Iraq oil stalemate worsens as Gulf Keystone cuts production in Kurdistan

(Bloomberg) – Gulf Keystone Petroleum Ltd. becomes the latest oil producer in Iraqi Kurdistan to cut production amid a dragging legal battle between the region’s government and Baghdad that has pushed up crude prices.

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The London-listed company said it expects to shut down Shaikan field flows processed at Plant 1 on Friday. Those going to Manufacturing Plant 2 will be sent to storage tanks for about two more weeks before closing.

Gulf Keystone “remains of the belief that the suspension of exports will be temporary,” it said.

The Iraqi federal government and Kurdistan officials will meet again next week in Baghdad. These could lead to the resumption of more than 400,000 barrels a day of Iraqi oil exports passing through Turkey, a KRG official told Bloomberg.

Other companies, including DNO ASA and HKN Energy, have already started cutting production in Kurdistan. Genel Energy Plc expects to shut down the Sarta field this weekend, according to a company release.

Turkey closed a pipeline running from the northern Iraqi region to the Mediterranean port of Ceyhan on Saturday. That came after an international economic court ruled that the Kurdistan Regional Government should not export oil from the terminal without Baghdad’s consent.

The Paris-based International Chamber of Commerce has largely ruled against Turkey in a case brought by the Iraqi federal government. The move was part of Baghdad’s longstanding attempt to rein in the KRG, which ultimately wants independence, and gain more control over its oil.

Brent crude is up 5.7% this week to above $79 a barrel, partly on traders’ fears of a long standstill. The US has urged the KRG and Baghdad to quickly resume exports.

Baghdad says it is up to the KRG to break the blockade by accepting that Iraq’s state-owned oil marketing company, known as SOMO, should handle Kurdish supplies from Ceyhan.

Smoother Relationships

Relations between the Erbil-based KRG and Baghdad have improved since Mohammed Shia Al-Sudani became Iraq’s prime minister in October. The ICC case was brought by a previous government.

“We were already seeing talks before the arbitration panel reached its verdict,” said Richard Bronze, head of geopolitics at Energy Aspects, an adviser to energy traders. “There’s a reasonable chance for them to strike some sort of deal that will allow the pipeline to restart sooner rather than later.”

Gulf Keystone’s shares are down 18% this week, while Norway’s DNO is down 6.3%.

The combined storage capacity for PF-1 and PF-2 at Shaikan is about 150,000 barrels, Gulf Keystone said. Shaikan produces around 45,000 barrels of crude oil daily.

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