Baghdad-Erbil: oiling up their rusty diplomatic relationship?

Published: Tue 30 Jul 2013
A blog entry by Ruth Lux

Contributed by:

Ruth Lux
Director
Strategic Analysis

Ruth Lux's Blog

By Charlotte Le Masson, Researcher at Strategic Analysis

Erbil and Baghdad have always had a tense relationship. However, as Iraq is submerged in a political and security crisis fired by on-going sectarian conflict and the war in Syria, it seems like both governments wish to strengthen their bilateral relations. This is evidenced by the first meeting in three years between Iraqi Prime Minister al-Maliki and Massoud Barzani, the President of the Kurdistan Region on the 7th of June in Baghdad.

The major issue behind the Erbil-Baghdad relationship has been related to oil partially caused by the almost non-existent hydrocarbon law, which has according to article 112 of the Iraqi constitution, a revenue-sharing deal based on population by province. The Iraqi-Kurdistan region has approximately 4.9 million habitants (2011); a low number compared to other provinces and has some of Iraq’s major oil fields (such as the Taq Taq field and the Khurmala Dome). It produces a total of 242 thousand barrels per day, representing 17% of Iraq’s oil reserves. Oil reserves in the three Kurdish governorates are estimated at more than 45 billion barrels and the shares of oil companies operating within the Kurdistan region is in excess of $3.5 billion.

The Kurdistan Regional Government (KRG) has been exploiting its oil resources and in 2007 it passed its own Oil and Gas Law (No.22) due to the lack of clarity and modernity of the hydrocarbon law. This has facilitated a flourishing number of Production-Sharing Agreements between the KRG and international oil companies (IOCs). In 2007 the Iraqi government claimed it considered any agreement signed post 2007 as illegal; yet in 2012 both governments signed an agreement legitimising KRG oil and gas contracts. Thus far disputes over oil revenues remain and the deadlock between the two governments will perpetuate until a new law passes.

Despite efforts to renew diplomatic relations, the KRG remains driven by autonomous ambitions and in June it announced the completion of the oil pipeline independently linking the KRG oil fields to Turkey in September of this year. The KRG has been exporting oil to Turkey in a bid to strengthen their relationship independent from the Iraqi government. Turkey wishes to lose its dependence on expensive oil coming from Iran and Russia as half of its consumption (700,00bpd) comes from Iran. It has chosen to deal with the KRG despite deteriorating friendly relations with the Iraqi government; in 2012 Iraq was Turkey’s second largest export market, with up to $10.8 billion exports and $3.12 billion imports from Iraq to Turkey.

What is Baghdad’s motivation behind looking to change its diplomatic position towards the KRG? With the upcoming parliamentary elections in 2014, the new hydrocarbon law is likely to be approved, despite repeated amendments and cancellations since 2011. The on-going dispute about the distribution of the oil revenue should be solved as agreed during the meeting between the two presidents in June. This will ease the relationship between the two governments, and if not immediately, it will at least be a milestone in their history.

The KRG is doing extremely well compared to most of his neighbours in terms of its economy and security. Its safe environment has already attracted $10 billion in IOC investments which has prompted development of its infrastructure and is likely to continue to do so. Security attracts big energy firms such as Chevron, Total and ExxonMobil which are willing to deal with the KRG despite facing intimidation from the Iraqi government, as it has blacklisted any company investing in the KRG from operation in Iraq. In February 2012, ExxonMobil was blocked from bidding for exploration rights after having invested in Kurdistan.

This is a diplomatic war using economic weapons. Turkey is consciously damaging its relationship with Iraq; but at what price? Turkey’s increased willingness to deal with the KRG coincides with greater western sanctions on Iranian oil exports which would explain the economic motivation behind the action. Additionally it also corresponds with the truce signed with the Kurdistan’s Workers Party (PKK) in March; which would suggest the Turkish government had finally recognised the Kurds’ rights. Nonetheless, despite investing in Kurdistan’s economic development, Turkey is firmly opposed to its independence. All of these actions are counterproductive as the issue of Kurdish rights in Turkey might stand in the way of a long-term Turkey-KRG relationship.

This triangular relationship between Iraq, Kurdistan and Turkey is not sustainable; the underlying problems are political and touch upon entrenched issues such as Kurdistan’s independence. The economic game is a means for the three parties to win what they want, but it does not seem like it will end up in a fruitful deal unless the new hydrocarbon law agrees with the Iraqi government’s wishes and the KRG’s needs. This law needs to accommodate both governments, otherwise Iraq will descend further into its economic and diplomatic crisis whilst the KRG and Turkey will increase their relationship. Whilst there are suggestions of a rapprochement between the Iraqi government and the KRG which clearly indicates the KRG’s dependence upon improved relations with Baghdad; the KRG will continue to find unilateral ways for its economy to grow as it has been doing without the support of the federal Iraqi government, but for how long?

Strategic Analysis’ managing director, Ruth Lux, contributed to this article.