Turkey’s run-off election cripples major oil exports from northern Iraq

Turkey’s runoff election is compounding delays to restart about 450,000 barrels a day of Iraqi crude oil exports, as Ankara studies its relationship with Baghdad, analysts and market sources told CNBC.

Oil generally flows into Turkey from both the Iraqi state and the semi-autonomous Kurdistan Regional Government (KRG). Specifically, this crude from Kirkuk uses the Iraq-Turkey pipeline linking the northern Gulf country to the Turkish port of Ceyhan in the Mediterranean. But the flows have been paralyzed since March 25 by a legal dispute involving Federal Iraq, the KRG and Turkey.

The resolution depends on the outcome of a second presidential vote this weekend, but a prolonged shutdown could reduce Iraqi crude output.

The KRG had previously transported its crude exports by truck until it connected its main oil producing fields to the Iraq-Turkey pipeline and began shipping crude in 2014. The federal government in Baghdad denounced the independent sales of Erbil crude as illegal, threatening to ban customers from such supplies. to buy the largest volumes of crude from Basra in Iraq.

After a nine-year trial, the Court of Arbitration of the International Chamber of Commerce in Paris found that Turkey had violated the 1973 version of a pipeline transit agreement between Baghdad and Ankara over the period 2014-2018. Turkey was ordered to pay Iraq about $1.5 billion in damages, according to Reuters. A second arbitration proceeding covering 2018 to date is still ongoing.

The ICC verdict follows a national victory for Baghdad, after the Iraqi federal court in February 2022 declared the KRG’s oil and gas legislation unconstitutional and invalidated its contracts with foreign companies. The move led US companies to forfeit contracts in Kurdistan and deterred 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 was able to restart flows via Ceyhan and was awaiting Ankara’s response.

“Our colleagues in Turkey said there were assessment issues that they had to take into account. And that resulted from the earthquake,” he said, noting that an Iraqi delegation will be sent to a unspecified time in Turkey to discuss restart.

Kirkuk crude is exported from the Botas terminal in Ceyhan in southern Turkey, separated from flows of Azeri crude shipped from the nearby Baku-Tbilisi-Ceyhan port terminal. Botas resumed loading the day after the devastating February 6 earthquake that killed at least 50,000 people in Turkey and Syria, according to the UN. The BTC terminal suffered a longer outage.

Several trade, shipping and oil-producing sources — who could only comment anonymously due to contractual obligations — told CNBC that, following a request from Baghdad, Ankara was widely expected to resume crude exports from Kirkuk since then. Ceyhan on May 13 – a day before presidential elections in Turkey, whose inconclusive first round on May 14 hampered oil recovery.

The sources pointed out that Turkish authorities are loath to take responsibility for the restart, while incumbent President Recep Tayyip Erdogan is battling his main rival Kemal Kilicdaroglu to extend his rule by around two decades.

“The main problem with oil resumption via Ceyhan is the ongoing elections in Turkey. Another obstacle to oil resumption is the ongoing ICC case in Paris against Turkey by Baghdad since 2018 until Ankara is asking Baghdad to drop this case, but Baghdad has not done so yet,” Political analyst and former Kurdistan official Lawk Ghafuri told CNBC.

“The ruling party in Türkiye [Erdogan’s AKP] wants to settle the elections and then deal with KRG oil with Baghdad.”

Other analysts have further underlined Turkey’s priority to avoid further legal disputes by insisting on a strict and clear agreement on the legality of oil exports between Baghdad and Erbil. The current agreements between the two counterparts are political rather than legislative agreements.

“There are still a lot of technical details that need to be ironed out between the KRG and Baghdad. [is] to export and which party controls the revenue,” Yerevan Saeed, a research associate at the Arab Gulf Institute in Washington, told CNBC.

In addition to deciding on commercial distribution, Baghdad and Kurdistan may also have to rework agreements under which foreign companies have prepaid sums to Erbil in exchange for oil volumes, as well as reimbursement contracts for foreign oil producers. Kurdish, according to market sources.

Saeed noted that Ankara could expand negotiations with Baghdad to cover Euphrates water resources and Turkey’s military presence in Kurdistan and Sinjar.

Bilal Wahab, Wagner Fellow of the Washington Institute for Near East Policy, agreed that controlling Kurdish oil export flows gives Turkey the power to ask Baghdad to drop its fine and second arbitration lawsuit, as well as to redefine the scope of Ankara’s trade relationship. with Iraq.

“This arbitration award forces a decision on Ankara: should they continue to do business with Kurdistan, where it has led to legal problems with federal Iraq, or should they use this as a bird in hand to chain and have a chance to do business in Iraq? Overall, by shutting down the pipeline, Turkey doesn’t lose much, maybe transit fees,” he told CNBC via phone, referring to Kurdistan’s payment to transport crude along the Iraq-Turkey pipeline.

Third party candidate Erdogan’s endorsement by Sinan Ogan on Monday strengthened Erdogan’s position as Turks head to the polls.