By Simon Watkins - Dec 30, 2024, Oilprice.com
The Kurdistan region's efforts to achieve financial independence through oil exports have faced significant resistance from Iraq’s Federal Government.
The stand-off resulted in a years-long embargo on oil exports via the Iraq-Turkey Pipeline.
Despite a recent court ruling in favor of foreign oil contracts with the KRI, Baghdad isn't like to loosen the reins.
It is coming up to two years since oil exports from the semi-autonomous Kurdistan region of Iraq (KRI) through the Iraq-Turkey Pipeline (ITP) were halted by the Federal Government of Iraq (FGI). Billions of dollars in export revenues have been lost by both sides, in addition to the many foreign oil firms working in the region. However, according to local news sources, on 18 December the Karkh Court of Appeals in Baghdad reversed previous rulings favouring the FGI’s Oil Ministry. These had sought to permanently invalidate foreign firms’ oil exploration and development contracts directly with the KRI government based in Erbil. So does this mean that the costly, long-running embargo on oil exports is about to end?
The genesis of the current dispute does not begin in March 2023 when the ban was imposed by the FGI in Baghdad or in February 2022 when the Baghdad-based Federal Supreme Court of Iraq deemed such contracts unconstitutional -- it began instead on 23 April 2013. On that date, the regional parliament of the semi-autonomous Kurdistan region of Iraq – the KRG – passed a bill that would allow it to independently export crude oil from fields located in the region if the FGI failed to pay the KRI its share of oil revenues and exploration costs. A corollary bill to create an oil exploration and production company separate from the FGI and a sovereign wealth fund to take in all energy revenue was approved at the same time by the KRG’s cabinet under then-Prime Minister (and now President) Nechirvan Barzani. At that point, the KRI was producing around 350,000 barrels of oil per day (bpd) – with the rest of Iraq’s output standing at around 3.3 million bpd – and planned to increase this to 1 million bpd by the end of 2015. In short, it was intended by the KRG in Erbil to give the KRI complete financial independence from the FGI in Baghdad as a precursor to total political independence shortly thereafter, as analysed in my latest book on the new global oil market order. The next phase after independent oil sales were assured by the KRI was a planned referendum on independence. The FGI saw this existential threat to its future extremely seriously as this is what the U.S. and its allies had quietly promised the KRG in exchange for its providing the boots on the ground in the fight against Islamic State at that point, in the shape of the fearsome Kurdish Peshmerga army.
The FGI’s initial reaction was to bring legal action against independent oil exports from the KRG as and when the opportunities arose. July 2014 saw FGI government lawyers file a suit to impound the US$100 million cargo of Kurdish oil aboard the United Kalavryta tanker anchored in the Gulf of Mexico off the U.S. coast. The lawyers insisted that the KRI had sold the oil without the permission of the central government, and that only the FGI had the legal right to export oil from anywhere in Iraq, including the Kurdish region. The U.S. Federal magistrate said that because the tanker was outside U.S. territorial waters, she was unable to order the enforcement order against the tanker or its cargo by U.S. Marshals and that the matter should be settled in Iraq. The FGI took this, and similar rulings on similar cargoes, as evidence that the U.S. was still supportive of the idea of full independence for the KRI and allowing it the financial autonomy through oil exports that this would require. Following these legal setbacks, the FGI concluded a deal in November of that year with the KRI. This would see the central government pay the KRI 17% of the FGI’s budget after sovereign expenses (around US$500 million at that time) per month in exchange for the KRG organising the export up to 550,000 bpd of oil from the Iraqi Kurdistan oil fields and Kirkuk to the FGI’s State Oil Marketing Organization (SOMO).
Despite the agreement, neither side had shifted from their core positions relating to oil exports. The KRI wanted all the revenues from oil produced in their territory to lay the financial basis for independence, and the FGI wanted to give it neither. The legal position relating to the Iraqi oil industry and the distribution of its revenue sharing between the KRG area and the FGI did not help to clarify the impasse, with both sides claiming a right to the revenues from the disputed oil flows. According to the KRG, it has authority under Articles 112 and 115 of the Iraq Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 - the year that the Constitution was adopted by referendum. In addition, the KRG maintains that Article 115 states: “All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organised in a region.” As such, the KRG maintains that, as relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive revenue from its oil and gas exports. Additionally, it argues the Constitution provides that, should a dispute arise, priority shall be given to the law of the regions and governorates. However, the FGI maintains that under Article 111 of the Constitution oil and gas are under the ownership of all the people of Iraq in all the regions and governorates.
It was little surprise, then, that the agreement had failed to function effectively within three months of its signing. The KRG accused the FGI of not paying the full amount promised, and the FGI accused the KRG of not supplying the full amount of oil agreed. Matters became even worse in 2017 in the wake of two major developments, detailed in full in my latest book on the new global oil market order. First, there was a huge vote in favour of Kurdish independence in September, following which FGI and Iranian forces took back control of the oilfields in Kurdistan, including the major oil sites around Kirkuk. Second, Russia effectively took over Iraqi Kurdistan’s oil sector due to three key deals also analysed in full in the book. Moscow sought to leverage this presence in the KRI into a similarly powerful position in the south of the country by casting itself as an intermediary in the ongoing budget disbursements-for-oil deal. Russia’s mischief-making in the country diminished in 2018, after an understanding was reached between it and China that Moscow would focus more on its interests in Iran and Syria, while Beijing would concentrate more fully on developing its assets in Iraq, in line with its ‘Belt and Road Initiative’ plan. The agreement between the two powers occurred as China was in the process of formulating its September 2019 ‘Oil for Reconstruction and Investment’ agreement signed with the FGI in Baghdad, which would be expanded in 2021 to the all-encompassing economic, political, and military ‘Iraq-China Framework Agreement’.
It remains the case that it is not in China’s or Russia’s interest to have a fractious breakaway region with previously strong ties to the U.S. Not only does it make the administration of Iraq’s massive oil and gas sector more difficult but also the granting of independence to the Iraqi Kurds might well make the sizeable Kurdish populations in the Middle East restless for the same. The endgame for China, Russia (and Iran) in Iraq is clearly delineated in the 3 August statement last year from Iraq Prime Minister, Mohammed Al-Sudani. He highlighted that the new unified oil law – run, in every way that matters, out of Baghdad - will govern all oil and gas production and investments in both Iraq and its autonomous Kurdistan region and will constitute “a strong factor for Iraq’s unity”. Destroying all financial independence for the region, which is reliant on ongoing independent oil supplies, is the key mechanism for achieving this aim. Once this has been done, then the region can simply be rolled back into one unified Iraq. Consequently, it would be extremely unwise to believe that the 18 December decision by the Karkh Court of Appeals against Iraq’s Oil Ministry marks a new dawn for the KRI. It might just be the twilight before the sun sets for good on its hopes for independence.
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