Zhitong Finance learned that the Iraqi Prime Minister said that due to differences over the cost issue, the restart of an important oil pipeline in Iraq, which had been shut down for more than a year, was blocked, and this setback unwittingly helped the country get closer to OPEC's production limits. The Iraqi Government has not been able to agree on how much to pay international oil companies operating in the northern part of the country. Iraqi Prime Minister Mohammed Shia Al-Sudani said the federal government's budget allowed it to pay $8 per barrel of oil, while the contract with the Kurdistan regional government paid $26 for oil companies. The political impasse has affected production in the region and delayed the restoration of the pipeline.

The pipeline can transport nearly 0.5 million barrels of oil from Kurdistan to the Turkish coast every day, and the pipeline's closure has led to billions of dollars in lost revenue. However, restarting it will leave Iraq in a dilemma. Iraq has failed to comply with OPEC+ production quotas due to urgent financial needs, but has repeatedly stated that it will make up for overproduction. Failure to reach the limit has been a focus of controversy with Saudi Arabia, the de facto leader of OPEC+. “We are committed to complying with OPEC's decision to maintain oil prices to balance the interests of users and producers,” Al-Sudani said.

Plumbing issues

In March of last year, after an arbitration court asked Turkey to pay $1.5 billion in compensation to Iraq, Turkey stopped construction of this pipeline because Turkey was not authorized by the Iraqi government to transport oil through this pipeline. The Turkish side claims that the pipeline was closed because it needed to be repaired after two major earthquakes in February. The Turkish government said in October that the pipeline is ready to be put into operation and the resumption of transportation depends on Iraq.

But financial and legal issues have arisen, such as paying costs to the company. International oil companies said they also want to clean up past membership fees, including $1 billion of oil produced between September 2022 and March 2023.

Due to the closure of exports, these companies have been producing some crude oil and selling it locally. Iraqi officials have previously said that this production has caused problems in complying with the quotas set by OPEC (OPEC). According to data, Iraq's daily production is limited to 4 million barrels, but last month's daily production was 4.32 million barrels. The country and some other OPEC+ members will gradually increase these restrictions starting in December.

After years of war and internal conflict have hit Iraq's industry and oil production, Al-Sudani is eager to increase production over the long term. British Petroleum (BP.US) signed a preliminary agreement in August to help increase production in Kirkuk. Iraq has also been repairing and upgrading damaged refineries to help reduce fuel imports.

He said, “Due to the war and siege of the past 40 years, Iraq has been slow to make real rational use of our natural gas and oil wealth. Now we're looking at how to actually use the new wealth we have and how to use them effectively.”

Economic diversification

However, Al-Sudani said that the price of Brent crude oil fell to around $72 per barrel, close to its lowest level since 2021, which highlights the need for economic diversification. Iraq is OPEC's largest oil producer after Saudi Arabia, and most of its revenue comes from oil exports. It requires a much higher price than it is now to balance the budget.

The International Monetary Fund (IMF) has long stated that Iraq needs to develop its private sector, that its huge public sector wage bills hinder economic progress, and that successive governments have done little to curb wage increases.

Al-Sudani said his government wants to invest around 40% of oil revenues in Iraq to boost the development of the non-oil sector. He added that the planned trade corridor extends from Basra province in southern Iraq to Turkey and then to Europe is Iraq's “dream.” He wants the Gulf countries to help fund the $17 billion project.