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New Oil Law Likely To Be The End Of Iraqi Kurdistan’s Independence Dream

A series of legal rulings by Iraq's Federal Supreme Court (FSC) on 21 February underlined that the planned New Oil Law being worked on by the government of Iraq in Baghdad will be the final agent of change that will end any semblance of independence for Iraqi Kurdistan. And for Western oil companies working in the region, it looks like the future has been cancelled.

To begin with, the FSC ruled that the Kurdistan Regional Government (KRG) must turn over "all oil and non-oil revenues" to Baghdad. This marks the end of any debate over whether the KRG can continue to conduct oil sales independent of the Federal Government Iraq's (FGI) State Organization for Marketing of Oil (SOMO) - it cannot. And even it managed to arrange channels to do so, it would have to hand over all the money made from the oil sales to the FGI in Baghdad anyway. This effectively returns all financial control of Iraqi Kurdistan back to Iraq's central government. The FSC added that the FGI, in turn, would be responsible for paying the salaries of public servants in the KRG, with the amount paid to be deduced at source in Baghdad from the KRG's share. And the KRG must provide monthly, in-depth accounts of every salary that the FGI is paying. Related: 2 Ways to Play Europe's $800 Billion Energy Crisis

Effectively, this is a much tougher reset of the original 'budget payments for oil revenues' deal agreed between the KRG and the FGI back in November 2014, as analysed in full in my new book on the new global oil market order. The deal was that the KRG exported up to 550,000 barrels per day (bpd) of oil from its own fields and Kirkuk via SOMO. In return, Baghdad would send 17 percent of the federal budget after sovereign expenses (around US$500 million at that time) per month in budget payments to the Kurds. This arrangement never functioned properly, with the KRG frequently (and rightly) accusing the FGI of underpaying budget disbursements, and the FGI frequently (and rightly) accusing the KRG of under-delivering oil revenues. The deal was then superseded by an understanding reached between the KRG and the new Iraqi federal government formed in October 2018 and centred on the 2019 national budget bill. This required the FGI to transfer sufficient funds from the budget to pay the salaries of KRG employees along with other financial compensation in exchange for the KRG handing over the export of at least 250,000 bpd of crude oil to SOMO. Again, this arrangement never worked properly either.

However, things became much worse in late 2017 for two reasons. The first reason was that 25 September 2017 saw a non-binding vote on full independence for Iraqi Kurdistan. Independence had been tacitly promised to Iraqi Kurdistan by the U.S. and its allies in exchange for Kurdistan's fearsome Peshmerga army being the West's principal boots on the ground in the fight against the then-rampant ISIS. Over 92 percent of voters in the 2017 referendum voted in favour of independence, but shortly after the results were announced, forces from Iraq and Iran (supported as well by Turkey) moved into the Kurdish region and quelled any further moves to make independence a reality. Neither Iraq nor Iraq nor Turkey (all with sizeable Kurdish populations) could tolerate the ramifications of a broader upsurge in the Kurdish independence movement across the region. The second reason was that soon after that, Russia gained control over Iraqi Kurdistan's oil sector through three key mechanisms also analysed in full in my new book on the new global oil market order.

Moscow's aim was not just to secure the big oil and gas reserves of Iraqi Kurdistan but, more importantly in the long term, to sow the seeds for the destruction of Kurdish independence and its assimilation into one Iraq. It was Russia, then, that stoked mistrust and discontent between the KRG and FGI over the original 2014 'budget payments for oil revenues' deal, which is largely why it never worked properly. The fault-line that Moscow used to create chaos between the two sides was handed to it by the lack of clarity over oil revenues in Iraq's own Constitution. According to the KRG, it has authority under Articles 112 and 115 of the Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 - the year that the Constitution was adopted by referendum. In addition, the KRG maintains that Article 115 states: "All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organised in a region." As such, the KRG maintains that as relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive revenue from its oil and gas exports. The KRG also highlights that the Constitution provides that, should a dispute arise, priority shall be given to the law of the regions and governorates. However, the FGI and SOMO argue that under Article 111 of the Constitution oil and gas are under the ownership of all the people of Iraq in all the regions and governorates. 

Another turn for the worse for Iraqi Kurdistan came at the end of 2021 when the U.S. formerly ended its combat mission in Iraq, which effectively flung open the door for even greater economic, political, and military influence in Iraq by Iran, Russia, and China. It is in the interests of none of these three countries for the still broadly pro-U.S. Iraqi Kurdistan to exist. Moscow is happy enough to continue to work on fields in north and south Iraq, but under the administration of a centralised pro-Russian authority in Baghdad. In tandem with this, China has been building up its influence in southern Iraq, through multiple deals done in the oil and gas sector that have then been leveraged into bigger infrastructure deals across the south. The apotheosis of Beijing's vision for China is all-encompassing 'Iraq-China Framework Agreement' of 2021. This in turn, was an extension in scale and scope of the 'Oil for Reconstruction and Investment' agreement signed by Baghdad and Beijing in September 2019, which allowed Chinese firms to invest in infrastructure projects in Iraq in exchange for oil, as also analysed in full in my new book on the new global oil market order.

Given all of this, it should not surprise anyone that on 3 August last year, the then-new Iraq Prime Minister, Mohammed Al-Sudani, clearly stated that the new unified oil law - run in every respect out of Baghdad - will govern all oil and gas production and investments in both Iraq and its semi-autonomous Kurdistan region and will constitute "a strong factor for Iraq's unity". Nor should it surprise anyone that a very high-ranking official from the Kremlin said recently at a meeting with senior government figures from Iran that: "By keeping the West out of energy deals in Iraq - and Baghdad closer to the new Iran-Saudi axis - the end of Western hegemony in the Middle East will become the decisive chapter in the West's final demise," a senior source who works closely with the European Union's energy security apparatus exclusively told OilPrice.com.

By Simon Watkins for Oilprice.com

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Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More