The US intervention in the oil dispute between Baghdad and Kurdistan has been met with resistance from Baghdad, who views it as meddling in internal affairs.
The Federal Government of Iraq aims to unify the country under its control by ending Kurdistan’s independence and controlling all oil and gas production and revenue.
The ongoing oil embargo and the dispute over budget disbursements have left Kurdistan’s oil future uncertain and highlight the challenges of achieving a sustainable agreement between the two sides.
The U.S. last week stepped into the long-running embargo by the Baghdad-based Federal Government of Iraq (FGI) of independent oil exports from Iraq’s semi-autonomous region of Kurdistan (KRI) centred in Erbil. These flows into Turkey were stopped on 25 March 2023 after the International Chamber of Commerce (ICC) ordered Ankara to pay the FGI US$1.5 billion in damages for these allegedly unauthorised oil exports. U.S. State Department spokesperson Matthew Miller told local Iraqi news outlets that Washington has encouraged the historically pro-West Erbil and more pro-China Baghdad to reach a sustainable agreement on budgetary issues that would facilitate sustained oil production in the Kurdistan Region. The U.S. State Department added that political parties in the Kurdistan Region should form an inclusive government as this will enhance the Region’s stability and economic advancement. Long-delayed parliamentary elections were finally held in the Region on 20 October, but no agreement has been made on the mechanism for forming a government. In response, Iraqi Parliament’s Foreign Affairs Committee member Mukhtar Al-Mousawi told Iraqi news sources that: “This blatant interference in Iraq’s internal affairs, including the budget and other issues, cannot be ignored and must be formally rejected by the relevant government bodies, parliament, and political forces.” He added: “The financial and oil disputes between Baghdad and Erbil are internal matters, and no external party should interfere as such involvement only exacerbates the disagreements, so the U.S. State Department must avoid meddling.”
In the migraine-inducing complexity of Iraq politics, it is often difficult to see the proverbial wood for the trees. However, a clear path to the conclusion of the seemingly interminable disputes between the FGI and the KRI has long been signalled by Baghdad if the observer looked closely enough. It 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”. To put it even more plainly, the Federal Government of Iraq’s endgame is simply to end any independence for the Kurdistan Region and to roll it into a unified Iraq, as analysed in full in my latest book on the new global oil market order. The principal mechanism by which this will be done is to starve it of cash from its only significant source of income – oil exports, and to a lesser degree those of gas. In this way, all troublesome political wranglings over budget disbursements will end, as will similarly time-consuming legal rumblings from international oil companies still operating in the Kurdistan Region, and the Federal Government of Iraq will keep all the money from oil and gas sales across the entire country. Baghdad’s key sponsors China and Russia fully support such a solution according to multiple senior sources in the Russian, Iranian and Iraqi regimes exclusively spoken to in recent months by OilPrice.com. As one such source put it: “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.”
Aside from anything else from Baghdad’s perspective, the dispute centred on oil produced in the Kurdistan Region has not been properly settled since its emergence at the onset of the new system of governance in Iraq in 2003, immediately after the fall of Saddam Hussein. At that time, it was broadly agreed that the KRG would export a certain volume of oil from its own fields and Kirkuk via Iraq’s State Organization for Marketing of Oil (SOMO) and would not independently sell oil from the fields on the international markets, as also detailed in my latest book. In return, Baghdad would disburse a certain level of payments to the KRG from Iraq’s central budget. From 2003 to November 2014, there was constant dispute from both sides that the other had not met the terms of that understanding. In November 2014, however, a deal was struck between the FGI and the KRG in which the KRG agreed to export up to 550,000 barrels per day (bpd) of oil from its own fields and Kirkuk via SOMO and, in return, Baghdad would send 17% of the federal budget after sovereign expenses (around US$500 million at that time) per month in budget payments to the Kurds. This agreement – which again functioned properly only sporadically – was then superseded by an understanding reached between the KRG and the new Iraqi federal government formed in October 2018 centred on the 2019 national budget bill. This required the FGI to transfer sufficient funds from the budget to pay the salaries of KRG employees (along with other financial compensation) in exchange for the KRG handing over the export of at least 250,000 bpd of crude oil to SOMO. Since then, though, the FGI delivered the funding for the monthly salaries of the KRG employees less than reliably and the KRG delivered the agreed upon volume of oil to SOMO on the same ad hoc basis.
Another recurrent sticking point for the two sides at that stage was a fundamental disagreement over the amount of budget dispersals and oil transfers that should be involved in the deal – the same reason that the November 2014 deal did not survive intact for long. The situation was worsened by the ‘yes’ referendum vote for independence in Kurdistan in September 2017, as also thoroughly analysed in my latest book. Before this, Kurdistan had been hoping to raise oil exports above 1 million bpd, becoming one of the world’s fastest growing oil regions and allowing for the full resumption of the November 2014 deal. After the ‘yes’ vote, the basis of the deal became null and void when FGI and Iranian forces took back control of the oilfields in Kurdistan, including the major oil sites around Kirkuk. A that point the FGI argued that the Kirkuk fields had been occupied illegally in the first place, having been under Kurdish control only since 2014 when the Iraqi army collapsed in the face of ISIS. From then, the starting point of any negotiations for the FGI in Baghdad over budget disbursements to the KRG was that they should accord with the percentage share of the Kurdistan population in the overall population of Iraq. This, according to the FGI, was 12.67% – a long way from the 17% of the federal budget after sovereign expenses that had been the cornerstone assumption of the November 2014 deal.
The issue of the percentage share of the FGI Budget which should be disbursed to the KRI was apparently settled in the talks that led to the 2023-2025 Budget Agreement between the two sides. The figure arrived at stayed at 12.67% in direct allocations. However, as highlighted by non-resident senior fellow with the Atlantic Council’s Iraq Initiative, Ahmed Tabaqchali, this share becomes larger when some of the KRI’s related elements of sovereign expenditure are added to this percentage allocation. More specifically, in the 2023 budget proposal, the KRI’s 12.67% share amounted to IQD14.8 trillion (US$11.3 billion), which increased to IQD16.6 trillion following related elements of sovereign expenditures. Consequently, the resultant effective share of the FGI Budget due the KRI rises to 14.76%. It is towards addressing this inherent discrepancy in the formula that the latest disagreements between the FGI and KRI have arisen. November saw the FGI Cabinet approve a proposal to amend the Article (that covers sovereign expenditures, in particular relating to transportation expenses.
Crucially from the KRI’s perspective, the figures that will be used in such Budget calculations will come from “an internationally specialised consulting entity, as agreed upon by the Federal Ministry of Oil and the KRG’s Ministry of Natural Resources, within 60 days of the law’s enactment”. It added: “If no agreement is reached within this period, the Federal Council of Ministers will determine the consulting entity.” The announcement then stated that oil produced in the Kurdistan region must be promptly delivered to SOMO or the Federal Ministry of Oil,” and that, “The Federal Ministry of Finance will provide an advance payment of US$16 per barrel to cover production and transportation costs, with final settlement occurring retroactively after the consulting entity’s review is completed.” In short, a senior energy sector source who works closely with KRI politicians exclusively told OilPrice.com last week, the KRG thinks the review and the outcome will be rigged against it by the FGI. Given this, there seems little prospect that the FGI and KRI will reach any sort of sustainable agreement any time soon and even less that the embargo on Kurdistan oil exports to Turkey will be lifted either.