Iraqi Kurdistan will be ready to export its crude oil directly to world markets via Turkey within months after a new pipeline is completed, a move likely to deepen a row with Baghdad over the distribution of Iraq's hydrocarbon revenues.
The Kurdistan Regional Government (KRG) is on track to finish the pipeline in the third quarter, linking Genel Energy's Taq Taq oilfield with an existing Iraq-Turkey crude pipeline, four Turkey-based industry sources told Reuters.
Turkey has given the green light to the plan, under which oil from Taq Taq will enter the Kirkuk-Ceyhan pipeline at Fishkhabur pumping station near the Turkish border, from where it will flow directly to Turkey's southern port of Ceyhan for shipping to international markets, the sources said.
The move will help Kurdistan significantly increase its oil exports but could upset the Iraqi central government, which sees independent exports from the north as illegal and says growing trade between the KRG and Turkey threatens to split Iraq.
Oil is at the heart of the fight between the Arab-led central government in Baghdad and the ethnic Kurdish-run northern enclave, which dispute control over oilfields, territory and crude revenues shared between the two regions.
Washington, wary of the divisions between Baghdad and the autonomous region, has urged passage of a long-delayed national oil law to resolve the standoff, which has intensified since the last US troops left in December 2011.
"The new pipeline will be linked to the Kirkuk-Ceyhan line, said one Ankara-based industry source familiar with the matter. "Naturally, once they can export via a pipeline and no longer have to truck their oil to the border, the volumes will rise."
The new pipeline was originally designed as a gas pipeline but KRG Energy Minister Ashti Hawrami said it was to be converted to carry oil, a move which had helped Genel Energy to bring its plans of pipeline exports by 2014 forward, sources said. Genel declined to comment on the issue.
Sources said the pipeline has been laid up to Dohuk and iscurrently 80 percent complete. It will be able to carry up to 300,000 barrels per day (bpd) and is being built by a Turkish contractor.
Kurdistan crude used to be moved to world markets through a Baghdad-controlled pipeline to Turkey, but exports via that channel dried up last year as a result of a row over payments.
Crude pumped from the Taq Taq oilfield has instead been trucked over Iraq's northern border with Turkey, bypassing Iraq's federal pipeline system.
Baghdad has said it alone has the authority to control exports and sign contracts, while the Kurds say their right to do so is enshrined in Iraq's federal constitution.
But Iraqi Prime Minister Nuri al-Maliki softened his tone earlier this month, saying Iraq welcomed any step towards rapprochement with Turkey on the basis of shared interests, mutual respect and good-neighborliness.
Payments an issue
But the hopes of reconciliation could be tested again when the new pipeline is online and the issue of how to distribute revenues between the KRG and Baghdad becomes an even more pressing issue, sources say.
"I think that would require an agreement with Turkey, the KRG and Baghdad," an industry source said.
"Where will the money for the oil exports be paid and who will sell the crude from Ceyhan -- all of these issues will have to be finalized with a written agreement."
Turkey has said it could play an active role in settling the payment problems between the KRG and the central government in Baghdad.
Turkish Energy Minister Taner Yildiz said earlier this month Turkey stood ready to support an arrangement under which 83 percent of oil export revenue went to Baghdad and the remaining 17 percent to Kurdistan.
"Turkey will respect the sensitivities of both Baghdad and Arbil and will make sure both sides receive their shares from the oil revenues as stated in the Iraqi constitution," a Turkish official said.
Another Turkish official said opening an escrow account in Turkey into which Iraq's oil export revenues could be deposited would be a huge step in making sure they are fairly distributed.
"Turkey could help Arbil and Baghdad to overcome this problem," the official said.
Seeking US approval
For over a year, Kurdistan has upset Baghdad by signing deals with oil majors such as Exxon Mobil and Chevron, providing lucrative production-sharing contracts and better operating conditions than in Iraq's south.
Earlier this week, Kurdistan called on Washington to accept its negotiations with neighboring Turkey as a way to get its oil to market rather than seeing it as a threat to Iraq's unity.
"The KRG's relationship with America's NATO ally Turkey over energy should not be a concern to our US partners. Iraq's unity and upholding the federal constitution are central to all discussions with Turkey," KRG's Hawrami said in a statement.
He said Kurdistan would seek a dialogue with Baghdad to resolve outstanding energy issues based on the federal constitution. The KRG is entitled to make exports happen and prefers to do so with Baghdad, he said.
"We need to get oil from the Kurdistan region, and more widely from northern Iraq, to market. By 2019, over 3 million barrels per day of oil could flow through Iraq's northern energy corridor to Turkey and the international market," Hawrami said.
Iraq's central government says Kurdistan is expected to provide 250,000 bpd towards Iraq's 2013 oil export target of 2.9 million bpd. In 2012, the KRG was to contribute 175,000 bpd to the federal budget, but realized an average of only 61,000 bpd.