Lina: Hello and welcome to “The Crude Report.” This is a podcast series here at Argus Media looking at global crude markets. My name is Lina Bulyk, I am an associate editor of “The Crude Report” in the London office, and joining me today is Kuganiga Kuganeswaran, our deputy editor. Hello, Kuganiga.

Kuganiga Hi, Lina.

Lina: So today we are going to look at the return of Iraqi medium-sour Kirkuk crude after it has been off the market for a prolonged period of time, for over two years. And one of the questions we will be looking at is whether this crude is returning to the spot market. But first let’s take a step back and, Kuganiga, maybe you can help to make a larger picture of what Kirkuk crude is and what was its place in the European crude market before it was halted.

Kuganiga: So Kirkuk crude is produced in Iraq’s semi-autonomous region of Kurdistan, and then to be exported it needs to go through the Iraq-Turkey pipeline and then come out of the Mediterranean port of Shihan where it can be loaded onto a tanker or piped elsewhere in Turkey. In terms of export volumes, they previously averaged around 400,000 to 500,000 barrels a day and most of that was marketed by the Kurdistan regional government, the KRG. So around 85% was marketed by the KRG for their spot market and the rest was sold by Iraq’s state-owned oil marketer Somo to Turkish refiner Tüpraş on a term basis, so at the official formula price for Kirkuk. Pre-shutdown, the vast majority of Kirkuk supplies went to Italy, both for refineries in Italy and also for onward delivery through the Trans-Alpine pipeline to Central Europe. The other main buyers were also in the Mediterranean. The buyer base for Kirkuk was quite narrow because there were issues between Iraq and the KRG regarding the marketing rights of Kirkuk. So as a result, if you were a buyer of Kirkuk, you would get it cheaper than you would get maybe other medium-sour crude. So if you’re willing to buy Kirkuk, it was cheap before the halt of exports in March 2023.

Lina: And it sounds like it was a pretty good deal, right? A medium-sour crude, quite cheap, decent volume of close to 500,000 barrels a day. So what happened? Why did it get halted in the first place?

Kuganiga So in March 2023, there was an international arbitration ruling that Turkey had breached a pipeline agreement by allowing the KRG to export oil without Iraq’s consent. So following that, Turkey shut the Iraq-Turkey pipeline, and that was also the only route through which Kirkuk crude could be exported. There were several factors that prevented a restart, and they were largely based on marketing rights. Iraq wanted the marketing rights to be for itself alone, and it took until earlier this year for the KRG and Baghdad to reach a deal and iron out all those details. And then after that, there were further deals that had to be reached with the international oil companies that operate in Kurdistan. So there were a lot of things to be sorted out. And there were several times this year, and even in the years before, when hopes of a restart were dashed. And, you know, so it was like the restart’s going to happen and then it didn’t. But finally, the restart happened and flow through the Iraq-Turkey pipeline finally resumed on 27 September, so about two weeks ago.

Lina: And how big is the volume of Kirkuk coming through the pipeline after the restart? Is it the same as it used to be, 400,000 to 500,000 barrels a day, or is it a bit less, much less?

Kuganiga: No, at least not in the short term. Iraqi officials have said around 180,000 to 190,000 barrels a day will be exported from Shihan. I mean, that could change, but at least for now, it’s not going to return to those pre-shutdown levels.

Lina: Okay. But, I mean, even close to 200,000 barrels for Europe in the current state of things when European refineries don’t have access to Russian euros anymore, this is quite significant, right?

Kuganiga: Yes, absolutely, especially in the Mediterranean, where first Russian euros were sanctioned in 2022 and then Kirkuk was halted in March 2023, followed by OPEC+ output cuts. There were some local options, of course, like Kepco, which is Kazakh-origin euros, but that volume is limited. And then Norwegian Johan Sverdrup mostly goes to Northwest European buyers. But now what’s happened is that OPEC is unwinding output cuts and this has seen crude exports from Saudi Arabia and southern Iraq into Europe rise. And now we also have Kirkuk trading again as well.

Lina: So that sounds pretty good. And how about any changes in trading patterns? If it used to be the KRG and now it’s SOMO, did the conditions change anyhow?

Kuganiga: So firms who have TAM contracts with SOMO are able to buy Kirkuk at the official formula price for the grade that’s published by SOMO. SOMO likes to sell directly to end users, so typically TAM supplies aren’t meant to be resold. But as we have seen with other Iraqi grades like Basra Medium and Basra Heavy, a company may not always be able to take their TAM cargoes to their own refining system. And as a result, some Iraqi cargoes are then resold on the spot market. And we’ve seen this happen with Kirkuk this week as well with at least one trade heard on the spot market. From what we understand, Kirkuk is being traded at a differential to that formula price that SOMO publishes. But there’s then also a quality compensation component as well. So the contractual quality of Kirkuk is 36 degrees API gravity. But what actually comes out tends to be closer to 30 degrees API and buyers get compensated for that difference. So after accounting for that quality compensation, we’re hearing Kirkuk is trading on the spot market at about a $1.75 barrel discount to [inaudible 00:07:14] dated. That’s about $3 lower than the official October price.

Lina: And the first two cargoes that actually loaded Kirkuk at Shihan after the restart, they actually had this gravity of 30 degrees API that you mentioned, right?

Kuganiga Yes.

Lina: So like, do we expect this quality of Kirkuk to remain the same in the coming months or is there a possibility of some fluctuations?

Kuganiga: So the cargoes that left may have been supplies that were kept in storage from before the halt. While the quality of the flows currently being pumped might be different, I think it remains to be seen. There’s also a lack of clarity still about which fields are…to the Kirkuk blend and how much volume. So that could change the quality that comes out of Shihan.

Lina: Yes, that makes perfect sense. And those discounts that you mentioned, $3 to the official formula price and almost $2 to dated, they look quite deep compared to some other medium servers available to European buyers. But then the markets have shifted in the last two years when Kirkuk was offline. Do you think there is still space for that supply in the Mediterranean market?

Kuganiga: I think yes. And there’s two main reasons for this. As you said, it’s cheap, but it’s also a locally available option. It’s not as cheap as it was before the shutdown. But back then, not everyone wanted to take it because of the issues between Iraq and the KRG. Whereas now the buy base for Kirkuk might be wider. And I think Kepco is a good one to look at it as an example of what happens before and after sort of a geopolitical event. The price of Kepco is basically non-sanctioned euros, and it trades at a premium to dated on a delivered basis. But euros before 2022, before it was sanctioned, it traded at a discount to dated. But the tighter medium-sour crude availability means that Kepco is able to command that premium now. And similarly, Kirkuk is going to be trading at a higher price than it was pre the halt in March 2023.

But even then, it’s still pretty cheap compared to everything else available. If you look, even if you add freight costs on top, Kirkuk is still cheaper than Kepco, cheaper than bringing Norwegian Johan Sverdrup into the Med, and cheaper than Saudi Arab light crude into the Mediterranean as well. So there is plenty of scope for Kirkuk to find a space in the Mediterranean market, even if its price does rise higher than it currently is as well, as long as it sort of maintains that competitiveness over those other rival medium-sours.

Lina: Okay, thank you very much, Kuganiga.

Kuganiga Thanks for having me, Lina.

Lina: And I think you’re very right in saying that it will be very interesting to see how the things change and develop in the coming weeks, and especially if the supply of Kirkuk increases in the next year or in the following years. And you can follow all these developments and get all the updates from the Argus Crude Report and on Argus Direct. And thank you all for listening.