The Baghdad-Kurdistan deal to resume oil exports is promising but incomplete

Iraq now needs a reliable mechanism through which revenues are shared between federal entities

Excess flammable gasses burning from gas flares at the Havana oil field, west of the northern Iraqi city of Kirkuk in 2017. AFP
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Iraq’s federal system, and its oil and gas sector, have been beset by tensions and failed policies on all sides for the past 20 years. Those failures have caused significant financial losses and unnecessary suffering. Recently, that dynamic was upended by a number of landmark decisions that could finally help to build momentum towards a period of greater stability and prosperity. It is important to remember, however, that just because an opportunity exists does not mean that it will be seized upon, or that the right lessons will be learned from this saga.

The Kurdistan Regional Government has been working to develop its own independent oil policy for the past two decades, mainly by contracting with international oil companies directly and marketing its oil without co-ordinating with Baghdad. The KRG’s oil sector grew considerably, reaching approximately 450,000 barrels a day.

The KRG has always maintained that its independent oil policy was legal under the 2005 Constitution, but Baghdad never agreed with that position. The latter deployed a number of tactics to challenge the KRG’s oil sector, including legal proceedings before various jurisdictions.

In 2014, for instance, Baghdad brought a claim before the Federal Supreme Court, in which it argued that the KRG’s oil and gas law was in violation of the constitution. For years, the Court refused to hear the dispute on the basis that political issues of this type should be resolved through negotiations. However, in February 2022, the Court reversed that position and unanimously found that the KRG’s oil and gas law, and therefore all contracts that were adopted pursuant to that law, did not conform to the constitution and was, therefore, illegal under Iraqi law. The implication was that all of the contracts that were entered into with international oil companies were now subject to legal challenge in multiple jurisdictions.

Despite the Court’s decision, the KRG continued exporting oil but a second legal proceeding brought everything to a crashing halt. The second dispute emerged pursuant to a 1973 agreement to construct a pipeline from Kirkuk in northern Iraq to Ceyhan in Turkey. That agreement provides that the Ministry of Oil is the only authority in Iraq that can transport oil through the pipeline, but despite Baghdad’s protestations, Turkish authorities have been allowing the KRG to use the pipeline as well. Iraq launched a dispute against Turkey’s state pipeline operator in 2014, but the proceedings were delayed for a number of reasons, including the death of two of the three arbitrators.

Iraqi Prime Minister Mohammed Shia Al Sudani and KRG Prime Minister Masrour Barzani attending the signing of an oil export deal in Baghdad this week. AFP
The arbitral award will finally allow for Baghdad to be the sole authority for marketing the entire country’s oil internationally

In March 2023, an arbitral tribunal found that Turkey had violated the agreement and that it was liable to pay billions of dollars in damages to Iraq (a second damages award will also be issued covering a different time period). The immediate consequence was that the pipeline was shut down to all northern exports, which meant that the KRG’s only path to exporting its oil depended on its ability to reach an agreement with Baghdad.

As soon as the arbitral decision was announced, the KRG sent a delegation to Baghdad to negotiate a settlement. On Tuesday, Iraqi Prime Minister Mohammed Shia Al Sudani and KRG Prime Minister Masrour Barzani announced in a joint news conference that an agreement had been reached that would reopen the pipeline and allow for exports to resume. The full details of the deal have not been disclosed yet, but it appears that the KRG’s oil will now be marketed internationally by Iraq’s marketing company for oil, which reaffirms that Baghdad will be in sole control over the Iraq-Turkey pipeline. The agreement also provides that all revenues generated by the sale of the KRG’s oil will be maintained in a separate account under the Erbil’s control that will be subject to auditing by the Federal Board of Supreme Audit.

What this ultimately means is that the Federal Supreme Court’s decision and the arbitral award will finally allow for Baghdad to be the sole authority for marketing the entire country’s oil internationally. It also means that Baghdad and the KRG should now, hopefully, bring an end to their long-standing competition that has caused lost revenues for the country as a whole.

The announcement is a welcome step towards normalising the relationship between Baghdad and Erbil. However, in order for these gains to be fully sustainable, they would need to be translated into an oil and gas law that conforms to the constitution, and into the establishment and construction of some key institutions. But what would the key elements of such a law be?

Mainly, what Iraq needs and what is still missing from its institutional frameworks, is a clear, equitable and reliable mechanism through which revenues are shared between different federal entities. Revenue sharing is a particular area of contention in Iraq. The KRG has always complained that its share of national revenue is not what it should be. In addition, Baghdad has in the past cut off all transfers to Erbil following political disagreements, a highly controversial act that caused untold misery in Kurdistan and worsened distrust towards Baghdad.

A worker performs checks at Turkey's Mediterranean port of Ceyhan in 2014. Reuters

Modern federal systems typically include inbuilt mechanisms that are designed to prevent this type of breakdown from occurring. Iraq’s federal system, as provided for by the constitution, has long been a source of controversy not least because of how lacking in detail it is. Almost all modern federal constitutions in the world provide for the establishment of a revenue allocation commission that is used to allocate revenue to the federal government and to individual states or provinces.

Constitutions in federal states typically set out the criteria that should be used to allocate revenue. They also determine how the commission should be composed, usually by ensuring adequate representation of individual states or provinces. The commission’s decisions are also subject to challenge before the courts.

If there is one thing that Iraq’s federal system needs today, it is a revenue allocation commission that will work in a transparent manner to allocate revenue across the board in an equitable manner. The constitution does not provide for one, but such a mechanism could be established in the oil and gas law. This would require ensuring that the commission’s composition is representative, that it should be adequately staffed by competent bureaucrats, that its decision-making mechanism is fair, and that its decisions should be informed by clear and transparent criteria.

If Baghdad and Erbil are serious about adopting a long-term solution that is fair and transparent, they should prioritise the adoption of legislation and the construction of professional and reliable institutions. If that could be achieved, then it could open the possibility that the constant struggle over this issue can give way to a period of greater stability and prosperity for all.

Published: April 05, 2023, 2:00 PM