Erbil, Kurdistan Region, Iraq – In 2014, Dr. Maliki’s government cut the entire Kurdistan budget creating a financial crisis for the people of the Kurdistan Region.
At that time, despite the limited capacity to export oil, the Ministry of Natural Resources (MNR), under the directive of the Kurdistan Region Oil and Gas Council, moved quickly to organize alternative financial support for the Kurdistan Region through a) increasing pipeline export capacity, b) boosting actual oil exports, and c) successfully securing from buyers pre-payments against future oil supplies.
Therefore, as a direct result of the above measures, the KRG had managed to survive financially during 2014, although payments of some government salaries were partially lagging behind. However other unexpected factors came to play that impacted hugely the financial situation such as the added costs ofthe war against IS terrorists and the economic burden on the Region from hosting 1.8 million refugees and internally displaced people.
Then at the end of 2014, following new budgetary discussions, the KRG and the entire political leadership in Kurdistan (including the 5 political parties in the coalition government) decided to give a chance to the new government in Baghdad under its new Prime Minister Dr. Al-Abadi. This cooperation and coordination reached with Baghdad, was encouraged by all the Kurdistan political leaders which in general consisted of a plan to supply certain volumes of oil from the Kurdistan Region to SOMO in return for the KRG’s full federal budget entitlement during 2015, which was estimated at around $1bn per month, and this became an undertaking towards KRG in the federal budget law of 2015.
At the time of that agreement, although MNR was very pleased with the agreement with Baghdad, MNR internally registered its doubts based on experienced gained from all the past failed agreements whether Baghdad could or would in reality fulfil its financial obligations to Kurdistan under the agreed oil-for-budget plan. Nevertheless, MNR fully encouraged the KRG’s decision to proceed and actively did all that was possible to make the plan work for both sides.
Regrettably, as predicted by MNR, the KRG received only one third of its budget entitlement from Baghdad in the first five months of 2015. This led to a rapid deterioration of the financial crisis in Kurdistan Region and caused a significant backlog in the pay of government salaries, including those of the Peshmerga and security forces.
MNR predicting that the crisis will be deepened on the monthly basis, in the spring of 2015 it organized a series of meetings with the Regional Oil and Gas Council, the Council of Ministers, the political leadership of the five parties in Kurdistan, and our MPs from the Kurdistan parliament and the Kurdistan MPs from the parliament in Baghdad to explain and warn what lies ahead.
MNR explained the economic realities of the situation facing the Region and urged action to back reforms to cut government costs.
The Minister of Finance, supported by the Council of Ministers, took a lead on this and produced a credible reform plan to cut government costs and increase non-oil related revenues of the Region.
Unfortunately, the Minister of Finance did not receive the needed political support (particularly from some key decision makers in his own party) to implement that reform program. Thus, the budget shortfall from Baghdad, coupled with ever increasing KRG expenditure, led to more delays in government salaries and support for the Peshmerga and other vital security services.
By late spring this year, the inability or unwillingness of Baghdad to provide the KRG with its fair share of the agreed budget, had become clear to the KRG and the entire political leadership of Kurdistan Region, but despite the overwhelming evidence, no action was taken by the political leadership to deal with this new deteriorating reality.
Only in mid June did the political parties of Kurdistan reluctantly agreed to MNR’s long-suggested proposal to increase direct sales of KRG oil to international exporters in order to provide a direct and predictable economic lifeline to our Region.
That political decision took effect on 24 June, 2015. The program involved the following:
- MNR to boost the export to 500,000 barrels per day of crude oil from KRG-operated fields, assuming no interruptions to the flows in the pipeline beyond MNR’s control, and no political interference or backtracking of the decisions taken.
- It was assumed and hoped that an average netback price of $55 per barrel will remain in place for the rest of the year.
- This was then expected to generate around $850 million per month, which was deemed to be sufficient to pay ongoing government costs and salaries and begin covering the backlog in the salaries.
- MNR was assigned responsibility for finding buyers for KRG crude oil and for agreeing with the previous buyers of KRG’s oil (who had made pre payments in 2014) to defer their outstanding pre-payments until 2016 to enable KRG to receive the full $850 million per month during 2015.
- It was assumed that this $850 million per month would also be enough for the KRG to set aside some money to pay the exporting International Oil Companies in order that they maintain and then increase export levels, thus to increase the revenues even further.
- It was also agreed that the Ministry of Finance would be in charge of receiving all oil revenues at the KIB and HalkBank.
- On July 7th, a further government directive, signed by the KRG Prime Minister, authorized Minister of Finance with controlling the movement of money from KRG’s account in the HalkBank in Turkey.
- It was also agreed that all other revenue, if not directed to Halk Bank for any practical reason, should be directed to the Ministry of Finance account at the KIB.
As a result MNR duly performed the following:
- Immediately signed contracts with experienced international oil traders and buyers for its available export volumes, a process approved by the Regional Oil & Gas Council around the 3rd week of June 2015.
- MNR obliged the buyers guarantee $850m monthly assuming the average export levels are achieved.
- MNR persuaded by agreement all the traders involved to defer receiving oil against their outstanding pre-payments until 2016.
- However, in practice MNR faced significant interruptions to the oil flow through the pipeline in Turkey due to sabotage and theft, leading to reduced export levels and the loss of revenue to the KRG of $501m (detailed of which was published by MNR recently).
- Failure to meet contractual export delivery targets below the agreed average levels released the buyers from their full payment obligations of $850m per month, however even then the traders were once again persuaded not to cut back on the payments on those occasions.
Adding to all these challenges, the price of crude oil has dropped since mid June 2014 by approximately 20%.
Despite all the above difficulties, the following payments have been achieved or expected in the last two months (from June 24 to Aug 24):
- As of the 20th of August, the KRG received $1,241.6 million into the KIB account in favor of Ministry of Finance – it was then up to the Ministry of Finance to follow up with KIB on the management and movement of the funds received.
- A further deposit of $187.5m will be made into the same KIB account on 21st of August (i.e. by tomorrow).
- A further $125.0 m is also expected on or before August 24.
- Thus a TOTAL of $1,554.1 m, which is more than promised under the agreements reached with the traders despite the reduced oil exports caused by interruptions.
- In addition, there were KRG’s refined product purchases, which amounted to $134.0 m using export oil swaps for diesel for KRG’s power stations.MNR is therefore well ahead of the money gathering schedule compared to the agreed program, despite the difficulties and the flow interruptions.
The money flow management and transfers through KIB and HalkBank are solely assigned to the Ministry of Finance. But Ministry of Finance has been unable to bring all the oil revenues into Kurdistan for reasons cited below:
- Minister of Finance has not been able to take the procedural and administrative steps to take financial responsibility for the Minister of Finance with the HalkBank to improve on the flow of the funds into Kurdistan. It is understood that this is because of direct political interference by some people in his own party, in order that they can shift the blame to MNR for the delay payment to the Peshmerga, and the government employees.
- Also there are some recognized difficulties in bringing dollars into Kurdistan via the KIB in a timely manner and converting them into dinar to pay salaries. Ministry of Finance is working on solution to these difficulties, and MNR has always been ready to assist if needed.
- MNR has stuck to the task at hand and continues to deliver for the people of Kurdistan.
- MNR operates on professional and technical basis throughout all its organisations, contrary to the myths circulated by certain politicians and their media outlets; MNR does not allow party politics to interfere with its work.
- MNR defends the interests of the people of Kurdistan against political interference and is taking the lead in helping to secure the economic stability of Kurdistan and its future.
- MNR also believes that the Minister of Finance is doing an excellent job at his ministry, but to be more effective and more successful, he should not be hindered by political influences in a way that damages the interest of the people of Kurdistan Region.
- Minister of Finance should be supported and authorised as soon as possible in its program of economic reform and MNR is ready to assist side by side in this process.
- MNR is confident that providing there are no future big interruptions, whether through sabotage or theft or indeed political interferences or back tracking on agreed export policies, the immediate needs of the people of the Kurdistan can be met through continued direct oil sales.
- And the doors of the KRG should always remain open for dialogue and discussion with our colleagues in Baghdad on ways to resolve all outstanding issues on oil and gas and develop long term cooperation that could lead to a win-win situation for all concerned.