Can Baghdad takeover the Kurdistan region through oil?
The Iraqi Kurdistan region's ambition to heat European homes with its natural gas could promote the region from a pawn to a queen in the chess game that is international politics. Yet an Iraqi court ruling intended to deprive the autonomous region of its energy sector could eliminate the pawn altogether.
After years of weakness, Baghdad has regained its strength, and it hopes to employ this power to strip the Kurdistan region of its oil and gas. This has the potential to abolish the Kurdistan Regional Government (KRG), as it doesn't possess united military, intelligence and security services. The KRG pays others to keep the region's various forces in check. Baghdad has the constitution and circumstances on its side through a court ruling to push the Kurdistan region further north.
For the past eight years, Baghdad has imposed a financial embargo on Iraqi Kurdistan. The 1.3 million KRG employees, most of the working population, have insufficient wages as a result of a long fought for Kurdish policy in Iraq. In 2014, the region opted for independent oil exports through Turkey, but this did not ease its problems. The oil was sold at a significant discount, and Erbil paid a handsome fee for the transit through Turkey. It could only pay a portion of employees' salaries, though, which prompted region-wide protests and raised serious questions about the KRG's legitimacy. Some even wished for a return to the Saddam Hussain era.
After years of waiting for Baghdad to send the region its share of the federal budget, KRG Prime Minister Masrour Barzani has said that it no longer wants Baghdad's money. To counter the Iraqi capital, the Kurdistan Democratic Party (KDP), which controls key positions in the KRG, including its oil ministry, wanted to replace Russian and possible Iranian oil exports to Europe. Iran responded by firing 12 ballistic missiles at Erbil, demolishing the villa of Kurdish oil tycoon Bin Baz who owns the Kar Oil Company, the company which could put this plan into operation.
The KDP wants to decouple from Baghdad and gain access to the rich European energy markets. Such a move would be an independence referendum in all but name, complementing the 2017 referendum, which to date remains a paper exercise.
Due to its close proximity, the Kurdistan region could be important for Europe, which has just agreed to ban Russian energy. Gas needs pipelines, so distance is a crucial factor, making it possible for the Kurds to be a natural choice for the Europeans, especially given that other suppliers are unreliable at the moment.
The income from this would give the KRG what it needs to fill its own coffers and adopt a more Kurdish-centred foreign policy independent of Baghdad. An independent Kurdistan bordering the restive Kurdish populations in Turkey, Iran and Syria would, of course, have serious geopolitical implications.
On 12 February, Iraq's oil ministry disclosed its ambitions to take over the Kurdish region's energy sector and establish a company headquartered in Erbil to stifle the KRG's plan. On 14 May, Iraq's state-run North Oil Company (NOC) announced that it was suing the KRG, deploying security forces to take control of the oil fields of Khor Mor, Khurmala, Avana and Safia that were operated by the NOC until 2008. The KRG has developed its oil and gas sector independently of Baghdad based on a 2007 law. The regional government has called the NOC's claims "baseless" and questioned the legality of the firm's operations in Khurmala in previous years.
Iraq's State Organisation for the Marketing of Oil (SOMO) has called the KRG's handling of the region's oil "illogical" and said that it exempts companies from taxes and gives them the right to sell "Kurdish" energy and hand the KRG a share, but the opposite is more likely. The KRG has made contracts to sell its oil and break Baghdad's financial embargo even though most energy revenues are not disclosed to the Kurdish public. Through its desperate attempt to salvage its financial ruins, the region has broken the OPEC quota allocated to Iraq, which gives Baghdad another reason to push through the court's ruling.
The oil ministry hired Cleary Gottlieb Steen and Hamilton, an international law firm, to talk to oil and gas companies operating in the Kurdistan region to "initiate discussions to bring their operations into line with applicable Iraqi law." The KRG enacted its energy law in 2007 and split its energy revenues by exporting crude oil through Turkey in 2014.
Khurmala and Khor Mor oil fields are the backbones of the region's energy production and its main source of income, without which the region would face domestic unrest. The fields constitute 42 per cent of its reserves and produce the finest gas and oil. Khor Mor is considered one of the most important natural gas fields globally, producing more than 7 billion cubic metres of gas per annum. It is managed by Dana Gas, a KRG-based firm whose stakeholders have extensive links to the KRG and KDP leadership. The Khor Mor field is governed exclusively by Kurds.
KRG plans to heat European homes from these two oil fields. Khor Mor is located in Sulaimani, while Khurmala is in Erbil, putting it within the KRG's jurisdiction. Iraqi militiamen besieged Khurmala last October but did not take control, as it would have resulted in an armed clash between Kurdish security forces and the militiamen. The security forces in Erbil respond to the KDP, while those in Sulaimani are allied with the Patriotic Union of Kurdistan (PUK). Aram Haji, a constitutional expert, told me that Baghdad could manage these fields under the federal constitution, making this a possible flashpoint, something that could end in the downfall of the KRG.
PUK leader Bafel Talabani controls the security forces of the Sulaimani and Halabja governorates, where most of the KRG's oil and gas fields lie. He objects to exporting natural gas to Europe because it would not serve the people.
Talabani referred to the region's experience of an independent oil policy where the KDP became the richest party at the expense of the KRG forces while the population suffered as inflation, increased prices and quarter wages have made the people restive. The region's separate energy policy has increased energy prices almost three times compared with neighbouring Iraqi governorates, with both ruling parties constantly exchanging allegations of blame.
The Kurdistan region as a confederacy between the KDP and the PUK is in jeopardy due to tense disagreements between the two city states. Disputes over the office of the Iraqi presidency have brought the two Kurdish parties close to abolishing the KRG and establishing independent administrations. The Kurdish house is divided at a time when Baghdad has re-emerged with assertive policies. The tension between the PUK and the KDP is the main obstacle to forming the next Iraq government.
The timing of the court ruling coincides with this stalemate in Baghdad. The KDP, a key ally of Muqtada Sadr, has its eyes on winning the Iraqi presidency and forming a majority government, which is essentially a dagger aimed at the heart of Tehran in Baghdad. Thus, the decision could also oblige the KDP to reconsider its position because, without the KDP, Sadr could not move with the plan.
For the first time since 2005, Baghdad has regained its strength; foreign power has largely left matters in its hands. The federal government now enjoys high revenues from high energy prices, and it uses this to relocate all control to Baghdad, as in 1973 when oil prices rocketed and Saddam Hussein created a centralised state in Baghdad. Since February last year, Iraq has left Chapter VII of the UN charter, which removes Baghdad's limited sovereignty over Iraq to full sovereignty. The vacuum left by Baghdad in northern Iraq will, sooner or later, be occupied again, albeit through softer means.
Midhat Muhammed has been Iraq's supreme judge since 2005 and is a close friend of former Prime Minister Nouri Al-Maliki and leaders who oppose independent Kurdish management of the region's energy sector. Article 110 of the 2005 Iraqi constitution, composed of nine clauses, grants Baghdad the exclusive rights to sign and ratify agreements and manage resources. Muhammed has the leeway to interpret the Article in Baghdad's favour.
Most oil states only have a single national oil company, while the Kurdistan region has some oil companies owned by the two ruling parties. As such, Baghdad would have international support to relocate control of the energy sector to the Iraqi capital.
In 2015, Turkey signed a 50-year contract with the KRG to supply 100,000 barrels towards its daily oil needs. Now Baghdad deems the contract to be illegal, but that doesn't necessarily buy President Recep Tayyip Erdogan's help for the KRG. Historically, Ankara has got along with Baghdad better. However, natural gas sent to Europe through Turkey would give Ankara a stronger hand in settling its dispute with Brussels and EU members.
High oil prices have removed another obstacle to Baghdad implementing the court ruling. The KRG has accrued a $23 billion debt since it began its independent oil export policy in 2014. If Baghdad were to take over the KRG's energy legally, it would take on that liability. However, with a large petrodollar income, Iraq would not see that as a problem. Former Prime Minister Adel Abdal Mahdi and incumbent PM Mustafa Al-Kadhimi, who have long and cordial relations with the Kurds, have up until now delayed the decision because Iraq faced a severe financial problem during the pandemic and had a large budget deficit.
Europeans are the main beneficiaries of the KRG. The Kurdish entity is Europe-friendly as almost every household in the Kurdistan region has a relative living in Europe; hence, it would be an excellent choice for Brussels. However, the KRG needs significant improvements made to its energy infrastructure, and it is still too early to talk of a lucrative contract. The region's security forces cannot protect the oil fields against the much larger and better armed Iraqi army.
In retrospect, all Kurdish rights, whether achieved or violated, were made in Baghdad, depending on the circumstances of the old Abbasid Caliphate capital. The Kurdistan region's future and eventual downfall is also in Baghdad, not Europe or elsewhere.