Iraq says to discuss oil smuggling to Iran with Kurd authorities

The Iraqi government has called for urgent talks with the Kurdistan Regional Government to discuss the growing trade in crude oil and oil products from the semi-autonomous Kurdish region in defiance of US sanctions, government spokesman Ali al-Dabbagh said Sunday.

Dabbagh spoke on Dubai-based al-Arabiya television in response to a report carried by the Saudi-owned channel about the rise in smuggling of fuel by tanker truck across the border between Iraq and Iran.

"We will be contacting the Kurdish authorities to work together to put a stop to this phenomenon," Dabbagh said, adding that footage shown by the Dubai-based network of oil tanker trucks waiting to cross into Iran "was clear evidence" that smuggling was taking place. He said the Iraqi government would call for immediate contact with the KRG to discuss the issue.

It was not immediately known what volumes of crude oil produced in Kurdish-controlled areas and refined product produced in illegal topping plants in Iraqi Kurdistan were making their way into Iran. However, Al-Arabiya showed footage of long lines of tanker trucks waiting to cross into Iran from the border post of Haj Umran, one of three border crossings it said were used in the smuggling operation.

Some of the crude oil was being taken to Iran's Abadan refinery, which lies close to the border with Iran, Al-Arabiya said.

Dabbagh said the government was trying to obtain details about the smuggling, which he said has been a phenomenon in the past because refined product prices in neighboring countries were higher than Iraqi prices, which are heavily subsidized.

Iraqi Kurdistan currently has only two oil producing fields, Tawke and Taq Taq, which are believed to have a combined capacity of 60,000 b/d. Exports from the two fields began on June 1 last year but were halted three months later in a dispute between the KRG and the Baghdad government over payment to the foreign contractors.

Norwegian independent DNO is operator of the Tawke field, while a Turkish-Chinese consortium is developing the Taq Taq field. Both fields are producing below capacity with no sign of a resumption of exports despite announcements that the Iraqi government had agreed to repay the foreign operators' costs.

The New York Times reported July 8 that hundreds of millions of dollars in crude oil and refined products were being smuggled over the Kurdish mountains into Iran every year without Iraqi government approval.

It said the stream of tankers into Iran continued without interruption during an Iranian military campaign last month against Iranian Kurdish separatists operating at the border.

Hundreds of tankers, each with a capacity of at least 226 barrels of crude oil and refined products, enter Iran every day from Penjwin and two other border posts in Iraqi Kurdistan, the newspaper quoted Kurdish officials as saying. The Times quoted some tanker truck drivers as saying that while much of the refined product is used in Iran, which sorely lacks refinery capacity, the crude oil is trucked all the way down to the Persian Gulf ports of Bandar Bushehr, Bandar Imam Khomeini and Bandar Abbas, where it is emptied into reservoirs or loaded onto ships.

It quoted Kurdish energy minister Ashti Hawrami as saying that the trade is supported by an estimated 70 mini-refineries or topping plants dotted around the Kurdistan region, many of which are unlicensed.

The provision of refined products to Iran is a breach of recently passed US sanctions, which prohibit any company or party from supplying refined oil products to Iran as part of an effort to force Tehran to abandon its nuclear ambitions.

The KRG's official spokesman, in a statement posted on the KRG's website on Sunday, referred to inaccuracies in the New York Times article with regard to the refining of crude oil in Kurdistan. He did, however, concede that some oil and refined products were finding their way across the border.

"The [Kurdish] region's refineries provide essential fuels to Iraqi domestic and international markets," he said. "The KRG is proud of its growing oil and gas sector and the KRG's free trade policies."

The KRG has licensed three refineries in regions under its control, all of which were issued in accordance with the Iraqi constitution and the Kurdistan region's oil and gas law of 2007, he added.

"Surplus from some refined products from Kurdistan's refineries is available for export. The KRG conducts open and competitive tendering for the export sale of petroleum products," he said.

The major sources of refined products are the large refineries in other parts of Iraq, including Baiji, near Baghdad, and Daura, in the Salahiddeen governorate. Some of that product may well be exported through the Kurdistan Region.

"In other parts of Iraq, fuel oil is sold to the local private sector by Federal agencies at a significant discount to the international price. This discount is intended to stimulate the local economy. Unfortunately, this creates incentives for the buyers to engage in cross-border trade," the spokesman said.

"The KRG is aware of the fact that profiteers in fuel oil refined outside Kurdistan have exploited Kurdistan's international borders," he said, adding the KRG, with the active support of Kurdish president Masoud Barzani, was "instituting a series of measures to ensure full compliance with the Iraqi Constitution and international law, and in this regard the KRG is committed to working with the Federal Government to eliminate permanently all such profiteering in fuel oil, not only in the KRG but also along the entirety of Iraq's international borders."

Although Iran and Iraq are oil-producing members of OPEC, the oil and gas industries in both countries face huge challenges as a result of wars and sanctions. Iran turned a blind eye to illicit Iraqi oil exports while Iraq was under UN sanctions for its 1990 invasion of Kuwait, when sanctions-busting tankers would smuggle crude oil through the Persian Gulf.

Iran too faces constraints in developing its oil and gas resources and the expansion and upgrade of its refineries because of a lack of sufficient foreign investment, due largely to UN and US sanctions that have squeezed its financial sector and prevented large inflows of foreign funds into Iran.

Iran, like Iraq, is a net importer of oil products to meet domestic consumption, which is high because of subsidies that apply to most refined products.