Iraq’s oil deal with Kurds is good for everyone

Patience, strategic vision and win-win agreements are in short supply in Iraq. But last week’s oil deal between the autonomous Kurdish region and the federal government in Baghdad could be a rare exception.

The arrangement calls for the Kurdish region to export 250,000 barrels per day (bpd) of its own oil production, and 300,000 bpd from the Kirkuk fields. These remain notionally under federal authority, but the Kurds took control in the wake of ISIL’s seizure of Mosul in June.

The oil will be marketed by the state organisation Somo, not by the Kurds themselves, as they had originally demanded. But they will receive 17 per cent of the federal budget – a number previously trimmed, then entirely cut off, by Baghdad – as well as half the expenses for their Peshmerga military.

The Kurds should be delighted with the deal. After the euphoria of securing Kirkuk, the combination of the advances of ISIL, unexpected weakness of the Peshmerga, internal divisions and vetoes from Turkey and Iran made it clear that, for the time being, independence was off the table.

Now, from the verge of bankruptcy, they will receive the money crucial for their fight against ISIL, as well as their project of state-building. Payments to the international oil companies that have invested in the Kurdish region will allow further improvements in production. The Kurds can continue to balance between unreliable partners instead of becoming totally dependent on Ankara. If the agreement breaks down, it strengthens their moral and legal case for independent exports.

The slumping oil price made the deal essential for both sides. With a projected budget deficit of about US$40 billion, Iraq’s only option is to boost production. Of course, for other Opec members, this contributes to driving down prices further.

An interview with Hoshyar Zebari, the Iraqi finance minister, with the industry publication Iraq Oil Report, was as interesting for what it concealed as what it revealed. Mr Zebari skated over the questions about which Kirkuk fields would supply the oil, what would happen to previous Kurdish oil exports challenged legally by Baghdad, and what will happen when the Kurds can export more than the agreed 250,000 bpd.

These grey areas show a sensible willingness on both sides to avoid getting hung up on previously contentious issues. The new Iraqi oil minister, Adel Abdel Mahdi, and his long-serving Kurdish counterpart Ashti Hawrami have, for now, managed to work constructively.

There are no permanent deals in Iraqi politics, only those that can be maintained by the force of arms or alliances. But if this new arrangement endures, it will raise further constitutional questions.

Basra governorate produces the bulk of Iraq’s 3 million bpd, and has fertile land and the country’s only sea access. But it is plagued by poverty, militias, kidnappings, open sewers, heaps of rubbish and derelict buildings. With Basra having similar oil production and population to Kuwait, it is not surprising to hear politicians calling for federalism on Kurdish lines.

If Baghdad is to recover northern and western Iraq from ISIL, it will need some form of political settlement. If that involves a further step towards federalism, the largely Sunni Arab population of the region is likely to want similar powers to the Kurds to sign oil exploration contracts – although prospective, the area produces little oil and gas today.

From this deal with the Kurds, Iraq could take one of three paths. The arrangement, like so many others before it, could founder amid recriminations and mistrust. It could prove one more step along the long and patient road to an independent Kurdish state. Or it could be the last chance to make a genuinely federal Iraq work.

Robin Mills is head of consulting at Manaar Energy and author of The Myth of the Oil Crisis

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