August 3, 2012 / 2:05 PM / 5 years ago

COLUMN-The outsized impact of the Kurdish oil dispute: Campbell

By Robert Campbell
    NEW YORK, Aug 3 (Reuters) - This week's thaw in the dispute
between the Iraqi federal government and the Kurdistan region
over oil export revenues will offer hard-pressed Mediterranean
refiners less help than expected and underscores the wider
impact of this issue.
    The semi-autonomous Kurdistan Regional Government (KRG)
offered this week to partially resume exports of oil from the
region for a month. 
    Although the dispute has directly affected some 175,000
barrels per day of Iraq's Kirkuk blend exports, the shutdown has
exacerbated the tight spot supply situation in the Mediterranean
for sour crude oil, driving up the price of Russian crude
throughout Europe.
    Baghdad and the KRG have been at loggerheads over the
sharing of oil export revenues and regional control over the oil
industry for some time.
    The KRG unilaterally halted oil exports in April to pressure
the central government to turn over revenues it says is owed for
the oil.
    Steps by the KRG to expand its oil exploration efforts with
the help of international oil firms, and in defiance of Baghdad,
have only further inflamed the issue. 
    Led by ExxonMobil, international oil majors have
risked Baghdad's wrath to sign exploration deals with the KRG
this year even though Iraqi federal oil legislation remains
     With Europe's ban on imports of Iranian crude oil coming
into effect on July 1, the loss of some Kirkuk supplies has come
at a particularly difficult time.
    Kirkuk is seen as a good substitute for Iranian crude, but
the export disruption has made it difficult for Mediterranean
refiners to substitute the Iraqi grade for Iranian oil.
    Crude oil traders say the dispute has contributed to lengthy
delays in loading Kirkuk shipments for export as the loss of
supplies from Kurdistan has exacerbated delays in fulfilling
Kirkuk export programs. 
    Tankers are forced to wait at least three weeks to load oil
at Ceyhan, imposing significant costs on customers, traders say.
    There are few things oil refiners hate more than uncertainty
over the delivered cost of crude oil, other than, perhaps, the
risk that a cargo may not arrive in time to ensure continuous
    The uncertainty over shipping costs and the time it may take
to receive oil has driven Mediterranean refiners to search for
more reliable supplies.
    The result has been steady buying of Russian Urals crude
oil, adding further upward pressure on the relative price of the
main Russian export blend grade, which was already boosted by
the ban on imports of Iranian oil.
    Strong prices for Urals in the Mediterranean have also
supported the value of the grade in Northern Europe due to the
active arbitrage trade between the Baltic and the Mediterranean.

    That in turn has lent some additional support for the prices
of other short-haul Northern European crudes, including the four
North Sea grades --Brent, Forties, Oseberg and Ekofisk-- that
set the price of Brent.
    A key question for European oil traders is how long this
dispute may go on. 
    The KRG offered this week to partially resume shipments to
the export terminal at the Turkish port of Ceyhan, but only
until Aug 31, a move that will only somewhat alleviate the
    Should the resumption of exports prove only temporary it
will offer only a limited reprieve to Mediterranean crude buyers
and will do little to alleviate concerns over the reliability of
Kirkuk exports.
    A great deal of money may have to change hands just to
ensure flows start to get steady. The KRG says it is owed
hundreds of millions of dollars by Baghdad for oil exports.
    Foreign companies operating in the Kurdish region say they
have not been paid for the majority of the oil they have
exported since 2009.
    Yet up front cash is far from the only problem. 
    The heart of the dispute is the Kurds' desire for greater
autonomy from Baghdad and control over its own oil industry.
    The furious reaction of Iraqi federal officials to the
exploration deals signed between the KRG and international oil
majors suggests that an agreement over this issue remains
    Iraqi politicians have been struggling since 2007 to pass
federal oil legislation to replace the Saddam Hussein-era laws
that still govern Iraq's oil sector.
    In the absence of progress on this crucial legislation
further disputes between Baghdad and the KRG that affect oil
exports remain likely.

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