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Ashti Hawrami: Oil Export Stoppage Caused By The North Oil Company

Ashti Hawrami: Oil Export Stoppage Caused By The North Oil Company
Kurdistan Region Minister of Natural Resources Ashti Hawrami. Photo Rudaw.



Rudaw: Minister Hawrami, thank you for agreeing to answer our questions. As you imagine many of our readers speculate about KRG’s oil export arrangements with Baghdad, so are you able to tell us some of the facts about the nature of your agreement with Baghdad?

Ashti Hawrami: Basically, we have an oil export Agreement with Baghdad, which is reflected in the 2011 Federal Budget. In January 2011 the KRG reached an interim agreement (the Agreement) with the federal government to enable the Kurdistan Region contractors to be paid to export oil from their contract areas. It was agreed that 50% of the exported oil sales revenue would be available to the KRG to cover the costs of the contractors basis until such time that a permanent agreement is finalized based on the Constitution. The average level of oil export to be contributed by the Kurdistan Region was agreed to be around 100,000 barrels per day. This amount consists of 85,000 barrels of Crude Oil from the producing fields and 15,000 barrels of Fuel Oil from the Region’s refineries.

The inclusion of the Fuel Oil on the KRG side was reciprocated by a clear obligation on the Ministry of Oil to resume direct supply of Fuel Oil to the Kurdistan Region cement plants and other factories. (The supply was to be resumed from the Baiji refinery, which had been previously stopped by the Ministry of Oil in 2010.) In fact, the Ministry of Oil did not manage to resume the Fuel Oil supply, so the regionally processed Fuel Oil continued to be consumed locally instead of being exported. This means that the KRG’s export target obligation based on the Agreement is only 85,000 barrels of Crude Oil per day.

In addition, it was assumed that KRG would be able to have continuous access to the export system managed by NOC (North Oil Company) of the Ministry of Oil to ensure that the agreed KRG export target can be met. However, in practice the export system had suffered daily interruptions, therefore it has not been accessible to the KRG for some 29 days (cumulatively) since early February 2011. Taking this record of export system downtime into consideration, the average KRG’s oil export obligation should be expected to be reduced based on the availability of the operating hours of the export system– hence KRG’s obligation means an obligation of 72,000 barrels per day.

"Unfortunately, before checking the facts on the ground, some officials took the opportunity to falsely accuse the KRG for the stoppage"

Rudaw: What about the payments from the share of the sales revenue you mentioned earlier?

Ashti Hawrami: Based on the Agreement, the export targets that I mentioned were only expected to be achieved assuming that KRG’s contactors receive 50% of the oil sales revenue to compensate them for their past and their ongoing costs. This payment process has been relatively too little and too late. If you wish I can elaborate on that later.

Rudaw: You summarized the oil export levels required under the Agreement, but can you tell us about the actual performance targets achieved by the KRG so far?

Ashti Hawrami: The actual performance by the KRG and its dedicated contractors has been outstanding. As you know, the Crude Oil export from the Region started in February this year. We started at 70,000 barrels per day level, and this rate has increased rapidly by late June/early July to around 175,000 barrels per day. This means, on average, around 130,000 barrels per day over the whole export period so far.

This puts the cumulative oil export during this period plus the early part of September at around 28 million barrels. So, even if one hypothetically assumes that the export completely ceases from now on till the end of 2011, the export that has been already achieved amounts to around 84,500 barrels per day (that is to say as an average for the whole 11 months period from early February through December 2011). This already meets KRG’s original expected average Crude Oil export obligation of 85,000 barrels per day.

Rudaw: So, has the export stopped? What is really happening, because a few days ago Baghdad said the KRG has stopped the export and you responded by saying that there was a technical problem caused by NOC over-pressurizing the pipeline, but yesterday and also today we heard that the export has stopped again? Can you tell us the real truth about all of this?

Ashti Hawrami: The original stoppage was caused by the NOC (North Oil Company). Unfortunately, before checking the facts on the ground, some officials took the opportunity to falsely accuse the KRG for the stoppage. The facts are well known, so I don’t wish to repeat the details as these are stated in our press release of 11 September 2011.

As for the new stoppages of yesterday and today, again this is part of the same problem related to NOC. It would appear that some leaks have developed in the main pipeline south of the KRG’s area, which could have been caused by the same over-pressurizing practice that caused the problem earlier for the KRG. It would appear that this time, the whole pipeline export system is down, but we hope that it will be repaired very soon by NOC to enable us to continue with the KRG export as before.

Rudaw: Are you able to elaborate more on the payment now, you mentioned a 50/50 revenue split earlier?

"The oil production capacity of the Region stood at 100,000 barrels per day as far back as 2008"

Ashti Hawrami: That is another story. Let me briefly explain the situation. On the sales revenue side, the total amount derived by SOMO so far from the past KRG export should be around $2.8 billion. According to the Agreement, KRG should have received $1.4 billion from this revenue to compensate the contractors for their costs. It was agreed that any payments received would be treated as cash advances until the companies’ costs are independently audited and verified. We, therefore, agreed that the KRG would be responsible if any overpayments made prior to the completion of the required audits.

Rudaw: Did KRG receive all the payments as agreed?

Ashti Hawrami: No. Instead of the expected amounts I mentioned, so far KRG has only received around $450 million dollars from the Federal Ministry of Finance, because of the constant interferences of some anti-KRG officials who do not wish this Agreement or any other process of cooperation with the Kurdistan Region to succeed. Essentially, those people are now trying to say that the payments should continue once the independent audit is completed, but that was not in any way in the original Agreement.

Rudaw: The KRG has passed its own Regional Oil and Gas Law in September 2007, so why did you not start oil export earlier?

Ashti Hawrami: This is a good question. Actually, the oil production capacity of the Region stood at 100,000 barrels per day as far back as 2008. The Ministry of Oil officials then refused to cooperate to resolve the export issues. Had they cooperated with the KRG at that time, the export could have started much earlier and the capacity could have been increased to 250,000 barrels per day by 2010, and we could have been exporting over 300,000 barrels per day by now. This past non-cooperation has not only delayed the export, it also caused the oilfield investment programs to slow down, and this in turn caused Iraq some $18 billon in sales revenue losses over that period. This avoidable loss is on top some $3 billion year on year losses resulting from all the unchecked and the unquestioned gas flaring practice carried out in the South, all at the expense of all the Iraqi people.

Rudaw: Despite this export, they are still not cooperating with the KRG, because we still hear them saying that your contracts are not transparent and illegal?

"Frankly, we are dismayed by these renewed attacks on KRG’s contracts"

Ashti Hawrami: Unfortunately, the same officials who were responsible for the export delays that I have outlined are still giving themselves the right to criticize KRG’s policies. It would appear that they are not even satisfied with their ongoing interference with KRG’s payment process, they are also making the job of any manager or official of the Ministry of Oil very difficult if he dares to cooperate with the KRG on the export. Yes, regrettably, also we appear to be going back to the old “illegal” and “not-transparent” slogans they used in the past and issuing decrees blacklisting more companies who have recently chosen to bring their investments to the Kurdistan Region.

On the legality and transparency of KRG’s contracts, we wish to reiterate that we continue to adhere to the Constitution of Iraq, and we are ignoring all unfounded accusations of non-transparencies. We are proud of our processes, as any company working or has attempted to work in the Kurdistan Region can verify the degree of the openness and the highest levels of transparency followed during all the negotiations and in arriving at contract permits and approvals. Frankly, we are dismayed by these renewed attacks on KRG’s contracts. Instead, those people should be putting their efforts to a better use by solving Iraq’s many other pressing services problems. They should leave the oil export Agreement alone and let the others in the Ministry of Oil and the Ministry of Finance to manage it, as this way we can together maximize revenues for all the Iraqi people.

Rudaw: We thought that principles of the federal hydrocarbon law were agreed as part of the formation of the government in Baghdad, so why the arguments again?

Ashti Hawrami: You are correct that there is a political agreement, which states that the draft law must be prepared based on the Constitution, and of course also to be jointly supported in the House of Representative (CoR) in Baghdad. We thought the CoR draft was reasonable, it was prepared in consultation with all the parties, and it is in line with the Constitution. However, surprisingly, without any consultation, the Council of Ministers rushed through a centralized and an unconstitutional draft to prevent the CoR version being progressed in the Parliament. This is the most important piece of legislation that as far as we are concerned must be consistent with our political agreement as well as fully compliant with the Constitution.

"The increase in KRG oil export must be fully supported and encouraged"

Rudaw: Minister Hawrami, thank you, if we could ask you one final question, are you overall happy with what is happening and do you have any final comment for our readers?

Ashti Hawrami: Of course, I am not content with the unfortunate interferences on our payments, on export interruptions, and developments on the oil law. But, I am content with our results. I think that I can say that we are proud of our achievements and our contractors’ performances. Despite all the hurdles, KRG’s export capacity is now around 200,000 barrels per day and this could increase rapidly to 300,000 barrels per day. I am sure that this increased capacity will be put to practical use, because from our part we remain committed to the export Agreement. We also remain confident that eventually common sense will prevail through constructive dialogue and we shall arrive at a lasting constitutional solution about all our outstanding issues. Iraq badly needs the increase in the revenue, therefore the increase in KRG oil export must be fully supported and encouraged which means the payments to our contractors must continue without any new obstacles or preconditions.
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