Iraq’s Kurds, Baghdad Take Step Towards Compromise

Iraq’s Kurds, Baghdad Take a Shaky Step Toward Compromise

November 14, 2014 | 2136 GMT

Kurdistan Regional Government Prime Minister Nechirvan Barzani speaks during a press conference in the northern Iraqi city of Arbil on Sept. 18, 2013.(SAFIN HAMED/AFP/Getty Images)

 

Summary

Kurdistan Regional Government (KRG) leadership and Iraqi Oil Minister Adel Abdel Mahdi announced Nov. 13 that they have reached an agreement for the KRG to send 150,000 barrels per day of oil to the central government and for the central government to send $500 million to the KRG to pay salaries for civil servants for the month of October. Financial stress has pushed the Kurds to negotiate with Baghdad, but the core points of contention between Baghdad and Arbil that hamper a more comprehensive and enduring compromise remain.

Analysis

Despite the KRG’s repeated claims that it can develop enough energy revenue to exist independently of Baghdad, financial and political factors keep Arbil from having that option. Without a deal with Baghdad, the KRG is losing out on roughly $1.2 billion per month, the bulk of which goes toward paying the salaries of civil servants — a critical component of the patronage networks underpinning the KRG’s two main parties, the Kurdistan Democratic Party and the Patriotic Union of Kurdistan. The lack of budget allocations has put the KRG in more than $9 billion of debt. The KRG claimed in September that it has made only $1.3 billion from the legally questionable export of 14 million barrels of oil over the course of eight months. As of October, the KRG has shipped a total of 17 million barrels of crude from Ceyhan, in Turkey, and is pumping about 300,000 barrels per day through the KRG-Turkey pipeline.

The KRG had to sell its oil at a sizable discount — at least 15 percent below market value, on average — due to the legal risk of defying Baghdad’s authority and the insurance premium on crude cargoes sitting for months in tankers in search of willing buyers. With the price of Brent crude now below $80, the profits are becoming even slimmer. This financial strain is intolerable for the KRG: It has to pay the monthly salaries of peshmerga fighters on the front line with the Islamic State, pay off debt to international oil companies and contractors operating in the region and manage the growing financial burden of a large influx of refugees.

Baghdad has also lost out on revenue from Kirkuk crude sales while its conflict with the KRG has persisted, but southern Iraqi oil production continues to grow at a steady pace, with southern terminals averaging 2.55 million barrels per day for October. Baghdad could certainly use extra revenue from northern oil exports to help manage growing costs from the war against the Islamic State, but the central government is under far less financial stress than the KRG. Thus, the burden of the compromise lies on Arbil.

 

The New Agreement’s Limitations

The central government and the KRG have kept the details of the preliminary agreement vague, but it is unlikely that Baghdad would agree to release funds without the KRG conceding that at least a portion of the oil exported from the KRG be marketed through the Baghdad-controlled State Oil Marketing Organization and that Baghdad distribute the revenue from those exports. Knowing that the KRG will be loathe to give up physical control of the export and marketing of this oil, Baghdad will have the right to restrict budget allocations at any time. And knowing that Baghdad will be able to withhold payments at any time, the KRG will resist sacrificing full authority to the State Oil Marketing Organization and will seek additional funding sources to scrape by and maintain some leverage in its ongoing negotiations with Baghdad. (The KRG has been rumored to have negotiated a $5 billion loan with Goldman Sachs and Deutsche Bank to help create a financial buffer.) This is the state of limbo in which the preliminary deal has been set.

But the complications do not end there. The status of Kirkuk will continue to be a major impediment to a lasting deal. During the Islamic State siege, Kurdish peshmerga occupied the Baba and Avana domes of the Kirkuk field and the nearby Bai Hassan field. These fields are still legally under Baghdad’s control through the North Oil Company but are now under the Kurds’ physical control. Without Baghdad’s permission, the KRG reportedly has been producing roughly 120,000 barrels per day from the Avana dome and Bai Hassan field collectively and has been blending that crude for both domestic use and export. The KRG was already facing legal challenges in exporting crude from the Tawke, Taq Taq and Shaikan fields that lie indisputably in KRG territory, but exporting crude from clearly disputed fields will only add to the legal ambiguity surrounding KRG exports, even as the KRG will try to use the preliminary deal with Baghdad to convince investors of a new level of Kurdish energy autonomy.

 

The Outside Players

Turkey will also be a key factor in determining just how far KRG energy autonomy will expand. Ankara sees the need to keep the KRG dependent on Turkey for export routes and ultimately its economic survival. Though Turkey is eager to exploit Kurdish energy and is building out infrastructure to this end, its strategy toward the KRG is still driven by containment as Ankara struggles to limit a kaleidoscope of Kurdish factions seeking autonomy through political, financial and militant means within and beyond Turkish borders. It is no coincidence that the KRG-Baghdad preliminary agreement came after Turkey hosted Iraqi Foreign Minister Ibrahim Jaafari on Nov. 7 in Ankara, where Turkey made a point to reiterate its respect for Iraq’s territorial integrity.

What remains to be seen is whether Baghdad and Ankara come to an agreement on how revenue from KRG oil export sales will be handled. To date, Turkey has deposited revenue in a Halkbank account, parsing it out in small amounts to the KRG but keeping the Kurdish region financially strapped. Ankara and Baghdad will want to maintain that financial leverage over the KRG, but Baghdad will not allow Arbil to export its own oil while Turkey determines revenue distribution. The KRG naturally would prefer to control its own revenue, but deprived of that option, it will demand that Turkey or another outside arbiter manage the account to avoid being held hostage to Baghdad.

Meanwhile, the evolution of the battle against the Islamic State will have a degree of influence over the level of cooperation between Baghdad and Arbil. The Islamic State threat has placed the United States at the center of Iraq once again, and Washington’s interest is to maintain Iraq’s cohesion and instill enough cooperation among factions to develop a ground fighting force capable of containing jihadist forces. Indeed, the KRG has tried to leverage any peshmerga support it would offer in an offensive to retake Mosul in its energy negotiations with Baghdad. The Islamic State threatens both the KRG and Baghdad sufficiently to compel the two sides to cooperate for now. But as the jihadist movement weakens over time, so will this aspect of their cooperation.

The thorniest details have yet to be sorted out, and those details strike at the fundamental issue of sovereignty and territorial integrity for Arbil, Baghdad and Ankara alike. Though constraints have pushed the KRG to the negotiating table with Baghdad, this highly tenuous agreement still faces many hurdles.