The Return of Reason: The Baghdad-Erbil Oil Dispute, Nouri al-Maliki and Haider al-Abadi

In a BBC interview in March 2013, Tony Hayward, former BP chief and current CEO of Genel Energy, an upstream oil corporation that is heavily invested in the Kurdistan Region, argued, when questioned about the Kurdistan-Iraq oil dispute, that in the coming months ‘…saner heads [would] come to the table and there’ll be an agreement…We’re going to get to a place where people realise this is too big an opportunity for all of Iraq.’ Although well over a year has gone by and an agreement has yet to be reached, it seems at least that ‘saner’ heads have at least come to the table. With Nouri al-Maliki stepping down as Prime Minister late this summer, and the more pragmatic and Kurdistan-friendly Haider al-Abadi taking his place, optimism is again to be felt in both Baghdad and Erbil.

Image courtesy of jan Sefti, © 2009, some rights reserved.

Image courtesy of jan Sefti, © 2009, some rights reserved.

The dispute

This dispute that revolves around the right to produce and sell the vast hydrocarbon resources in the autonomous Kurdistan Region comes down to different interpretations of the 2005 Iraqi constitution. Although the constitution clearly states that the central government in Baghdad owns the right to existing oil fields, it does not provide a clear picture of who has the ownership of new oil fields. Baghdad claims that it has the right both old and new fields; whereas Erbil states that the constitution gives them the right to take advantage of untapped reserves, and produce and sell its own natural resources. Furthermore, all oil revenues should, according to Baghdad, flow directly to the central government, and then be distributed to the different regions of the country. The agreement also states that the Kurdistan Regional Government (KRG) should receive 17 per cent of the revenue; but according to officials from Erbil, they have repeatedly received amounts that do not make up more than 10 per cent of the country’s total oil revenue.

Despite repeated warnings from Baghdad, over the last decade the KRG have, without involving the central government, invited foreign oil corporations to explore and extract oil, and offered them production-sharing deals that directly benefit the KRG. This way of ‘teasing’ the central the government, and, in many ways, testing the waters for increased autonomy in the future, reached new levels in January 2014, when the KRG started to ship the oil independently to the Turkish port of Ceyhan. This move infuriated Mr. Maliki. In February, he decided to cut the KRG’s part of the budget, claiming that the oil exports were a violation of the constitution and simply illegal. However, Erbil claims that it has the rights to sell the oil that is extracted from the new oil fields, and since both the Taq Taq and the Tawke fields; the two largest oil fields exporting Kurdish crude through Turkey; started drilling after 2005, they should be counted as new oil fields. Therefore, despite the harsh blow this was for Erbil, the KRG continued with its independent exports, and sold its first shipment of crude oil to the international market in May.

Although hardly a surprise, Mr. Maliki, who is known to be a tough negotiator, did not let Erbil get its way without a fight. By threatening to take legal action against international buyers of Kurdish crude, Baghdad has managed to halt some of the shipments, exemplified by the stranded tanker filled with Kurdish crude off the coast of Texas. Baghdad has also banned three tankers from Iraqi ports on the grounds that they have carried Kurdish oil, and consequently been accomplices to the KRG’s allegedly illegal dealings. Still, since its first sale, the KRG has, in a rather covert style, sold crude oil to the international market worth close to $3 billion, despite Baghdad threatening to sue whoever buys the oil. Thus, shipping crude oil to the international market has been good business for the KRG, and they recently claimed that exports likely would rise to about 500,000 barrels per day (BPD) in early 2015, and one million BPD by early 2016; meaning that they are closing in on being at least economically independent.

Is there indeed an end in sight?

With the KRG continuing with its independent oil sails despite resistance for from Baghdad, no significant progress has been made. The dispute reached its climax this summer after the Kurdish ministers withdrew from Mr. Maliki’s government in protest over what it felt was a lack of will from Baghdad’s side to reach an agreement. Obviously, this was not to the benefit of either side. As Mr. Maliki additionally failed to adequately address the growing threat from the Islamic State insurgency, he was essentially forced by both national and international actors to step down and let a new prime minister take over.

The new government was thus formed under Haider Al-Abadi, and the Kurdish ministers returned to Baghdad to resume negotiations. In late October, the Kurdish representatives in the new government gave Prime Minister Abadi about a month to return what the central government owns the KRG, as well as to provide Erbil with more autonomy to produce and sell what they claim is their own oil. Mr. Abadi has, in contrast to his predecessor, said that he will be willing to compromise, but he has also told the Kurds that if they are to strike a deal that both sides can live with; they will also have to be reasonable and willing to compromise.

Thus, although Baghdad does fear that Erbil will use increased oil independence and control over its own revenues as a stepping stone for complete secession in the future, they also understand that, if the Iraqi economy is to stabilise in the near future, a solution on the oil issue has to be reached sooner than later. Moreover, it also seems that the Kurds understand that breaking away from Iraq is not going to happen right away, and that they will have to be patient and fight one battle at a time, something the Kurdish Prime Minister, Nechirvan Barzani, reaffirmed this week, as he affirmed that the KRG did not want to destroy Iraq, and would instead seek additional autonomy rather than independence.

Although Prime Minister Abadi has yet to lift the budget-suspension and transfer the contested billions of dollars to Erbil, he has been far more open-minded, reasonable and willing to negotiate than his predecessor. This shows that he understands that ending the oil dispute is positive for Iraq as a whole, and it now seems that the two parts could reach an agreement and put the dispute behind them in the not too distant future.