Iraq Fights Kurds Over Crude in Texas Oil Tanker Court Battle

Jul 29, 2014 5:38 pm ET

July 29 (Bloomberg) -- Iraq persuaded a U.S. judge to order the seizure of $100 million of oil inside a tanker anchored off Galveston, Texas, that it claims was illegally pumped from wells in Kurdistan.

Kurdish officials “misappropriated” more than 1 million barrels of oil from northern Iraq and exported them through a Turkish pipeline, according to a complaint filed yesterday in Houston federal court. U.S. Magistrate Judge Nancy Johnson in Galveston authorized U.S. marshals to seize the cargo and have it moved ashore for safekeeping until the dispute is resolved.

The problem, the judge said at an emergency hearing today, is that the vessel is outside U.S. territorial waters. She said if the ship crosses that boundary, her order must be enforced. But until that happens, it’s out of her hands.

“Seems to me this is not a matter for U.S. courts to tell the government of Iraq who owns what,” Johnson said. “This just seems way outside our jurisdiction.”

The U.S. officially recognizes Kurdistan as part of Iraq, although the Kurdish people have jockeyed with the Baghdad-based national government for autonomy for more than a decade. Oil revenues from the northern oil fields could fuel Kurdistan’s fight for independence.

“Either they’ll bring the oil into port, where we’ll take possession of it, or they’ll sail off somewhere else,” Phillip Dye Jr., a Houston-based attorney for the Iraqi Oil Ministry, said in a telephone interview today. His clients don’t know who bought the cargo, and he said he had no reports that any oil has been removed from the tanker yet. In a separate court filing, AET Inc., a lightering services firm, identified Talmay Trading Inc. as the company that hired it to transfer the crude.

The Iraqi government warned Kurdish officials to stop the illegal exporting through Turkey, which began in December, according to the complaint. The crude shipment left Ceyhan, Turkey, on June 23, and has “changed destinations multiple times” while at sea, according to the filing. The ship is anchored about 60 miles southeast of Galveston, according to data compiled by Bloomberg, outside U.S. territorial waters.

U.S. Refinery

If a U.S. refinery accepts shipment of the crude, it will send a signal to the rest of the world that it is acceptable to do business with the Kurdish government, said Carl Larry, president of Oil Outlooks & Opinions LLC.

“It opens the door to some kind of breakup in that region where you could have a separate Kurdistan and Iraq,” Larry said in a telephone interview. “It’s definitely going to create that separation, and more people are going to recognize that and respect it.”

Bernadette Meehan, a spokeswoman for the National Security Council, said in an e-mail that “U.S. policy on this issue has been clear and consistent. Iraq’s energy resources belong to all of the Iraqi people.”

Arrest Warrant

The Iraqi Oil Ministry asked U.S. marshals to oversee lightering operations to remove crude from the tanker and store it onshore at Iraq’s expense. The proposed arrest warrant filed with the complaint didn’t ask to seize the United Kalavrvta, the Marshall Islands-flagged tanker, which is too large to enter the Houston Ship Channel and offload cargo directly.

The tanker was cleared by the U.S. Coast Guard to proceed with offloading, the agency said.

AET, a Kuala Lumpur-based company, and Dallas-based AET Offshore Services Inc. yesterday filed a request in Houston federal court for a declaratory judgment on its rights in the matter.

Talmay Trading

AET said it entered into a lightering contract -- transferring cargo between ships -- with Talmay Trading, a British Virgin Islands-based company. AET said it has yet to receive instructions for the transfer of the crude oil aboard the United Kalavrvta. While the ship was underway, AET said it had been contacted by lawyers for Iraq claiming the oil was its property. A spokesperson for Talmay couldn’t be immediately reached for comment.

“As the Republic of Iraq has put AET on notice of its claim to title and/or possession of the crude at issue, AET requests that this court determine the validity of that claim,” AET said in the filing.

At today’s hearing, AET lawyer Andy Durham told the judge the company is “between a rock and a hard place.”

“We are not permitted to take possession of the cargo which, according to the Republic of Iraq, is stolen property,” he said. Harold Watson, a lawyer for the Kurds who shipped the oil, declined to comment.

Oil producers are actively pursuing resources in coordination with the Kurdistan Regional Government, which estimates the northern territory holds 45 billion barrels of oil reserves. The Kurdish government expanded its control over the country’s resources in early June, when Kurdish Peshmerga armed forces took control of northern Iraq’s key oil hub, Kirkuk, after militants routed the Baghdad government’s army.

The primary case is Ministry of Oil of the Republic of Iraq v. 1,032,212 Barrels of Crude Oil Aboard the United Kalavrvta and the Ministry of Natural Resources of the Kurdistan Regional Governate of Iraq, 3:14-249, U.S. District Court, Southern District of Texas (Galveston).

--With assistance from Nicole Gaouette in Washington and Dan Murtaugh in Houston.