t is nearly two years since the Federal Government of Iraq (FGI) blocked oil exports from the semi-autonomous Kurdistan Region of Iraq (KRI) through the Iraq-Turkey Pipeline (ITP). The 25 March 2023 decision has seen billions of dollars in revenue lost by both sides, as around 400,000 barrels per day (bpd) of Kurdish crude exports and 75,000 bpd of Kirkuk crude sales have ceased to flow through the KRI into the Turkish port of Ceyhan. Hopes for a resumption of such oil flows have been buoyed by the Iraqi parliament’s approval last week of a budget amendment to guarantee that US$16 per barrel (pb) will be paid by the FGI’s Finance Ministry to the Kurdistan Regional Government (KRG) for oil produced in the northern region. This effectively acts as a subsidy for production costs incurred by international oil companies (IOCs) operating in the KRI and replaces the previous offer of US$7.90 pb that was rejected by the KRG. So, is this optimism that oil exports will resume from Iraq’s Kurdish Region into Turkey well-founded?
History would strongly suggest that it is not. The origin of the current dispute was not March two years ago when the ban was imposed by the FGI in Baghdad or February 2022 when the Baghdad-based Federal Supreme Court of Iraq deemed such contracts unconstitutional. Instead, it all began on 23 April 2013. On that date, the KRG passed a bill that would allow it to independently export crude oil from fields located in the semi-autonomous 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 in Baghdad 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 bpd – out of a total 3.3 million bpd across Iraq — and planned to increase this to 1 million bpd by the end of 2015. In sum, the KRG intended the 2013 bill to give the KRI complete financial independence from the rest of Iraq 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 correctly saw this as an existential threat to its future, given that it is what the U.S. and Great Britain had quietly promised the KRG in exchange for its providing the Kurdish Peshmerga army as the key boots on the ground in the fight against Islamic State.
The FGI’s first response was to sue the KRG for any oil sales done independently of the central government at every opportunity. However, these legal manoeuvres had mixed results for Baghdad, as the 2005 Iraq Constitution was unclear on the issue of which authority had power over 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.
Consequently, Baghdad has argued that any IOC which did not submit contracts made independently with the KRG for revision by Iraq’s Oil Ministry in accordance with the Iraq Constitution have no right to use the Kurdish routes to export the oil they produce.
Following several mixed legal results for the FGI, Baghdad switched tactics and decided instead to try to conclude a deal with the KRG that would curtail all independent oil sales from the Kurdish Region in exchange for a regular disbursement of funds from the central government budget. More specifically, a landmark deal in November 2014 laid out that the FGI would pay the KRG 17% per month of the central government of Iraq’s budget after sovereign expenses (around US$500 million at that time) 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). However, it was not just the lack of clarity of the 2005 Iraq Constitution that undermined the chances of success for this deal.
More crucially it was the completely opposite endgames that each side had in mind for the financial power that would result from dispersal of those oil export funds. In essence, the KRG still wanted to use the money to establish financial independence from Baghdad before doing the same politically and establishing the independent state of Kurdistan. At the other end of the scale, the FGI wanted to centralise all oil flows through its own SOMO vehicle, then incrementally reduce the budget disbursements to the KRG, and then simply roll the Kurdish Region into the rest of Iraq to function just as any other non-independent region of the country, as also examined in detail in my latest book on the new global oil market order. This ultimate objective was even more clearly laid out on 3 August last year when Iraqi Prime Minister, Mohammed Al-Sudani stated 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 the FGI and KRI areas and will constitute “a strong factor for Iraq’s unity”.
Given its massive oil and gas reserves, critical geographical positioning in the heart of the Middle East, and crucial role in the Shia Crescent of power stretching across the region, the world’s big powers also have their own agendas at play in its destiny. China and Russia have long been core sponsors of the FGI, along with neighbouring Iran, and have been powerful forces behind the idea of subsuming the KRI into the wider Iraq. As a senior political source in Moscow exclusively told OilPrice.com many months ago: “Iraq will be one unified country and by keeping the West out of energy deals there, the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.” On the other hand, according to a senior source who works closely with the European Union’s (E.U.) energy security complex, the KRG has made it clear that it wishes over the long term 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, according to the E.U. source.
This superpower tug-of-war is also being played out in new oil and gas deals seen in the FGI region of Iraq. France’s TotalEnergies is still working on its landmark US$27 billion four-pronged deal there, and Great Britain’s BP has agreed to develop the huge Kirkuk oil fields. This not only dovetails into the British firm’s 50%-stake in Iraq’s giant Rumaila field but also sinks into TotalEnergies’ plans across the country. On the other hand, more than a third of Iraq’s proven oil and gas reserves and over two-thirds of its current production are managed by Chinese companies, according to industry figures. Indeed, Chinese companies combined have direct shares in about 24 billion barrels of reserves and are responsible for the production of around 3 million bpd. It may well be that Baghdad is still playing its long-running game of playing both sides against each other for maximum gain, in which case keeping the stalemate going between itself and the KRG remains in its best interests. Iraqi Oil Minister Hayan Abdul Ghani said last week that talks are underway with the Turkish government to prepare the Iraq-Turkey Pipeline for a resumption of operations. However, he also said that his Ministry has made it clear to the KRG that to benefit from new budget disbursements it must transfer its oil to SOMO at a volume of never less than 300,000 bpd.
By Simon Watkins for Oilprice.com
