Iraq seeks last-ditch deal with Kurds to restart 0.5% of global oil production

Dispute between Baghdad and Erbil over oil and gas dates back to controversial articles in Iraq's 2005 constitution

Kawergosk refinery in the autonomous Kurdish region of northern Iraq, where the government is at odds with Baghdad over oil production and exportation rights. AFP

Iraqi officials in Baghdad and members of the semi-autonomous Kurdish Regional Government (KRG) in Erbil have been trying to strike an agreement on the future of the northern region’s oil exports, after talks ended inconclusively on Tuesday.

The negotiations follow an international arbitration ruling last week that declared Kurdish oil exports were illegal, leading to the shutdown of oil supply to the main export pipeline through the Turkish port of Ceyhan. About 0.5 per cent of global production has been halted.

The move could end an almost 15-year-long dispute between Baghdad and Erbil over how oil exports and revenue are managed in the semi-autonomous region.

Potentially, negotiations could settle a row over the country’s constitution, which was supposed to outline rights to oil production and exportation. A new law called for by the constitution, detailing national-level energy rights, has languished for years but could yet be revived.

“The KRG at the moment is working hard with Baghdad to pass the oil and gas law,” a Kurdish government official told The National on condition of anonymity.

“Article 112 of the constitution says we must jointly manage the oil and gas sector and this is what we have been trying to do since 2019 with the current cabinet,” the official added, outlining the Kurdish interpretation of Iraq’s 2005 constitution.

For now, both sides are trying to break the impasse.

Oil production shut down

In the absence of a deal, up to 450,000 barrels per day (bpd) of oil from fields operated by Kurdish and international companies could be shut in, as storage space runs out after the closure of the Iraq-Turkey pipeline, a move which followed the ruling.

But a deal on the fate of the oil — which Baghdad has long insisted belongs to the federal government — could yet be struck, which could mean the debt-ridden KRG receives about $1 billion a month from the federal government, analysts have told The National.

Regular payments from Baghdad to the KRG were agreed on following the US-led invasion, at 17 per cent of Iraq’s oil revenue, based on an estimate of the region’s population.

Under a new deal, these could resume, having been in dispute since January 2014 when the Kurdish region began exporting oil independently using the Iraq-Turkey pipeline, without Baghdad’s consent.

Former prime minister Nouri Al Maliki objected to the use of the pipeline by the Kurdish government in Erbil. Baghdad then stopped the monthly payments, plunging the region into a financial crisis in the midst of the conflict with ISIS. The region has yet to fully recover from the dispute, weathering further global disruption such as Covid-19 and bitter territorial disputes with Baghdad.

After the ISIS war ended, payments were partially restored but at a lower level, 12.67 per cent, based on a 2003 estimate of the Kurdish region’s population by the UN, and even then only irregularly.

Various short-lived deals have been struck between the two sides, in which the Kurds allowed Iraq's State Organisation for Marketing Oil (Somo) to market the oil in exchange for payments to Erbil from Baghdad.

In several instances, the deals ended amid accusations of Baghdad withholding payments or that the KRG was keeping oil from Somo.

Financial crisis

In the absence of regular payments, the Kurdish region has struggled to meet public sector salaries and payments for international oil companies, amounting to several billion dollars' worth of debt.

The region has also had to sharply cut the price of its marketed oil, a sweetener after Baghdad threatened buyers with legal action.

Last week, the Paris-based International Chamber of Commerce's International Court of Arbitration ruled that the Kurdish exports were in breach of a 1973 agreement between Baghdad and Ankara, which said the pipeline through Ceyhan could not be used without Baghdad’s permission.

Turkey was ordered to pay Iraq about $1.5 billion in compensation, reportedly a far smaller sum than Baghdad had hoped for. Iraq was also ordered to pay Turkey an as-yet-unknown amount for failing to pay Turkey fees for use of the pipeline in Turkish territory, a claim that dates back decades. Iraq still uses the original leg of the pipeline to export oil from Kirkuk.

At the heart of the dispute is the failure of both Baghdad and Erbil to pass a federal law that would have settled a row over articles in the country’s constitution related to oil and gas rights.

Constitution row

The Kurdish official close to the matter said the crisis was accelerating long-stalled efforts to pass a version of the legislation.

The law “will reform the oil and gas sector throughout the country but until then the KRG will be keen to resume oil flows through Turkey and the KRG is expecting the oil flow to resume within the current week”. the official said.

His remarks echo a statement from Iraq’s Ministry of Oil saying both sides would “discuss the mechanism of exporting Iraqi oil through Turkey’s Ceyhan port with the concerned entities in the Kurdistan region and Turkish authorities”.

According to Kirk Sowell, who runs the Utica Risk consultancy focused on Iraqi politics, a new deal could involve resumption of significant payments to the KRG — provided oil prices remain elevated and even in the absence of a new oil law.

Iraq’s Prime Minister Mohammed Shia Al Sudani has tried to build cordial ties with the Kurdish Democratic Party (KDP), which dominates the region’s oil industry from its base in Erbil, and the Sulaymaniyah-based Patriotic Union of Kurdistan.

The outreach is despite pushback from allies within his largely Iran-aligned coalition, the Co-Ordination Framework, the dominant bloc in parliament, some of whom are strongly opposed to the KDP.

“The Sudani-KRG deal is incorporated into the budget," Mr Sowell said. "It creates what is called a unified account for all KRG revenue and requires the KRG to export 400,000 bpd through Somo minimum and also submit customs duties to this account.

“When Sudani and others say that this resolves all problems between Baghdad and Erbil, that is only true if there is compliance,” he added, referring to past failed agreements between the two sides.

“The whole pipeline issue will go away if the KRG complies, because they'll be exporting through Somo and not independently. The problem is that the KRG has massive debts, including payments to oil companies it has to make for its independent oil industry to function.”

Mr Sowell said the KRG stood to receive 1.38 trillion Iraqi dinars, or about $1.06 billion, a month, but this could depend on oil prices remaining high. He said the Kurdish regional government, like Baghdad, overspends heavily on public sector salaries, putting its economy in jeopardy during oil downturns.

Omar Al Nidawi, an analyst with the NGO Enabling Peace in Iraq Centre, said prospects for a deal were encouraging but warned hardliners linked to Mr Al Sudani could yet derail compromise.

“The passage of a law would be positive," he said. "There is, however, considerable risk of negative repercussions. That risk arises from the potential of the kind of Baghdad we have right now — a Co-ordination Framework-dominated one — to overreach.

"If politicians in Baghdad choose to overreach and see this as an opportunity to humiliate the Barzanis, then that sort of approach could produce legislation [or attached settlement terms] that can be destabilising to the KRI [Kurdish Region of Iraq] internally, or to its relations with the rest of Iraq," he said, referring to the Barzani dynasty that runs the KDP.