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Political Dynamics Impacting Oil Dispute in Iraq

The dispute over who controls oil in Iraq reflects internal Iraqi divisions that are about more than control over oil revenue. It is fundamentally a manifestation of the political struggle between the Kurdish Regional Government (KRG) and the Iraqi federal government over the distribution of national wealth, the scope of Kurdish autonomy in the new Iraqi federal system, and the magnitude of authority and influence of the Iraqi federal government in the Kurdish territories. International buyers of oil from northern Iraq must realize that their dealings with the KRG and buying unilaterally exported oil is essentially adding further complications to an already complicated internal Iraqi political scene.

kurdistan regional government

The Iraqi Constitution states that “oil and gas are the property of the Iraqi people in all governorates and provinces.” (Article 111) And in the article that follows, the Iraqi Constitution grants the federal government more authority in the management of existing oil and gas fields, but a shared authority with local governments in planning strategic policies to develop the oil wealth to maximize the benefits from its revenues. Additionally, Article 130 adds to the federal government’s authority by acknowledging all laws that are biased against local governments, from times predating the Iraqi Constitution, until they are replaced by new laws, which has not happened because of the disagreements among the Iraqi factions.

The Kurdistan Regional Government (KRG) interprets the constitution in a way that allows local governments to have a right to unilaterally decide management and contractual policies for new fields, especially when the Iraqi Constitution and existing law are silent on certain issues. The KRG cites Article 115 of the Iraqi Constitution, which states that any powers not specifically allocated to the federal government are retained by the local governments, and in case of a dispute between the federal government and local governments, the laws of local governments will prevail. Meanwhile the federal government insists that no policies can be set without its approval. Taking advantage of the current weakness of the federal government, the KRG executed contracts with several oil companies to develop new oil fields without any involvement from the federal government, which retaliated by rejecting the contracts.

The latest manifestation of the dispute between the two sides stemmed from the Iraqi Parliament’s failure to pass a federal budget before the end of its term. This left the KRG without funds if the production rates and oil marketing process were not agreed to with the Federal Government. The KRG responded to its financial crisis by deciding unilaterally to export oil from its fields through an arrangement with the Turkish government, whose role in Iraq has been politically disruptive: Baghdad and Ankara have disagreed over Iraq’s internal politics; they also disagree over the policy towards Syria, with Turkey supporting the armed opposition to President Bashar Assad while Iraq has called for a political solution.

When the Turkish government announced it authorized the export of Iraqi oil from northern Iraq without the approval of the Iraqi government, the latter responded on May 23, 2014 by filing a request for arbitration with the International Chamber of Commerce in Paris, citing Turkey’s violation of past bilateral treaties between the two countries. Turkey announced that it intends to distribute the revenues between the KRG and the Federal Government “according to the Iraqi Constitution,” while the Iraqi government argues that it is not Turkey’s business to interpret the Iraqi constitution, which does not have a formula to distribute the revenues (Turkey refers to the existing Iraqi budget figures that allocate 17% of the funds to the KRG).

Aside from Turkey, the rest of the world (especially potential importers) is divided on this issue. Most importantly, the U.S. official position has been a great disappointment to the KRG. The U.S. has said both in State Department press briefings and in statements by Bret McGurk, the US Deputy Assistant Secretary of State for Near Eastern Affairs, that the U.S. does not support any export of oil without the permission of the Iraqi federal government, and has expressed concerns about the ramifications of such unilateral action. The U.S. was also disappointed with the failure of the disputants to continue working according to the deal Bret McGurk helped to broker in March 2014, according to which the KRG would contribute 100,000 bpd to the Iraqi Government via the Iraqi pipeline network as of April 1st, 2014, while negotiations with Baghdad were ongoing. This good-will gesture was short-lived and the dispute now is back to square one, with the Kurds signing an agreement with Turkey to export oil in full defiance of the Iraqi federal government.

However, navigating international oil market rules is not as simple as it might seem. The KRG has learned that, although it can opt for unilateral actions without fear of coercive retaliation from Baghdad, it cannot as successfully impose its will outside Iraq. Other than Turkey, no other country seems to be enthusiastic about entering into trade agreements with the KRG without the approval of the Iraqi central government. The tanker carrying KRG’s first oil shipment has been zigzagging from one foreign destination to another—but so far there are no buyers. Countries like the U.S. and Italy have cautioned their firms against buying Kurdish oil after Iraq warned that it was going to take action against any buyers of the illegally exported oil. In other words, the Kurds can put the oil on tankers, but it is up to Baghdad to clear or block the way from the shipments to their destination. Aside from legal deterrence, it doesn’t pay in the long run for oil markets to purchase a small amount of Kurdish oil while jeopardizing long-term relations with the Iraqi federal government, which is one of the top oil producers and controls the second largest proven oil reservoir in the world.

What remains to be seen is the impact of the current crisis in Mosul, which fell into the hands of the Islamic State in Iraq and the Levant (ISIL). This new challenge is going to force the federal government to seek the support of the KRG and its Peshmerga forces to combat the terrorist threat in Mosul, which threatens both sides. This new development and the flood of refugees from Mosul into KRG territories, will prevail over the differences between the federal government and the KRG, and force the federal government to fund the KRG to cover the cost of hosting the tens of thousands of refugees who add a great financial burden to an already struggling region.

But in the long term, the dispute is not only about revenue and cash distribution. Both the Iraqi central government and the KRG are concerned about the political impact of whatever outcome this impasse is going to have. The KRG is trying to take advantage of the current chaos in Baghdad and enforce its own interpretation of the Iraqi constitution by creating precedent and fait accompli conditions that will be hard to reverse when the central government regains its strength. Being able to export northern oil will go a long way to secure independence and financial security for the KRG, which reduces any need to compromise when negotiating with Baghdad on all political and economic matters.

From Baghdad, the success of the KRG is viewed as a threat to the central government’s ability to exert any influence on the northern region and its ambitious leaders, who have repeatedly expressed the desire to become independent. Many in the federal government believe that the KRG’s ability to achieve sustained financial independence is a prelude to the partition of Iraq. As the situation stands now, the 17% of the Iraqi budget that goes to the KRG (mainly from the Basra oil exports) seems to be the only glue that keeps the quasi independent KRG attached to the rest of Iraq. Other than the mandate to equitably distribute the Iraqi revenues among Iraq’s regions, none of the other constitutional articles or other Iraqi laws seem to have a binding influence on the KRG-governed region. Even the airports and border entry points are operated by the KRG. The KRG has its own requirements for foreigners to enter its territories to the exclusion of those set by the federal government, although the Iraqi constitution clearly allocates this authority solely to the federal government.

Although this dispute is only a symptom of deeper, more durable, political and economic divisions, the current security developments in the Sunni areas of Iraq will reshape its outcome in more than one way. First, the Iraqi federal government will need all the help it can receive from the KRG in restoring security to northern areas that were deserted by the federal troops, by deploying the KRG forces (the Peshmerga) to the areas of Mosul and Kirkuk. Some of this deployment is already underway to protect areas with heavy presence of Kurdish populations. This need for cooperation will force some compromise over the oil issues in order to incentivize the KRG to faithfully aid the federal government in this time of need. Additionally, the presence of KRG forces outside the Kurdish territories will create facts on the ground, especially in the disputed territories claimed by the KRG, which will reshape all future negotiations between the KRG and the federal government. It is safe to say, that the greatest winner in the current Iraqi crisis is undoubtedly the KRG.

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