By Energy Hedge Funds Syndicate
The delay in the renewal of the agreement for the operation of the Kirkuk-Ceyhan oil pipeline has served as a reminder of the many obstacles that still have to be overcome if the line is ever to fulfill its potential, both as an export route for Iraq and as a source of transit revenue for Turkey.
Talks between Iraq and Turkey over the renewal of the agreement stalled earlier this week. Although Turkish Energy Minister Taner Yildiz publicly predicted that the impasse could be overcome within "a week to ten days", privately Turkish officials were less optimistic. They claimed that Iraqi officials were insisting that the new agreement should protect any oil transported through the pipeline against court sequestration orders. Turkish officials maintain that such a guarantee would violate international law.
The Kirkuk-Ceyhan pipeline has been operating well below capacity for nearly 20 years. First commissioned in 1976, the pipeline runs for 620 miles (990 kilometers) from Kirkuk and nearby oilfields in northern Iraq to the port of Ceyhan on Turkey's eastern Mediterranean coast. In 1987, a second pipeline was added, running parallel to the first. The twin pipelines currently have a combined capacity of 1.5 million barrels/day (b/d) of crude oil.
Turkey paid for the construction of the approximately 400 miles (640 kilometers) of pipeline running across its territory in the expectation that transit revenue would prove to be a lucrative source of foreign exchange. Under a 20 year agreement signed in 1985, Iraq agreed to pump a minimum of 700,000 b/d along the pipeline. The agreement was extended for a further five years in 2005.
However, damage inflicted by US-led allied bombing during the 1991 Gulf War was followed by UN sanctions, which only began to be eased in 1997. The twin pipeline is built above the ground and, in recent years, has proved an easy target both for insurgents in Iraq and for the Kurdistan Workers' Party (PKK), which has been waging a 26 year-old insurgency of its own for greater rights for Turkey's Kurdish minority. The introduction in 2007 of additional security measures has reduced the number of attacks on the pipeline, but they still occur.
Damage as a result of sabotage has exacerbated the already poor state of repair of the pipeline. In 2009, throughput averaged 480,000 b/d, considerably below both the pipeline's capacity and the minimum guaranteed to Turkey. In February 2010, the Kirkuk-Ceyhan pipeline carried an average of 455,000 b/d, approximately 22 percent of Iraq's total exports of 2.07 million b/d.
However, although Iraq remains publicly committed to increasing the throughput - and has even discussed expanding the capacity - of the Kirkuk-Ceyhan pipeline, in practice it has focused more on plans to improving its facilities around Basra and Khor al-Amaya in anticipation of a rise in exports from its southern oil fields.
In the run-up to the beginning of negotiations over the renewal of the Kirkuk-Ceyhan agreement, Turkish officials had indicated that they would raise the issue of the Iraqi government's future plans, particularly whether it was willing to increase the throughput and perhaps even increase the capacity of the pipeline. Turkish officials had suggested that they would also discuss improving security along the pipeline, and had warned that they could also push for higher transit fees unless Iraq delivered on its guaranteed minimum throughput.
The Iraqi demand that the new agreement should include guarantees against sequestration appears to have taken the Turkish officials by surprise. But the demand was based on experience rather than hypothesis. In July 2007, pumping was temporarily interrupted after a Turkish court ordered that oil from the pipeline should be used to pay $50 million of a $100 million debt incurred by the Iraqi state during the time of President Saddam Hussein.
The court ruled that the oil was an asset of the Iraqi state and, as it was being pumped across Turkish territory, creditors were within their rights to file a case with a Turkish court for its seizure. Although the case was subsequently resolved and oil once again began to flow along the pipeline, it has created a legal precedent; and raised the possibility that more cases may be filed with Turkish courts for the seizure of oil arriving at Ceyhan in payment both for debts incurred by the Saddam regime and as compensation for damages and losses incurred as a result of its actions.
Privately, Turkish officials remain adamant that including any guarantees against the sequestration of the oil in the new agreement for the Kirkuk-Ceyhan pipeline would be in breach of international law and maintain that they are confident of signing a new accord with the Iraqis. But, for the moment at least, it is unclear how the issue is going to be resolved.
( OilPrice.com )