Baghdad Scores a Goal in its Oil Dispute with Kurdistan

Last September, the federal government in Baghdad filed a $300 million lawsuit against the Kurdistan Regional Government’s (KRG) most important oil tanker shipping partner, Greece’s Marine Management Services (MMS). MMS’ oil tankers may be familiar to readers who followed the news about the KRG’s efforts to pursue independent Kurdish exports: the United Carrier, the United Emblem, the United Dynamic the United Leadership and the United Kalavryta (which is the tanker that spent months off the coast of Texas last year, until finally unloading its oil in Israel instead). The lawsuit claimed that MMS was illegally participating in the sale of Iraqi oil when it shipped the KRG’s exports to market without Baghdad’s consent.

It is not clear how the lawsuit would have turned out, as a number of provisions of the 2005 Iraqi Constitution support the Kurdish view that they have a right to export Iraqi Kurdistan’s oil (provided they share the proceeds with all of Iraq).  No one doubted, however, that a long legal battle would have proven very costly to MMS and might well have included injunctions and asset freezes until it was settled.  Often the simple act of pursuing someone legally is enough to change their behavior, no matter the likelihood or length of time until a legal judgement can be reached.

This is how Baghdad won a victory of sorts against the KRG this week. MMS agreed to settle with Baghdad rather than be dragged through international courts for the next several years. In the settlement, MMS apparently agreed that as soon as its current contracts with the KRG expire towards the end of this year, they will stay away from any Kurdish oil not approved by Baghdad. This furthers Baghdad’s efforts to deny the KRG a route to financial independence from the central government, and comes along with the ongoing denials of large portions of the KRG’s share of the Iraqi budget.

In all likelihood, the Kurds will be pushed to find new carriers for their oil – just as Baghdad’s refusal to pay Kurdistan-based oil companies for their oil started the whole Kurdish bid for independent exports in earnest.  Israeli flagged oil tankers, for instance, might enjoy the same advantage that Israel enjoys when it buys oil from the KRG: since Iraq does not recognize the Israeli state, it can hardly sue it or its companies in a court of law. Given that an export capacity of 500,000 barrels per day and counting is unlikely to remain stranded for long, other mechanisms may be found to get Iraqi Kurdish oil to international markets.

The truly galling part of all this involves the underlying logic, however.  As recently as in its December 2014 agreement with Baghdad, the KRG showed itself willing to share its oil proceeds with the rest of Iraq.  In that agreement, Kurdistan delivers some 550,000 bpd to Baghdad in return for its share of the national budget – which was illegally cut off by the previous Maliki government.  So far, the Kurds have been delivering most of that oil – although the daily tally sometimes dipped below 550,000 bpd, KRG Natural Resources Minister Ashti Hawrami insists that the average daily oil deliveries will come out on target.

Yet Baghdad has yet to deliver the KRG’s share of the 2014 budget. For 2015, sums far short of Kurdistan’s 17% of the Iraqi budget made it to Erbil. While public servants’ salaries in Kurdistan remain months in arrears, Baghdad keeps paying civil servants in ISIS-controlled territories like Mosul. Politicians in Baghdad have claimed that this is because the Kurds are still selling oil independently, beyond the 550,000 bpd they turn over to Baghdad’s State Organization for the Marketing of Oil (SOMO).  Yet Baghdad implicitly endorsed this practice in the December 2014 agreement when it refused to take on the task of paying oil companies in Kurdistan their productions costs (Kurdistan’s 17% share of the budget, in contrast, is calculated after oil operation expenses) and it asked the KRG not to sell additional oil more cheaply than SOMO.

With the price of oil so low and the war against the Islamic State still raging, neither Iraq nor Kurdistan can afford these sorts of shenanigans. The simple compromise would be for Baghdad to accept the KRG’s right to sign its own contracts with oil companies and manage its own oil resources, while the KRG agrees to let SOMO market its oil along with that of the rest of Iraq. SOMO would collect revenue with an automatic gross 17% going straight into a KRG-controlled bank account, from which the KRG could pay its oil companies. 

Unfortunately, nothing happens simply in Iraq these days.

David Romano has been a Rudaw columnist since 2010. He is the Thomas G. Strong Professor of Middle East Politics at Missouri State University and author of The Kurdish Nationalist Movement (2006, Cambridge University Press) and co-editor (with Mehmet Gurses) of Conflict, Democratization and the Kurds in the Middle East (2014, Palgrave Macmillan).

The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.