The August 1 announcement by the Kurdistan Regional Government (KRG) that it was ready to resume oil exports through the Iraqi pipeline after a four-month suspension concluded what was rather like a nasty school-yard brawl in the manner such scuffles invariably end: with a bloody nose and some tears. Will a handshake soon follow?
The federal government in Baghdad and the Kurdish government in Erbil long have been at loggerheads over a range of issues that, at their core, concern the nature of Iraq’s federal system and the Kurdish region’s future. They disagree especially over the extent of the region’s powers, including the authority to sign oil contracts; the status of territories claimed by the Kurds as part of Kurdistan; and payment for the Kurds’ regional guard force as well as federal budget allocations more generally. Although the 2005 constitution addresses these questions, its many ambiguities and gaps make it subject to varying interpretations. Both sides have employed these weapons to great effect.
The conflict escalated sharply late last year when ExxonMobil became the first major oil company to sign with the Kurdistan Regional Government, then aggravated the situation by taking exploration blocks located squarely in disputed territories. The Iraqi government threatened to punish the company, which holds significant concessions in the South, but has yet to take any concrete retaliatory steps. Instead, Chevron, Total and Gazprom have now followed in ExxonMobil’s footsteps, with others queuing up.
With the Kurdish region’s growing production potential, the question has been how the oil will get to market in the absence of a federal hydrocarbons law and as long as relations between Baghdad and Erbil remain as deeply frayed as they have been. For now, Baghdad controls the export pipeline, but the KRG hopes that, with Turkey’s consent, it will be able to skirt the Baghdad-controlled pipeline and pump the oil northward once the necessary infrastructure has been built. In the words of the KRG’s mineral-resources minister Ashti Hawrami, “The oil will flow. . . . When you have one million barrels a day stranded, it will find its way to the market despite the political haggling.”
Earlier this year, an agreement signed by the federal and Kurdish governments in February 2011 broke apart over Erbil’s allegation that Baghdad had failed to compensate fully the three companies with KRG contracts that have put oil into the export pipeline. Baghdad declared itself ready to pay but said it was awaiting expense receipts from the KRG for an audit; Erbil replied it had given Baghdad all it needed. The matter reached an impasse when, on April 1, the KRG pulled the plug on its exports, saying it would resume them only once Baghdad coughed up the money it owed and pledged to make future payments in a timely manner.
Coinciding with a larger fight over the nature of Prime Minister Nuri al-Maliki’s second term—in particular the accusation that Maliki is an autocratic leader seeking to extend his rule indefinitely—the squabble over oil exports soon ballooned into a tit-for-tat crisis involving mounting threats as well as concrete steps with potentially long-term consequences. In short summary:
● Hawrami claims (May 10) that Baghdad has cut the Kurdish region’s share of refined products and warns: “If it really gets worse, then I'll export oil by truck, refine it [abroad], and bring it back.”
● At an oil conference in Erbil (May 20), Turkey and KRG announce a deal to build oil and gas pipelines that would allow the Kurds to export directly to the Mediterranean, bypassing the Iraqi pipeline.
● In response to that announcement, Maliki’s media adviser, Ali al-Moussawi, declares (May 22) that all oil-related contracts should be based on the constitution, suggesting the Turkey-KRG deal can’t pass constitutional muster.
● Referring to ExxonMobil’s contract with the KRG, Moussawi says (June 19) that “Maliki views these deals as representing a very dangerous initiative that may lead to the outbreak of wars” and “breaking up the unity of Iraq.”
● Hawrami says (July 3): “Even if there’s no consensus with Baghdad, we will continue to sell natural gas and oil to Turkey.”
● In response to reports that for the first time a Kurdish crude is being shipped to Turkey as part of a barter arrangement, the KRG says (July 9) it involves only a small amount of oil, carried by four tanker trucks a day.
● Baghdad counters (July 9) by declaring these exports illegal and threatens to take “appropriate action.”
● Iraqi oil minister Abdul Karim Luaibi estimates (July 10) that the KRG could be liable for a whopping $8.5 billion (out of its 2012 budget allocation of $10.5 billion) as a result of its oil-export boycott, as well as for selling oil on the domestic market (much of which finds its way into Iran).
Within a month, the KRG suddenly announced it would resume oil exports as a “goodwill initiative,” citing international pressure and without any apparent concession from Baghdad concerning payments to KRG contractors or the supply of refined products to the Kurdish region. Hawrami warned, however, that if Baghdad failed to reciprocate, exports would stop again after one month.
Hawrami also circulated correspondence with the three contractors that showed they had balked at the prospect of resuming production without guarantees regarding compensation. This highlighted the vulnerable position into which the KRG has maneuvered itself: as long as it has no independent pipeline, nor Ankara’s agreement to circumvent Baghdad regarding Kurdish exports, it must rely on Baghdad’s cooperation and willingness to pay KRG contractors.
It is therefore fair to question the KRG’s timing of its decision to challenge Baghdad last April. Pipelines connecting the Kurdish region to the Mediterranean are still two years away. The Turkish government has not yet decided what kind of direct hydrocarbons relationship it wants with the KRG. That decision could lead to Iraq’s break-up, a prospect that Ankara has historically feared and actively resisted because of the threat it would pose to Turkey’s own territorial unity. Yet times are changing: the Syria crisis and a possible U.S.-Iran war could redraw the region’s borders. Not knowing how the chips will fall, political actors are starting to move to secure their interests as best they can and maximize any advantage they might gain.
The Maliki government and the Kurds are therefore unlikely to kiss and make up. Any new agreement will be a temporary accommodation that would give each what they need most right now—Baghdad: revenues from Kurdish crude before its own production in the south ramps up; Erbil: the ability to pay producing companies before they throw in the towel in utter frustration. The real battle—over the future of Iraq and Kurdistan—is still a couple years away.
Joost R. Hiltermann is deputy program director for the Middle East and North Africa at the International Crisis Group and a research affiliate of MIT’s Center for International Studies.