LONDON (Reuters) - Iraq’s semi-autonomous region of Kurdistan has for the first time detailed its secretive oil exports operations and said it plans to sell more, whether Baghdad likes it or not, as it needs money to survive and fight Islamic State.

General view shows Rumaila oilfield in Basra, southeast of Baghdad December 17, 2014. REUTERS/ Essam Al-Sudani/Files

The region’s minister for natural resources, Ashti Hawrami, said that to avoid detection oil was often funneled through Israel, transferred directly between ships off the coast of Malta, and decoy ships used to make it harder for Baghdad to track.

Kurdistan says it had been forced to bypass Baghdad and begin exporting oil directly because the latter refused to respect budgets in 2014 and 2015. The current and former Iraqi central governments have both said the Kurds have failed to respect deals to transfer agreed volumes of oil to Baghdad.

Kurdistan is entitled to 17 percent of Iraqi’s overall budget, and argued it needed stable revenues to pay its bills, support over a million of refugees fleeing the war in Syria and Iraq finance its Peshmerga army fighting against Islamist militants.

Kurdistan is exporting over 500,000 barrels per day (bpd) of oil - or every seventh barrel of OPEC’s second largest exporter - and believes that Baghdad has now accepted, at least in part, direct Kurdish exports going to as many as 10 countries.

“Effectively, we have been financially discriminated against for a long time. By early 2014, when we did not receive the budget, we decided we need to start thinking about independent oil sales,” Hawrami told Reuters.

With new pipelines completed, the Kurdistan Regional Government (KRG) still needed to find buyers for its oil, effectively one large tanker every two days.

Most customers were scared of touching it with Baghdad threatening to sue any buyer. Large oil companies - including Exxon Mobil and BP - have billions of dollars worth of joint projects with Baghdad.

“The scale was huge. And it was a totally new game for us. Buyers wanted the KRG to lease its own crude cargo ships. We knew nothing about the shipping or sea transportation industry,” said Hawrami.

The KRG engaged a veteran oil trader, Murtaza Lakhani, who worked for Glencore in Iraq in the 2000s, to assist finding ships.

“He knew exactly who would and who wouldn’t deal with us. He opened the doors to us and identified willing shipping companies to work with us,” said Hawrami.

Hawrami says it is premature to disclose the names of traders, shippers and buyers of Kurdish oil. Lakhani also declined to comment on the names of buyers and shippers.

Iraq has filed a lawsuit against Greek shipping company Marine Management Services for its role in Kurdish exports. Market sources have said several trading houses including Trafigura and Vitol have dealt with Kurdish oil. Both Trafigura and Vitol declined to comment on their role in oil sales.

Some buyers took tankers to Ashkelon, Israel, where it was loaded into storage facilities to be resold later to buyers in Europe. Kurdish oil was also sold offshore Malta via ship-to-ship transfers helping disguise the final buyers and thus protect them from threats from Iraqi state firm SOMO.

It was a high stakes game. A ship would dock off Malta waiting for another to arrive to take a cargo to a final destination. Sometimes two ships would be sent - one sailing off empty and another full - to complicate cargo tracking.

“Everyone suddenly became a ship tracking expert. So we had to raise our game too ... But one thing was proven correct - when oil is out, it flows,” said Hawrami.

The region plans to increase exports to as much as 1 million barrels and wants also to become a significant gas exporter, which would put it firmly on the global energy map.

BUDGET DISPUTE

Disputes over budget have been at the center of developments of the past two years.

“We simply cannot afford returning to the old arrangements with Baghdad and widening the financial gap again,” Hawrami said.

“We would accept a real budget that Baghdad can commit to without conditions, but we don’t want to be part of a theoretical budget which isn’t worth the paper it is written on,” he added.

Hawrami says the 2014 Iraqi state budget required Kurdistan to export 400,000 bpd of oil - which was simply technically non-feasible at the time due to a lack of export routes and pipelines.

Kurdistan received $500 million in state budget allocations in January 2014 instead of $1.0 billion-$1.2 billion foreseen by the state budget and then from February budget transfers were cut further and then stopped by March 2014.

“Baghdad demanded oil we didn’t have. Our delegation led by prime minister Nechervan Barzani went to Baghdad to try to find out what was going on. But they were not interested in hearing our arguments and continued with their decision to cut our budget,” he said.

“So we had to get our act together and speed up the completion of pipelines. By May 2014 the basic infrastructure was completed and we were ready for independent sales.”

By the time the new pipeline from Kurdistan to the Turkish Mediterranean coast, replacing the old Saddam-era link, was ready, the region was effectively broke.

It had limited cash, it was falling behind with salary payments to state employees including the army - just when Islamic State seized large parts of central Iraq and of Kurdistan itself.

The region was hundreds of millions of dollars in arrears to companies such as Genel and DNO, which have been developing fields in Kurdistan.

Gradually, buyers and traders started using their own ships for Kurdish oil but Baghdad filed a court case in the United States threatening to sue anyone who touched it.

A cargo was stuck in the United States for several months before sailing back to Europe and being resold there. Since then no Kurdistan oil has crossed the Atlantic.

Another cargo was stranded in Morocco. SOMO also sent warnings to all major clients in Europe and Asia.

“Looking back, the whole of 2014 was a huge success as we only had two ships in difficulty - one in the U.S. and one in Morocco ... We managed to finish the year (2014) with only one month of salaries behind,” said Hawrami.

“That was a pretty extraordinary achievement as we had ISIS attacking our soil, over a million of Syrian refugees and displaced Iraqis. All of that burden came and we hadn’t seen a cent from Baghdad”.

Independent oil sales in 2014 allowed Kurdistan to borrow about $3 billion including from Turkey and trading houses.

“We had a remarkable change in relations with Turkey. It has been very strategic and they have been incredibly supportive,” Hawrami said.

“ECONOMIC INDEPENDENCE”

Hopes of better ties emerged at the end of last year after a new government led by Haider al-Abadi came to power in Baghdad instead of Nouri al-Maliki.

“It was a new atmosphere. We hoped it would allow us to put our differences behind us,” said Hawrami.

In December 2014, Baghdad and Erbil signed a deal under which Kurdistan would transfer some average 550,000 bpd to Iraqi state oil firm SOMO over the course of 2015 while receiving 17 percent of Iraqi budget or over $1.1 billion a month.

The deal began to unravel almost immediately. Baghdad said Erbil was not transferring the agreed volumes and sent only $200 million in January instead of $1.1 billion. Between January and by June it transferred around $2 billion in total to Erbil – less than 40 percent of what the Kurds had expected.

“In February 2015, we went again to Baghdad only to discover that they have thrown their budget out of the window and were simply working with cash in hand. We told them that our state salaries constitute some $750 million - half of this to security and Peshmerga - so how could we live on just a third of our budget?”

“But they told us - cash in hand is all we have because of the collapse in oil prices and inability to fill the deficit in the budget. By March, we came to a conclusion that we had no option but to start independent oil sales again”.

Baghdad is firm in asserting it is abiding by the constitution.

“The party that did not abide by the text of the agreement is the regional government and not the federal government,” said Saad al Hadithi, spokesman for Prime Minister Haider al-Abadi.

“We had hoped the agreement that was made a year ago was the beginning of a new stage of cooperation and coordination, but unfortunately what happened is that the regional government did not export the agreed upon amount to SOMO,” Hadithi said.

Hawrami says as of November 2015 the number of countries taking Kurdish barrels has risen to around 10, declining to name them. Reuters has reported Kurdish oil making it to countries such as Israel and Hungary.

Independent sales have been allowing the KRG to generate some $800 million-$850 million a month from July to enable it to pay salaries and ongoing costs to oil companies like Genel.

However, the crash in oil prices since 2014 meant the gap in finances was much more difficult to close.

As of November, the country is still three months behind with salary payments but Hawrami says he is hoping to close the gap by pushing production up in 2016 while also looking to sell some assets and infrastructure to raise liquidity.

As of today, the KRG still owes $3 billion to its 2014 lenders but Hawrami says he hopes it could be paid back or at least significantly reduced over the course of 2016.

Another task would be a meaningful cut of state spending such as fuel subsidies in 2016 and an attempt to increase non oil revenues. Hawrami says he is seeing early signs that Baghdad is gradually removing its opposition to independent oil sales.

SOMO is still threatening to sue buyers of Kurdistan oil, but appears compliant with Erbil’s handling of the Kirkuk oilfield, which is not under the authority of the KRG, but whose exports of 150,000 bpd have been handled for months by the Kurds via Turkish ports.

“If you ask any Kurd, they will always tell you that their main dream is independence,” Hawrami said. “But at the government level, the main policy focus has been economic independence. We are aspiring to solve our own problems and we have enough resources to do it.”