Kurdistan payments to oil companies at risk as KRG-Baghdad dispute reignites
- Iraq stops budget transfers to Kurdistan as the region fails to deliver oil to the state oil marketing company
- This makes further delays in payments to the oil companies operating in Kurdistan more likely
- Negative sentiment for oil and gas companies in Kurdistan
Iraq and Kurdistan fall out again on federal budget transfers to the region. According to Argus Media and Kurdistan 24, the Kurdistan Region of Iraq has not fulfilled its part of the deal in 2020 and the federal government instructed the ministry of finance to stop making payments to Kurdistan as well as recover the amounts already transferred. Last year Baghdad and Erbil (Kurdistan) reached an agreement that the Iraq government would make transfers from the federal budget to Kurdistan, to pay the salaries of civil servants, including Peshmerga, the region’s military forces, among other things. In exchange, Kurdistan committed to handing over 250,000boepd of oil, roughly half of its exports, to the state oil marketing company (SOMO) controlled by the federal government.
Kurdistan already suffering from lower oil prices. The region, which heavily relies on oil and gas revenues, is already suffering from lower oil prices as proceeds from oil exports have dropped at least threefold since January. As a result, Kurdistan had to delayed payments for the November 2019-February 2020 shipments, at least until the end of the year, but promised to settle invoices on a monthly basis starting from March 2020. This commitment is now at risk as the Kurdistan Regional Government (KRG) has lost one more source of budget revenue and will have to reallocate its limited resources and prioritise expenses. As we've written before, Kurdistan’s ability to make timely payments to the oil and gas industry is not certain in the new oil price reality, and the recent suspension of transfers from the federal budget exacerbates those risks.
Iraq's federal government under political pressure. Iraq almost entirely depends on hydrocarbons as more than 90% of its budget revenues are generated by the oil and gas industry. With oil prices dropping at least threefold since January, the impact on the federal budget revenue is likely be of the same magnitude. Add Covid-19, the discontent of the Iraqi population with government policies and the inability of political parties to agree on several prime ministerial nominees, and the political backdrop starts to look quite challenging. With mounting financial and political pressure, the federal government is unlikely to resume payments to Kurdistan without receiving its share of the region's oil production. On the other hand, Kurdistan may be reluctant to give up 250,000boepd of oil exports at a time when both federal and regional budget revenues have fallen with no certainty that Baghdad will be able to send money.
How can the payments made to Kurdistan be recovered? We do not know what financial instruments the federal government has to recover the payments already made to Kurdistan in 2020, but for non-financial instruments, there is a recent example. In 2017, after Kurdistan voted for independence, the federal government responded by deploying armed forces to regain control of Kirkuk, a big oil producing province that was under KRG control in 2014-17. We hope the military option is not being considered, but we cannot completely rule it out since it was last exercised less than three years ago.
Negative sentiment for oil and gas companies in Kurdistan. The scenario of a severe 2017-like escalation between the KRG and the federal government pose a downside risk for the sector.
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