Crude oil production in Iraq’s semiautonomous Kurdistan region continues to climb, even as Baghdad intensifies efforts to pressure Erbil to scale back output to help the country adhere to its OPEC+ quota.
According to financial reports from five public oil companies operating in Kurdistan, their combined crude production reached 173,000 barrels per day (b/d) in the second quarter, up from 170,000 b/d in the previous quarter. This is a significant recovery from the mere 2,000 b/d produced in the quarter immediately following the shutdown of the region’s key export pipeline to the Turkish port of Ceyhan in March 2023. Before the pipeline closure, production stood at 182,230 b/d.
Overall crude output in the Kurdistan region, including contributions from the local Kar Group, is higher, with estimates from S&P Global Commodity Insights placing it at around 250,000 b/d. This is down from approximately 400,000 b/d prior to the pipeline’s closure.
Indicating a rebound in the Kurdish oil market, Norwegian oil company DNO announced plans to expand its operations in the region for the first time since early 2023. In its second-quarter financial report, DNO stated it would deploy a rig to drill a new well on its Tawke license, with production at its fields increasing by 9% from the last quarter, totaling 79,800 b/d in the second quarter of 2024.
Similarly, Canada’s Shamaran Petroleum, which has acquired the Atrush and Sarsang blocks operated by HKN, indicated that it expects to boost production. Gulf Keystone also reported ramping up round-the-clock trucking operations as demand and production levels rise, noting a “successful return to profitability and free cash flow generation” in its H1 2024 financial results after a challenging 2023.
OPEC+ Compliance Challenges
Despite the reduced output, Kurdish production has complicated Iraq’s compliance with its OPEC+ quota. In July, Iraq’s crude production increased by 110,000 b/d to 4.33 million b/d, according to the latest Platts OPEC+ survey by Commodity Insights—significantly exceeding its quota of 3.93 million b/d under the group’s latest agreement.
Iraq has consistently exceeded its production quota since the beginning of the year, drawing criticism from other OPEC+ members who have urged the country, along with other non-compliant members like Kazakhstan and Russia, to adhere more closely to the agreed limits.
In response, Baghdad has exerted additional pressure on the Kurdistan Regional Government (KRG), while also committing to reduce its own federal crude exports and domestic consumption. To align with OPEC+ targets, Baghdad has instructed the KRG to reduce its output to 46,000 b/d, with any excess requiring payment to the federal government. This directive was emphasized during an August 29 briefing by a senior official from the State Oil Marketing Organization (SOMO) to independent sources used by the OPEC+ alliance to monitor member production. The official warned that the KRG’s share of the federal budget, which includes funds for salaries, could be withheld if these instructions are not followed.
SOMO has also disputed the production figures reported by the international oil companies, estimating KRG output at around 150,000 b/d.
The KRG and the Association of the Petroleum Industry of Kurdistan, a trade group representing oil companies in the region, did not respond to requests for comment. As of March, Baghdad owed the Kurdistan region over $7 billion in unpaid dues, according to a statement from the regional government.
Local Market Adaptations
Producers in the Kurdistan region have found alternative domestic markets for their crude, albeit at prices significantly below international rates. Sales to local traders are reportedly made at around $28 to $40 per barrel through a process controlled by Kurdish officials. Local refineries primarily convert the crude into gasoil and diesel.
According to Mahmood Baban, a fellow at the Rudaw Research Center in Erbil, the five official refineries in Kurdistan have a combined refining capacity of 330,000 b/d. Additionally, hundreds of illegal topping plants and small refineries process smaller quantities of crude. On August 4, local authorities in the Erbil governorate announced the closure of 138 illegal topping plants and warned dozens of unlicensed refineries to comply with environmental protection regulations or face shutdowns.
While most of the refined products are used domestically and sold at local fuel stations, some are reportedly smuggled across the border into Iran and Syria via trucks or even pack horses, according to Commodity Insights.
Previously, crude from the Kurdistan region was a staple supply for refineries in the Mediterranean market, with shipments of medium sour Kurdish Test Blend sent through the Iraq-Turkey Pipeline’s terminal at the Turkish port of Ceyhan under agreements signed with the KRG, independent of SOMO’s oversight.
However, the pipeline is now embroiled in a protracted political and legal dispute, with no resolution in sight. The federal government may have little incentive to reopen the pipeline, as a full restoration of Kurdish crude exports would exacerbate Iraq’s OPEC+ compliance challenges.
