkuk Governorate’s produced crude oil and registering all fulfilled revenues, as a final, actual revenue, in the account of the State’s general treasury. Article 10 First The Kurdistan Region’s share is specified to be 17% of gross expenses explained in (sovereign expenses) attached to this Law and is paid by the Federal Finance Ministry. Second The 17% share of the Kurdistan Region is specified from the total expenses literally. Fifth Allocate a percentage of Iraq Army’s federal infantry forces’ allocation to the Peshmerga forces according to proportion of population, considering it as part of the Iraqi security apparatus. Article 11 Third If any party (the Federal Government, the Kurdistan Regional Government) does not fulfill its oil and financial obligations agreed upon in this budget, the other party is not obliged to fulfill its obligations weather they were oil or financial. Post Budget Technical Cooperation The crude oil from both the KRG and NOC fields is transported via the Kurdistan pipeline network to the KRG storage tanks in the Turkish port of Ceyhan. There it can be transferred to SOMO’s storage tanks. It is acknowledged by both sides that due to the need for technical upgrades to the infrastructure linking the NOC fields and the KRG pipeline network, the NOC fields would not be able to deliver 300,000 bpd in the first quarter of 2015. The KRG is currently upgrading the Khurmala-Fishkhabur pipeline at its own cost to increase the pipeline capacity. Work is expected to finish by the end of March. Once the capacity of the pipeline from Kirkuk is increased, the throughput of oil from NOC is expected to rise substantially to meet the annual targeted average of 300,000 bpd and fulfil its part of the 550,000 bpd commitment. The KRG is satisfied with the level of technical cooperation with the North Oil Company in Kirkuk, but is still waiting for implementation by federal authorities of the technical assistance commitments under the provisions of the January 8 agreement (paragraph 6 of January 8 Understanding). The KRG is meeting its obligations under that agreement. Interruptions to operations It is noted that in the first two months of 2015, there were substantial stoppages of oil export from Iraq, due to interruptions to the pipeline flows on the Turkish side of the border. In January and February such outages caused at least 15% shortfall in pipeline availability (see table at this link). Such interruptions are not under the control of the KRG and are considered as a Force Majeure event by all the parties. It should also be noted that infrastructure bottlenecks at the tank farm on SOMO’s side in Ceyhan have caused SOMO to inform the KRG on a number of occasions that it is unable to receive KRG oil as per the planned delivery schedule. While SOMO is transferring oil to its tankers or to local refineries, it is unable to take any oil from the KRG tanks. In Summary The KRG remains fully committed to the oil deal with the federal government and will abide by the Budget law of 2015. It is on track with its promised delivery of KRG-produced oil to SOMO in Ceyhan, and is also facilitating the export of otherwise stranded oil produced by the North Oil Company in Kirkuk. The accompanying tables to this announcement clearly illustrate that the KRG’s agreed commitment of oil supply to the federal government has been fulfilled. Further information on KRG’s agreed oil supply to the federal government in Ceyhan in 2015 is included in the table at this link which is also illustrated graphically at this link . To date, the federal government has provided the KRG with less than 20% of its share of the budget for January and nothing for February.