Context

Following the March 23 ruling by the International Court of Arbitration of the International Chamber of Commerce (ICC), which suspended oil exports from the Kurdistan Region to Turkey’s port in Ceyhan, the Kurdistan Regional Government (KRG) and Iraq’s Federal Government reached a temporary arrangement to resume the flow of crude oil exports.

On April 4, KRG Prime Minister Masrour Barzani and his Iraqi counterpart Mohammed Shia al-Sudani signed an agreement in Baghdad, marking a significant development in the relationship between the regional and federal governments. This deal is considered the beginning of a new era between the two parties after nearly a decade of tension over the management of oil-export revenues. Both sides have welcomed the agreement, which is crucial to the economic wellbeing of the region and the country.

What led to the agreement?

Oil exports from the Kurdistan Region have been ongoing since April 2014 after the Iraqi government suspended the KRG’s share from the federal budget. This occurred around the same time as the emergence of the Islamic State (ISIS) and the subsequent displacement of almost two million Iraqi citizens and Syrian refugees to the Kurdistan Region. The KRG had been using the oil revenues to run the administration of the autonomous region and fund the overpopulated refugee camps. 

This arrangement continued until February 2022 when, in a turn of events, Iraq’s Supreme Federal Court ruled that Kurdistan’s oil exports were unconstitutional. In response, the KRG adopted a resolute stance, asserting its right to manage the natural resources within its territories and characterizing the verdict as "politically motivated" and unjustified on a constitutional basis.

The oil deal is temporary and will be in force for a transitional period until the budget law is passed and, ultimately, the new Iraqi Oil and Gas Law is ratified. 

The Kurdistan Region's oil exports were governed by the provisions of Oil and Gas Law No. 22 of 2007, while Iraq continues to administer its energy sector based on the outdated Oil and Gas Law No. 80 of 1961. The Kurds hold that the latter was primarily designed for a central government and is unsuitable for the current federal structure of Iraq, which has been in place since 2005.

Nevertheless, negotiations to settle the long-standing oil and budget disputes have been actively underway between Baghdad and Erbil since the incumbent cabinet of PM Sudani was formed in October 2022. Thereafter, a high-level Kurdish delegation made several visits to Baghdad to discuss the differences and expressed optimism for achieving a lasting agreement.

In an exclusive interview with Kurdistan Chronicle, Umed Sabah, the President of the Diwan of KRG’s Council of Ministers, highlighted the atmosphere of goodwill and determination that facilitated the agreement between Baghdad and Erbil. 

Sabah emphasized that the regional and federal governments recognized the detrimental effects of the suspension of oil exports on the economy of Iraq and the well-being of its people. He further pointed out that the halting of oil exports from the Kurdistan Region and Kirkuk would result in a decline of 500,000 barrels per day in Iraq's overall oil exports, ultimately causing adverse impacts on both the economy and welfare of people in both the Kurdistan Region and Iraq.

Content of the agreement

The recent oil agreement between the Iraqi federal government and the Kurdistan Regional Government includes four main provisions aimed at resuming the flow of oil from Kurdistan to the international market. 

The agreement stipulates that a four-member joint committee will be established to formulate a mechanism for selling KRG's oil to traders who have contracts with the region until the passage of Iraq’s federal budget. The Oil Ministries of both the KRG and Iraq will negotiate with oil companies regarding their duties and entitlements in the Kurdish oil sector. The oil revenues will be deposited into a bank account approved by Iraq’s Central Bank, which will be supervised by the Iraqi government, while the Kurdistan Region's Prime Minister or its representative will have sole authority to access the revenues. Lastly, a representative of the KRG, chosen by PM Barzani, will be appointed as deputy general director of Iraq’s state oil marketing company (SOMO).

Iraq continues to administer its energy sector based on the outdated Oil and Gas Law No. 80 of 1961. Kurdistan insists that the law was primarily designed for a central government and is unsuitable for the current federal structure of Iraq. 

Kamal Mohammed, the KRG’s acting Minister of Natural Resources, shed light on the complex technicalities of the agreement in an interview with Kurdistan Chronicle. According to Mohammed, the joint committee created under the new deal will oversee the sale of Kurdistan oil at the highest price each month. However, all other procedures, including the extraction, transportation, storage, and management of Kurdistan crude, will remain under the complete control of the KRG.

“The only stage of oil exports that has been deemed illegal according to the ICC arbitration is the marketing stage. In other words, all other stages of oil exports have been found to be legal. In the past, the Kurdistan Region sold its oil at a lower price to encourage oil buyers who found dealing with the KRG risky due to restrictions imposed by the Iraqi government,” Mohammed added.

It is important to note that the KRG has entered into partnership agreements with international oil companies (IOCs), while Iraq has typically dealt with these firms through service contracts. This difference has resulted in a lower income per barrel for the Kurdistan Region's oil exports in the past.

Mohammed pointed out that the traders and IOCs who have contracts with the KRG have now accepted the new arrangements stipulated in the Baghdad-Erbil deal.

According to the information obtained by Kurdistan Chronicle, the governments of Iraq and the Kurdistan Region have reached a consensus on exporting 400,000 barrels of crude oil per day, with a margin of ±10%. The pricing mechanism for the exports will be determined by SOMO, which discloses the price in the first week of each month for traders to submit their offers.

Transitional period

The agreement in question, however, is said to be a temporary formula to deal with the export suspension for a transitional period. That means that a more concrete and comprehensive deal is expected to follow. Asked about what comes next, the President of the Diwan of KRG’s Council of Ministers noted that the agreement specifically outlines its temporary nature, as it is set to be replaced with the passing of Iraq’s federal budget law by the parliament.

The Iraqi Council of Ministers has approved the budget bills for the fiscal years 2023, 2024, and 2025, which have now been submitted to the Council of Representatives for ratification. The budget law contains provisions for a financial clearing process between the KRG's oil revenues and its share from the federal budget. This means that the Iraqi government will deduct the amount of monthly oil revenues from the KRG's monthly budget share to balance the difference.

Economic and political implications 

The deal between Baghdad and Erbil focuses exclusively on the resumption of oil exports, but it is evident that both sides anticipate positive political outcomes from the agreement in their relationship.

Since 2005, Baghdad and Erbil have had a tumultuous relationship, with the latter asserting that the former has not fulfilled its obligations to grant the Kurdistan Region its "constitutional rights," whether financial or political. Despite the challenges they have faced, the sides have continued to explore new initiatives to resolve their differences and have managed to maintain a functional relationship.

“We are 100% committed to the deal and don’t have any demands other than those in the budget bill. Moreover, we will fulfill our duties as a party to the deal and expect Iraq to fulfill its duties as well.” 

Umed Sabah, President of the Diwan of KRG’s Council of Ministers

When asked whether the recent oil deal between Baghdad and Erbil could be considered a win-win, Sabah replied that the Kurdish delegation did not approach the negotiations with the aim of outdoing the other party. Instead, they worked collaboratively as a single committee with their Iraqi counterparts to tackle the pressing challenge at hand.

“What was important for us during the negotiations was that we had the responsibility to protect the constitutional rights and interests of the people. This positive attitude helped us reach the deal,” Sabah stressed. “We are 100% committed to the deal and don’t have any further demands other than those in the budget bill. Moreover, we will fulfill our duties as a party to the deal and expect Iraq to fulfill its duties as well.”

International stakeholders

The disputes over oil exports affect not only Iraq and the Kurdistan Region but also international stakeholders involved in the sector, particularly those working in the Kurdistan Region. Therefore, any new agreement to regulate the oil sector between Baghdad and Erbil will also affect these vital partners.

After oil exports were suspended in March, there were concerns that the IOCs and traders would withdraw from the Kurdistan Region, but this did not materialize. On the contrary, according to Minister Mohammed, additional companies have expressed interest in investing in the KRG's untapped oilfields.

The KRG, meanwhile, appears optimistic about the implications of the recent deal with Baghdad. According to official statements, the Kurdistan Region hopes that the new arrangement will not only benefit the region financially but also provide a stronger legal basis for its oil sector, which has been a longstanding unresolved issue between the regional and federal governments.

In relation to the future of the contracts between the KRG and the IOCs, both Kurdish officials interviewed by Kurdistan Chronicle highlighted that Erbil would uphold its existing contracts within the new framework established by the agreement between Iraq and the Kurdistan Region.

What if a party breaches the deal? 

The Iraq-Kurdistan relationship has encountered numerous challenges due to internal, regional, and international factors in the past. This may raise concerns among both sides about the sustainability of the deal and each side’s commitment to it.

The Minister of Natural Resources of the Kurdistan Region stated that the political agreement that led to the formation of the current cabinet of Prime Minister Sudani serves as a guarantee for the deal. He added that the deal is considered "temporary" and only for a transitional period, as the permanent resolution of the oil disputes will be addressed in the Iraqi Oil and Gas Law, which is expected to be ready for ratification by the Iraqi Parliament within six months from the formation of the current Iraqi cabinet.

“Among the different stages of the oil business, including administration, extraction, transportation, storage, and marketing, only marketing was ruled illegal by the ICC.” 

Kamal Mohammed, KRG’s Acting Minister of Natural Resources

In October 2022, Iraq was finally able to form a new government after a year of early elections. According to the political agreement that facilitated this, the financial disputes between Baghdad and Erbil must be resolved. The agreement mandates a thorough audit of budget shares and oil exports from 2004 to 2023, with the resulting differences to be resolved.

This government-formation agreement, as the Kurdish minister argues, serves as the basis for the oil deal and, in fact, guarantees the commitment of both sides. 

Delayed resumption of exports

Asked about the delay in resuming the flow of oil exports from the Kurdistan Region to Turkey’s Ceyhan port, Minister Mohammed noted that there are several technical, contractual, and administrative procedures that must be completed before exports can begin under the new arrangement. The minister acknowledged that these procedures are complex and time-consuming, but expressed hope that they will be concluded soon. However, he also noted that the final decision on resuming exports ultimately rests with Iraq and Turkey.

“Turkey has suspended the pipeline at the request of the Iraqi government. Therefore, the latter will be required to officially request the former to lift the suspension. It also must be noted that the ICC’s ruling has put Turkey in debt to Iraq. This financial matter between Ankara and Baghdad needs to be addressed or it might affect the decision to resume KRG’s crude export,” the Kurdish minister concluded.