•             Trader was owed about $273 million under prepayment contract

•             Firm tried to renegotiate deal but Kurdish PM canceled meeting

By Jack Farchy

Commodities trading giant Trafigura Group is ending a relationship with the government of Kurdistan in northern Iraq, a fresh blow to the region’s ability to sell its oil independently.

The parting of ways comes after Trafigura failed to renegotiate the terms of its contract with the Kurdistan Regional Government following a drop in the price of Kurdish oil, according to a person familiar with the matter. After the Kurdistan government refused to renegotiate, Trafigura pinned its hopes on talks with Prime Minister Masrour Barzani in Davos, but a planned meeting last week was canceled by the Kurdish leader at the last minute without explanation, the person said, asking not to be named as the matter wasn’t public.

Trafigura was one of several trading houses that, starting in 2014-15, lent billions of dollars to the cash-strapped government of Kurdistan in exchange for future oil sales, in the process helping to finance its bid for independence. Oil is the lifeblood of Kurdistan’s economy, accounting for more than half the government’s revenues, and the exports through Turkey have underpinned its autonomy from Baghdad. For the traders, the deals with cash-strapped Kurdistan represented a potentially lucrative opportunity to secure new flows of oil.

But selling Kurdish oil has become more difficult in the past year as Baghdad — which disputes the autonomous region’s right to sell its oil independently — has stepped up legal threats against buyers at the same time as a flood of discounted Russian oil has weighed on prices.

“After working together successfully over a number of years, the KRG and Trafigura are amicably parting ways, bringing to an end their long-term contractual arrangements,” the two sides said in a joint statement emailed by a Trafigura spokesperson.

After the Davos snub, Trafigura had been preparing to send an acceleration notice to the Kurdistan government, demanding immediate repayment of the money it was owed, the person said. As of last week, the trading house was owed some $273 million in prepayments it had made for future oil flows.

Baghdad has long protested Kurdistan’s oil sales, but it has stepped up a campaign against them in the past year in the wake of an Iraqi court ruling in February that found the federal oil ministry should have oversight of Kurdish production. In August, Iraq’s state-run oil marketing company SOMO sent a letter to traders warning them of legal action if they bought Kurdish oil without Baghdad’s approval. Kurdistan’s oil exports of about 400,000 barrels a day are a small fraction of Baghdad’s sales of more than 3 million barrels.

There’s evidence that Baghdad’s threats had an impact. Tanker tracking data monitored by Bloomberg show that shipments of Kurdish crude to ports in Spain, Greece and Italy dropped sharply from the middle of 2022, with flows increasing to Israel, Croatia and China in the second half of the year and into the start of 2023.

The Kurdistan government owed a total of $3.5 billion to oil buyers at the end of June last year, according to its latest audited oil accounts. Meanwhile, $620 million of oil revenues were stuck in bank accounts in Lebanon as a result of the country’s financial crisis, according to the accounts. The importance of the Lebanese accounts for Kurdistan’s oil wealth became public thanks to a legal battle between a company controlled by veteran trader Murtaza Lakhani and Lebanon’s BankMed SAL.

Read more: Billion Dollar Broker: How One Man Managed a Nation’s Oil Wealth

The Kurdistan government has itself been seeking to renegotiate the prices it pays to oil producers in the region. ShaMaran Petroleum Corp. announced in October that its Kurdish unit had agreed to change the benchmark against which its crude was priced from Dated Brent to Kurdistan Blend, known as KBT. Separately, another producer said the change amounted to a $10-a-barrel reduction in prices for September.

Still, not all oil producers in Kurdistan have agreed to a change. DNO ASA’s managing director said in November that it was “not at this time engaged in active discussions” with the Kurdistan government about a change to the pricing formula. Genel Energy Plc’s chief financial officer told investors last week it “had not accepted any change in pricing mechanism.”

In Davos last week, Barzani was focused on shoring up political support for Erbil as well as attracting new investment. He met with the prime ministers of the Netherlands and Belgium, as well as former British prime minister Tony Blair, among others, according to the Kurdistan government’s website.