In theory, the embargo on oil exports to Turkey from the semi-autonomous Kurdish Region of Iraq (KRI) in northern Iraq imposed on 25 March 2023 by the Baghdad-based Federal Government of Iraq (FGI) in the south remains firmly in place. In practice, the Kurdish region is now producing around 250,000 barrels per day (bpd), compared to about 2,000 bpd only in the quarter immediately following the ban. “It is a direct challenge [by the KRI] to the authority of the Iraq government, which has repeatedly made it clear to [Iraqi] Kurdistan that all major oil flows from the region must go through the State Oil Marketing Organization [SOMO, controlled by the Oil Ministry],” a source who works closely with the Oil Ministry exclusively told OilPrice.com last week. “Such sales are the subject of continued legal action, and also jeopardise Iraq’s position in the ongoing OPEC+ cuts as they disrupt the quota [for Iraq as a whole],” he said. “This matter is not settled,” he added.
That said, according to a senior European Union (E.U.) energy security source, this latest course of action by oil firms in Iraqi Kurdistan might be regarded as the only worthwhile option left open to both them and any notion of independence for the Kurdish region. “Since the embargo was put in place, there have been frequent appeals from various companies, business groups, and politicians for a proper dialogue to begin over how best to end the current stalemate, but nothing was done, and there appeared no end in sight,” he exclusively told OilPrice.com last week. “As such, the Kurdish region [of Iraq] continued to lose the mainstay of its financing, and that threatens the viability of any genuine form of independence there from the federal government [in Baghdad], so what choice did they have?” Indeed, the current flouting of the spirit of the embargo followed an apparently last-ditch letter of appeal in January this year from the Association of the Petroleum Industry of Kurdistan (APIKUR) – the group that largely comprises the oil interests of several foreign firms directly or indirectly – to the U.S. Congress asking for its help in ending the impasse. The letter highlighted that the halt in exports affecting between 400,000-500,000 bpd of oil from Iraqi Kurdistan needed to be lifted because it put at risk over US$10 billion of U.S. and international investments in Kurdistan and because it was severely impacting the region’s economy and stability at a time when regional tensions are already heightened.
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Interestingly, although the recent huge increase in oil production in the KRI does run contrary to the spirit of the FGI’s embargo, it is a moot point as to whether breaks the letter of the law under which the embargo was imposed. Bizarrely in many instances, this huge addition in the region’s oil output is being sold through a variety of methods, which do not include direct use of main Iraq-Turkey Pipeline that runs from Kirkuk in the KRI to Ceyhan in Turkey on which the focus of the export ban falls. Instead, according to industry sources, the oil is often sold to local traders for a huge discount on the benchmark price who then typically sell it on to local refineries, which then turn the crude into gasoil and diesel. Otherwise, it is trucked to further-flung destinations, including Syria. Other reports mention that Iran is also a buyer of some of these flows from the KRI. However, given the longstanding close relationship between Tehran and Baghdad involving the disguising of Iranian oil as Iraqi oil and its onward sale into the international markets, as analysed in depth in my latest book on the new global oil market order, any oil sold from the KRI into Iran is unlikely to have the approval of Iran’s authorities and is likely to be smaller and ad hoc in nature.
That said, the question of the legal status of either the FGI’s embargo on KRI oil exports or of the KRI’s oil flows out of the country is one open to interpretation, given the 2005 Iraqi Constitution’s lack of clarity on the issue. According to the KRG, it has authority under Articles 112 and 115 of the 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. The KRG also 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 argues 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. However, the FGI in Baghdad and SOMO argue 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, they believe that all oil and gas developed across all of Iraq should be sold through official channels of the central FGI in Baghdad.
Efforts on both the FGI’s and KRI’s side to find a practical solution to this constitutional conundrum in previous years have also proven woefully unsuccessful. The original deal agreed between the two sides back in 2014 was for 17 percent of the FGI’s budget after sovereign expenses (around US$500 million at that time) to be made from Baghdad in exchange for the Iraqi Kurdistan region exporting up to 550,000 bpd of oil from its own fields and Kirkuk via the FGI’s SOMO. However, from very early on the deal never worked properly, with both sides claiming the other was not living up to its part of the bargain. From late 2017, Russia ensconced itself as a key negotiator between the two sides, having effectively taken over the KRI’s oil sector by that point, as also analysed in depth in my latest book. It was soon clear that Moscow was acting in bad faith when it came to the KRI, simply using its position to leverage greater oil and gas field advantages in the south of the country instead.
As it stands, the FGI has made it clear that the KRI must immediately reduce output to 46,000 bpd, with any additional output over that to necessitate the payment by the KRI of compensation to the FGI. According to the Iraq oil industry source spoken to by OilPrice.com, any failure to adhere to either of these strictures will result in the FGI withholding further budget payments to the KRI. Since the embargo began, the FGI has not paid around $7 billion of funds arguably due to the KRI, according to official comments from Baghdad. All these developments align perfectly with the FGI’s overriding ‘One Iraq Plan’, which ultimately aims to remove any remaining semblance of independence from the KRI before simply rolling it into the rest of a fully unified Iraq. This was more than hinted at on 3 August last year, when Iraqi Prime Minister, Mohammed Al-Sudani, clear 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 Iraq and its autonomous Kurdistan region and will constitute “a strong factor for Iraq’s unity”.
By Simon Watkins for Oilprice.com
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