Oil Smuggling to Iran: Kurdistan Region Risks Ties with Washington

Oil Smuggling to Iran: Kurdistan Region Risks Ties with Washington

7-12-2024

KURDISTAN, Iraq (AP) — Hundreds of oil trucks leave every day from sites near Erbil, the capital of Iraq’s Kurdistan region, heading north to Turkey and east to Iran, snarling traffic on the region’s winding, mountainous highways.

Observers say this trade could affect the close relations between the United States and Kurdistan.

A US official noted that this trade could also put Kurdistan on a collision course with its close ally Washington, which is assessing whether this trade violates any US economic sanctions imposed on Iran.

Reuters quoted another US official as saying that Washington is examining the oil trade to assess compliance with sanctions imposed on Iran.

The U.S. Treasury declined to comment. “U.S. sanctions on Iran remain in place, and we engage with our partners on a regular basis about sanctions implementation, but we do not disclose details of the conversations,” a State Department official said.

The trucks are the most visible aspect of a massive operation to move oil from the semi-autonomous Iraqi region to Iran and Turkey in opaque, informal deals that have been rampant since a formal export pipeline was shut down last year.

According to sources, more than 1,000 trucks carry at least 200,000 barrels of low-priced oil daily to Iran and also to Turkey, but in smaller quantities. It is a trade that generates about $200 million a month.

Asim Jihad, spokesman for the Iraqi Oil Ministry, said that the Kurdish trade did not have the approval of the Iraqi government, and that the state-run Iraqi Oil Marketing Company (SOMO) is the only official body allowed to sell Iraqi crude.

He said the government does not have accurate figures on the quantities of oil being smuggled to Iran and Turkey.

But a senior Iraqi parliamentary official familiar with oil affairs said Baghdad was aware of the details of the trade but was avoiding public criticism as officials sought to resolve disputes with Erbil.

The source, who requested anonymity due to the sensitivity of the issue, added that pressuring Erbil to stop oil smuggling would reduce the region and deprive it of all sources of funding, which could lead to its collapse.

Iraqi officials said the size of the unofficial exports, which have not been previously reported, is one reason why Iraq has been unable to comply with production cuts agreed by the Organization of the Petroleum Exporting Countries (OPEC) this year.

“OPEC is now less tolerant of smuggling and has been known to impose punitive measures on members who violate the law,” said Jim Krane, an expert at the Baker Institute at Rice University in Houston. “I doubt we will see any backlash against Baghdad because the Kurdish region is known to be outside the control of the central authorities.”

Until last year, the Kurdistan Region exported most of the crude oil it produced through the official pipeline between Iraq and Turkey, which runs from the oil-rich Iraqi city of Kirkuk to the Turkish port of Ceyhan.

But those exports, which had been around 450,000 barrels per day, stopped in March 2023 when an international court ruled to grant a request from the Iraqi government to halt shipments, leaving the pipeline in legal and financial limbo.

The Baghdad government, which has long maintained that it is the sole authority to sell Iraqi oil, has successfully argued that Turkey arranged the exports with the KRG without its consent, in violation of a 1973 treaty.

Local officials said there was no accounting or recording of any revenue from the trade in the coffers of the Kurdistan Regional Government, which is struggling to pay the salaries of thousands of public sector employees.

“There is no trace of oil revenues,” said Ali Homa Salih, a lawmaker who was head of the Kurdistan parliament’s oil committee before it was dissolved in 2023. He estimated the trade at more than 300,000 barrels a day, higher than most other estimates.

Hiwa Mohammed, a senior official in the Patriotic Union of Kurdistan (one of the two ruling parties in the region), said that the oil passes through the border crossings with the knowledge of the regional and Iraqi authorities.

Officials from the Kurdistan Regional Government did not respond to requests for comment.
There is no official spokesman for the KRG’s Ministry of Natural Resources, which oversees Kurdistan’s oil trade.

A senior official in the Kurdistan Ministry of Natural Resources said that the region’s oil production is 375,000 barrels per day, 200,000 of which are trucked to Iran and Turkey, and the rest are refined locally.

“No one knows what will happen to the revenues of 200,000 (barrels per day) that are smuggled abroad, or the oil derivatives sold to the region’s refineries,” said the official, who asked not to be named due to the sensitivity of the matter.

Political and oil sector sources said that oil companies in Kurdistan are selling crude oil to local buyers at discounted prices ranging from $30 to $40 per barrel, about half the global price of Brent crude, equivalent to revenues of at least $200 million per month.

While most oil production was halted when the pipeline was shut, some companies, including DNO, Keystone and Shamaran, said in statements that they have since started producing crude oil to sell to buyers inside Kurdistan.

Most political and oil sector sources said most of the oil trucked to Iran goes through official Iraqi border crossings, including Haj Omran, or through Penjwin in the south.

Political, diplomatic and industry sources said crude oil is loaded from there onto ships at Iranian Gulf ports in Bandar Imam Khomeini and Bandar Abbas, a trade route used in the past for Kurdish oil exports, or transported overland to Afghanistan and Pakistan.

The trade is the latest iteration of Iraq’s long-standing black market oil trade, which is often seen as benefiting political elites closely linked to business interests.

Twelve people said that officials in Kurdistan’s two ruling parties, the Kurdistan Democratic Party, to which the Barzani clan belongs, and the Patriotic Union of Kurdistan, to which the Talabani clan belongs, are the beneficiaries.

“There is a maze of black market salespeople who get paid and people who approve those sales,” said a source involved in the Kurdish oil trade. “It’s not that they just turn a blind eye; they get their cut.”

Political interests are so tied up with trade that resuming official exports via the pipeline, once seen as a priority, has fallen down the diplomatic agenda, said a senior diplomat in Baghdad.

KDP officials did not respond to requests for comment on the black market trade. Mohammed, the PUK official, would not comment on who might be behind it.

Kurdish officials say the region has been forced into the trade because of the pipeline closure, which they see as part of broader attempts by Iranian-backed Shiite parties in Baghdad to curtail the relative autonomy Iraqi Kurdistan has enjoyed since the end of the first Gulf War in 1991.

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