Kurdistan’s Oil Lifeline at Risk as Baghdad Payments Fall Short Again
- Kurdistan says Baghdad has transferred only ~41% of its owed budget since 2023, threatening salary payments, debt servicing to oil firms, and basic governance.
- Despite resuming limited exports via the ITP and transferring oil and non-oil revenues to Baghdad, the KRG says promised payments and investment funding have not materialized, eroding trust and leverage.
- With Iraq’s leadership in flux and foreign oil firms still owed over $1 billion, Erbil is pressing its case now.
The Kurdistan Region of Iraq (KRI) is once again edging toward a fiscal breaking point. Officials in its Erbil-based semi-autonomous regional government (KRG) say they are receiving only a fraction of the budget transfers they are owed under the current oil-for-budget payments arrangement with the Federal Government of Iraq (FGI) in Baghdad. This revives the same dispute that triggered the collapse of the deal in March 2023 and shut down the crucial Iraq-Turkey Pipeline (ITP) for more than two years. Erbil argues that Baghdad’s shortfalls are not technical delays but a structural breach that threatens its ability to pay public salaries, service debts to international oil companies, and maintain even the basic functions of regional governance. With the ITP still operating far below capacity and trust between the two sides eroded, Kurdistan’s economic stability — and its leverage within the federal system — is once again in question.
Broadly, the deal at the centre of the KRG’s current complaints — and a source of constant dispute since its inception in late 2014 — involves the Kurdistan Region sending oil from its own oil fields and from Kirkuk to the Federal Government’s State Oil Marketing Organization (SOMO), in return for which it receives a percentage of the FGI’s budget after sovereign expenses each month. The contours of this latest dispute are painfully familiar, echoing the 2014 budget freeze, the 2017 post-referendum squeeze, the 2020 pandemic-era cuts, and the 2023 ITP shutdown — all unfolding along the same axis of mistrust and asymmetry, as analysed in full in my latest book on the new global oil market order. The pattern is consistent: Baghdad uses legal ambiguity and fiscal pressure to reassert control over the Kurdistan Region’s oil revenues; Erbil insists on predictable transfers to meet its payroll and other obligations; and the absence of a functioning oil export route leaves the KRG with no leverage beyond political brinkmanship.
In this latest case, Erbil said just over a week ago that its total constitutional entitlement between 2023 and 2025 amounted to IQD58.3 trillion (USD44.4 billion), while actual receipts did not exceed IQD24.3 trillion. This represents just 41% of the KRI’s financial rights and about 3.9% of the FGI’s total federal budget. Erbil also says that although the Federal Government allocated IQD165 trillion for investment spending nationwide, the Kurdistan Region received no funding for investment projects, resulting in the suspension of key infrastructure schemes. The KRG added that since oil exports resumed late last year, it has pumped 19.5 million barrels through the Federal Government’s State Oil Marketing Organisation (SOMO) in addition to transferring IQD919 billion in non-oil revenues to the FGI’s Treasury during 2025, despite continued delays in receiving its own entitlements.
All this flies in the face of the broad agreement reached in August/September that led to the re-opening of the ITP. At that point it was agreed that up to 190,000 barrels per day (bpd) of crude oil would flow though the ITP from Kirkuk to Ceyhan, with plans to increase this to the 230,000-bpd level seen just before the pipeline’s closure in 2023, and then back to even earlier higher levels over time. Before the shutdown in March 2023, around 450,000 bpd of oil was flowing through the ITP, comprised of approximately 350,000-375,000 bpd of KRG crude (Kurdish Blend) and about 75,000-100,000 bpd of Federal Iraqi crude (Kirkuk grade). As previously reported by OilPrice.com, US$16 of the sales price per barrel would be transferred to an escrow account and distributed proportionally to the KRI’s oil producers, with the rest going to SOMO. This effectively acted as a subsidy for production costs incurred by international oil companies operating in the KRI and replaced the previous offer of USD7.90 per barrel that was rejected by the KRG.
However, even at that point last August/September, potential problems were already beginning to surface, including from foreign oil firms that were collectively still owed over US$1 billion by the KRG for oil produced and then sold previously. Norway’s DNO and its joint venture partner Genel Energy had long made it clear that they would not fully re-engage with crude oil exports through the ITP until they received assurances from the KRG that it would properly address the US$300 million or so of debt to the two firms. The eight other foreign oil producers that signed the initial agreement to restart ITP exports to Turkey were to have met within the 30 days following the recent resumption of flows to flesh out a mechanism with the KRG for settling these debts. For Erbil, however, any such mechanism depended on the FGI keeping up its budget payments to the Kurdistan Region as promised. Foreign oil firms operating in the KRI at that stage also stressed the need for future export payments that were consistent with each company’s existing, legally valid contracts, and for payments to be transparent and prompt, either in cash or through in-kind transfers of crude-oil entitlements.
With these pressures mounting, and no new Iraqi prime minister yet appointed following the 11 November general elections, the KRG may well judge that now is an opportune moment to raise these issues again. Mohammed Shia’ al-Sudani had taken a hardline approach to what the FGI perceives as its ‘Kurdish Problem’ for much of his recent prime ministerial tenure. This was broadly aligned with the strategy of China and Russia to remove all independence from it and to roll it into a single unified Iraq more aligned with Beijing, Moscow, and Tehran. As underscored exclusively to OilPrice.com some time ago by a senior energy source who works closely with Iran’s Petroleum Ministry, China’s and Russia’s view is that: “By keeping the West out of energy deals in Iraq, the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.” On the other side of the geopolitical equation, the U.S. and its key allies want the Kurdistan Region (and Iraq more broadly) to terminate all links with Chinese, Russian and Iranian companies connected to the Islamic Revolutionary Guards Corps over the long term. The U.S. and Israel also have a further strategic interest in utilising the Kurdistan Region as a base for ongoing monitoring operations against Iran. Following al-Sudani’s very recent decision to suspend his bid for a second term — effectively opening the way for the head of the State of Law Coalition, Nuri al-Maliki — another layer of urgency has been added for Erbil. Al-Maliki has long-standing ties to Tehran, having spent years in exile both there and in Syria, and favours a stronger federal Iraq, with Baghdad controlling all parts of it. So, raising the dispute now allows Erbil to press its case while the political landscape in Baghdad remains unsettled and before a new Al-Maliki-led administration consolidates its position.
By Simon Watkins for Oilprice.com
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