Turkey’s runoff election is paralyzing key oil exports from northern Iraq

Analysts and market sources told CNBC that Turkey’s runoff election has exacerbated delays in restarting Iraq’s roughly 450,000 barrels per day of crude oil exports as Ankara studies its relationship with Baghdad.

Oil usually flows through Turkey from the Iraqi state and the semi-autonomous Kurdistan Regional Government (KRG). More specifically, this Kirkuk crude flows down the Iraq-Turkey pipeline that connects the northern Gulf states with Turkey’s Ceyhan port in the Mediterranean. But those flows have been paralyzed since March 25 by legal disputes involving the Iraqi Federation, the Kurdish Autonomous Region and Turkey.

A resolution is pending the outcome of a second presidential vote this weekend, but a prolonged shutdown could reduce Iraqi crude output.

KRG previously exported its crude across the border by truck until it connected its main producing fields to the Iraq-Turkey pipeline and began shipping crude in 2014. Federal Baghdad has condemned Erbil’s independent crude sales as illegitimate and threatened to bar customers of such supplies from buying Iraq’s larger volumes of Basra crude.

After nine years of litigation, the International Chamber of Commerce Arbitration Court in Paris has ruled that Turkey violated the 1973 version of the pipeline agreement Between Baghdad and Ankara from 2014-2018. According to Reuters, Turkey was ordered to pay about $1.5 billion in compensation to Iraq. A second arbitration proceeding involving 2018 to the present is still ongoing.

The ICC judgment follows Baghdad’s domestic victory after Iraq’s federal court declared KRG’s oil and gas legislation unconstitutional and declared its contracts with foreign companies null and void in February 2022. This decision led to the decision of the US company to withdraw from the Kurdistan contract and prevented some KRG oil buyers from making further purchases.

Iraqi Oil Minister Hayan Abdul-Ghani said on May 23 that Baghdad had informed Turkey that it could restart the flow of oil through Ceyhan and awaited a response from Ankara.

“Our colleagues in Turkey said they had to look at some assessment issues. It was caused by the earthquake,” he said, noting that an Iraqi delegation would be sent to Turkey at an unspecified time to discuss reopening.

Kirkuk crude is exported from the Botas terminal in Ceyhan in southern Turkey, separate from the Azerbaijani crude stream that is shipped from the nearby Baku-Tbilisi-Ceyhan port terminal. Bottas resumed loading the day after the devastating February 6 earthquake that killed at least 50,000 people in Turkey and Syria, according to the united nations. The BTC terminal is out of power for a longer period of time.

Several trade, shipping and oil production sources – who can only comment on the condition of anonymity due to contractual obligations – told CNBC that Ankara was widely expected to resume exports from Ceyhan to Kirkuk on May 13 at the request of Baghdad. Crude oil, which is the day before the presidential election. Oil’s recovery was hampered by Turkey’s inconclusive first round of talks on May 14.

Sources have stressed that Turkish authorities are reluctant to take responsibility for the restart, with incumbent President Recep Tayyip Erdogan fighting arch-rival Kemal Kildaroglu to extend his roughly two-year term. rule.

“The main problem of restoring oil through Ceyhan is the ongoing elections in Turkey. Another obstacle to restoring oil is Baghdad’s lawsuit against Turkey at the International Criminal Court in Paris, from 2018 to the present. Ankara asked Baghdad to drop this case, But Baghdad has yet to do so,” Political analyst and former Kurdistan official Lawk Ghafuri told CNBC.

“Turkey’s ruling party (Erdogan’s Justice and Development Party) wants to resolve the election issue and then deal with Baghdad on the KRG oil issue.”

Other analysts further highlighted Turkey’s insistence that Baghdad and Erbil reach a strict, clear agreement on the legality of oil exports to avoid further legal disputes. The current deal between the two counterparties is a political agreement, not legislation.

“There are still many technical issues to be resolved between the KRG and Baghdad. While a tentative agreement has been reached, details have yet to be fleshed out on how the oil will be exported and which party will have control over the revenue,” said Eri of the Arabian Gulf Institute in Washington. Winseyid told CNBC via email.

In addition to deciding on marketing allocations, Baghdad and Kurdistan may have to rework agreements for foreign companies to advance payments to Erbil in exchange for oil volumes, as well as repayment contracts for foreign Kurdish oil producers, market sources said.

Saeed noted that Ankara may extend talks with Baghdad to cover water resources on the Euphrates and Turkey’s military presence in Kurdistan and Sinjar.

Bilal Wahab, a Wagner fellow at the Washington Institute for Near East Policy, agreed that controls on the flow of Kurdish oil exports gave Turkey the ability to demand that Baghdad forgo fines and a second arbitration proceeding, and redefine the scope of Ankara’s business relationship with Iraq.

“This arbitration award forces Ankara to decide whether they should continue to do business with Kurdistan, which has already led to legal disputes with the Iraqi Federation, or whether they should use this as a bird in the hand to continue to obtain the right to do business in Kurdistan. Opportunity Iraq? All in all, by closing the pipeline, Turkey doesn’t lose much, maybe transit fees,” he told CNBC by phone, referring to Kurdistan’s payment for crude oil transported along the Iraq-Turkey pipeline.

third party candidate Sinan Ogan’s support for Erdogan on Monday strengthened Erdogan’s position as Turks headed to the polls.