Kurdistan's oil export is yet to resume through the Turkish pipeline, 75 days after it was blocked following the ICC's arbitration court's decision issued on March 23, 2023, only two days after Kurdish New Year holidays known as Nawroz. Despite the fact that both administrations in Erbil and Baghdad were only able to reach an agreement within 10 days of the court's decision, the complicated process of restarting Kurdistan's oil exports has not yet been finished on a trilateral basis between the governments of Kurdistan Regional of Iraq, the Iraqi federal administration, and Turkey.
Unlike most estimates about the Erbil-Baghdad agreement, in Erbil and among worldwide supporters of the deals, notably in Washington DC, the arrangement couldn’t play the anticipated role in moving two governments closer to settling their long-standing disagreements. The long delays in restarting the Kurdistan oil export, followed by unexpected federal officials’ positions on Kurdistan's oil and eventually unilateral modifications by some Iraqi parties' parliamentarians in the previously agreed draft of the federal budget, indicate a rocky road in running the oil deal between two governments.
Oil deal between Erbil and Baghdad
The ICC Arbitration Court's decision on Kurdistan's oil export through Turkey's pipeline on March 23, 2023, despite highlighting the delivery of Kurdistan's oil to its buyer's vessels in Ceyhan in violation of the 1973 Iraq-Turkey agreement and its revision in 2010, resulted in the region's oil export being halted quickly, only two days after the issuance date.
Frictions surrounding Kurdistan's oil, which escalated to include reducing its allocation from the federal budget, first arose in 2007 with the passage of Kurdistan's oil and gas law by its parliament. This was followed by the establishment of the Ministry of Natural Resources to oversee the region's oil and gas policies. However, tensions intensified when Kurdistan's oil pipeline was linked to a Turkish pipeline, enabling access to international markets. Following Kurdistan's ambitious plan to meet European market demand with its natural gas reserves in early 2022, the federal supreme court's ruling on February 15th, 2022, assumed Kurdistan's oil and gas to be unconstitutional, and subsequent pushes by the Iraqi oil ministry on foreign companies working in the region's oil and gas to leave Kurdistan regional oil projects, made Kurdistan's oil and gas risky for most international service providers, however, the ICC Arbitration Court's decision largely halted the region's oil production, which eventually encouraged both governments to resume it through an agreement signed at April 4th, 2023, but recent developments in the Iraqi political context have cast serious doubt on the deal's future.
Hopes on Oil Deal
Most Iraqi and Kurdish parties domestically and foreign friends internationally, including the United States, welcomed and supported the Erbil-Baghdad agreement on Kurdistan's oil export as the first major step toward resolving all long-standing disputes between the two governments over land, federal budget shares, oil and gas, and border controls. Permanent differences between the federal government and the Kurdistan Regional Government (KRG) were seen to be resolved through the adoption of mutually acceptable laws for federal hydrocarbon management and the 2023 federal budget, the latter of which will serve as a framework for fiscal years 2023 through 2025.
Indeed, the agreement has been found supportive of the Iraqi federal plan for improving the state’s energy security, including the cooperations with neighboring countries to improve its capability in electricity supply, attracting some giant energy companies to participate in its natural gas and power production projects, where certain wealthy Kurdish investors play a major role in supporting federal government projects in the renovation and expansion of power plants and refineries in the central and southern provinces.
Difficulties began as a result of federal budget negotiation
Modifications unilaterally opposed by the Iraqi parliament out of the agreed-upon structure of the federal budget would result in a lower share of KRG in the federal budget and strengthen doubts on the chance to make a win-win federal hydrocarbon law, which was previously assumed could secure Kurdistan's rights according to the Iraqi Constitution and, most seriously, the Iraqi federal ability to satisfy its agreements with KRG in the presence of the Iraqi Federal Supreme Court, whose decisions are mostly against Kurdish understanding of the Constitution.
KRG's oil and gas production capacity, as well as administrative competencies, were the principal targets of federal budget modifications. Despite the fact that the majority of these regions have been under KRG control since 1991—roughly 12 years prior to the formation of the new Iraqi government in the wake of the US-led invasion of Iraq in 2003—the KRG's access will be eliminated to the already-developed oil fields in its administration areas placed in the provinces of Ninawa and Kirkuk. Also, the federal budget demanded that the KRG deliver at least 400,000 bpd of oil in order to receive its full share of the budget, which was well beyond the region's actual oil production capacity, especially considering that most oil fields within the KRG's territorial area had been shut down for over two months.
Another change appears to have been made with international oil sales in mind; it states that if Kurdistan’s oil loses access to the Turkish Ceyhan port, it must deliver its oil to the federal government for domestic refining instead. This would, among other modifications, reduce the Iraqi federal government's interest in settling the financial fines issues over the ICC arbitration decision with the Turkey government, which amount to about $1.47 billion and have remained the main barrier to resuming oil flow on the Turkish side, as well as raise difficulties in handling this amount internally in Iraq due to a lack of refinery capacity in the KRG and neighboring Iraqi provinces, as well as resolving contractual issues with international buyers of Kurdistan's oil, who mostly have paid for it in advance.
However, the most critical current change is that it eliminated payable expenditure for Kurdistan's oil production to be the same as Iraqi federal production rates, despite the fact that oil production in Kurdistan is in Production Sharing Agreements (PSA), which required oil operators to fund production against the Iraqi contract type of Technical Purchasing Agreement (TPA) using Iraqi federal funds. The different types of contracts and funds, as well as the nature of oil fields in both areas of Iraq, resulted in a 10 to 15 USD per barrel difference in Kurdistan's oil production side compared to the Iraqi federal side, and will automatically deduct the semi-autonomous region's budget amount to pay the extra costs to oil operator companies working in the region. This change will not only increase financial obstacles for KRG but will also reduce the development budget for future projects, resulting in less production capability in future months and years and reducing KRG's income from the federal budget, where its production rate is defined as a minimum of 400,000 bpd to receive its entire share of the federal budget.
Uncertainty over the oil deal
Indeed, the existing difficulties faced by the Kurdistan Regional Government (KRG) regarding the federal budget appear even more troubling when coupled with the statements made by Iraqi authorities regarding Kurdistan oil and their frequent changes in the projected timeline for resuming the export process. Particularly noteworthy are the recent comments made by the Iraqi federal government during an interview with Kurdish Rudaw TV, which highlighted the Iraqi government's financial gains resulting from the suspension of Kurdistan's oil exports.
In truth, the current challenges of KRG over the federal budget look more problematic when they would be companied by the Iraqi authorities words about Kurdistan oil and their repeated revises in claimed time for resuming the export procedure, critically the recent Iraqi federal remarks on Kurdistan's oil halt, described in profit of the Iraqi federal government during an interview with Kurdish Rudaw TV.
The probable lower share of the KRG in the federal budget, caused by recent modifications in federal budget law, and doubts over passing a win-win hydrocarbon law in the federal parliament, raised uncertainty about the Erbil-Baghdad agreement and could encourage KRG to go it alone. Turkey might be willing to directly cooperate with the KRG for higher transit prices and more discounts over purchasing oil, compared to its contract with Iraq.
As a consequence, it's not far from the truth to claim that the future of the Erbil-Baghdad oil deal is ambiguous and questionable, as other earlier deals have faced the same trust, without being initially operated or terminated midway, during the last two decades.
Shahriar Sheikhlar is an oil and gas analyst concentrating on Kurdistan’s and Iraq’s oil and gas industry. He consults local and international news media and think tanks on oil and gas development policy, energy security, and market analysis.
By Shahriar Sheikhlar for Oilprice.com