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Shahriar Sheikhlar

Shahriar Sheikhlar

Shahriar is a Mechanical Engineer and MBA graduate with more than 22 years experience largely in Oil and Gas in Iran and then in Kurdistan…

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Why The Oil Outage In Iraqi Kurdistan Continues

  • Oil flows from Iraqi Kurdistan to Turkey remain disrupted.
  • The future of Kurdistan's oil exports is extremely nuanced and depends on the interests of all actors, including global and regional major powers.
  • Adherence to the interim agreement with Baghdad will likely determine the future of the petroleum sector in Kurdistan.

In the coming weeks, Kurdistan's oil and gas sector faces a pivotal moment that could reshape the region's geopolitical landscape. Since March 25, 2023, the Kurdistan Regional Government (KRG) and the Iraqi federal government have struggled to resume oil exports from Kurdistan, following a ruling by the International Chamber of Commerce (ICC) arbitration court. This impasse has significant implications for the KRG's economy and administration, leaving the path forward shrouded in uncertainty.

In 2007, a new chapter began for Kurdistan when its regional parliament approved the production of the region's oil and gas resources. Subsequently, the Ministry of Natural Resources was established to oversee these valuable assets. However, tensions escalated between Baghdad and Erbil due to Kurdistan's independent oil and gas exports via the Kurdistan pipeline, connected to the Turkish pipeline leading to the Ceyhan port on the Mediterranean Sea. This led Baghdad to sever the KRG's share of the federal budget and initiate legal proceedings against Turkey, ultimately culminating in the suspension of oil supplies on March 25, 2023.

Five months after oil shipments from Kurdistan were halted, at the start of September 2023, despite a quick agreement between the KRG and the Iraqi federal government and both sides' hopeful positive remarks on quickly restarting the export process, the trilateral or bilateral meetings between the parties in this dossier not only failed to reach a new agreement to resolve the disputes but also pushed a real trilateral solution further out of reach.

Related: Large Crude Draw Lifts Oil Prices

In light of this, it is evident that the future of Kurdistan's oil exports is extremely nuanced and depends on the interests of all actors, including global and regional major powers.

To be candid, the fate of Kurdistan’s oil is primarily shaped by regional and international interests rather than the local government’s needs. The two major parties leading the Kurdistan regional government are no longer the sole major participants in Kurdistan's oil destiny. As local party battles have intensified over the last several months, a lack of oil revenue has driven them farther apart, diminishing their ability to stand up to foreign interests in decisions about Kurdistan's oil.

Below are a number of key points to consider in Iraqi Kurdistan’s oil exports:

Politicking in the Kurdish Region: The divide among the main Kurdish parties, especially those within the KRG, makes it easier for external factors to undermine the constitutionally granted autonomy of the territory. Uniting the largest Kurdish parties may serve the region's interests in passing the ongoing state's hydrocarbon law.

Compliance with Commitments by Erbil and Baghdad: Adherence to the interim agreement, especially regarding budget legislation and the formation of a federal hydrocarbon law, will likely determine the future of the petroleum sector in Kurdistan. Any deviations from the agreement could force radical choices.

The Presence of Kurdistan Oil in Global Markets: The timing and feasibility of Kurdistan's oil production resumption and access to international buyers now depend on Baghdad and Ankara. Cooperation among Kurdish parties may influence Baghdad's decision to support exports, while domestic usage of Kurdistan's oil could raise financial and administrative challenges.

The KRG's Readiness for Resuming or Maintaining Oil Production: The KRG should be aware that oil-exporting governments with higher export capacities tend to have more influence in international politics. If the KRG's role in global energy security continues to be marginalized, it could impact international partners' willingness to invest in the region, potentially accelerating the decline of the territory's oil industry.

Global Powers’ Interests in Kurdistan’s Oil Flow: The interests of global powers, notably the United States and Russia, in the region's oil and gas industry will be influential. Convincing these nations that Kurdish oil and gas pose no threat to their interests is a key international strategy for Kurdish leaders.

International Market Factors: Future shifts in the international oil market's balance could impact the decision to restart Kurdistan's oil production, potentially driven by significant changes in oil prices or global market dynamics.

Kurdish and Iraqi Opposition Roles: The reactions of Kurdish and Iraqi opposition groups to the Baghdad-Erbil oil accord and potential challenges in the federal supreme court could temporarily halt oil production.

Europe’s Energy Security and Access to Natural Gas Sources: Europe's gas market balance may hold significance for the future of Kurdistan’s oil industry, depending on Europe's natural gas demand in the coming years.

IOCs Interests between Erbil and Baghdad: How oil firms in Kurdistan respond to contracts with the KRG if the Iraqi federal government offers them direct engagement with Baghdad may impact the industry's dynamics and lead to potential conflicts.

Turkish Interests: The possibility of returning to independent oil exports for Turkey may influence the financial attractiveness of different agreements for Ankara.

Possible scenarios for Kurdistan's oil and gas industry vary widely, from a resumption of exports under the Erbil-Baghdad deal to a continued halt in oil flow with increased pressure from Baghdad. The outcome depends on the intricate interplay of these factors, and the future of Kurdistan's oil sector remains deeply uncertain.

By Shahriar Sheikhlar for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on September 11 2023 said:
    At the heart of the dispute is the idea of independence of Iraqi Kurdistan. Russia has oil investments in Kurdistan and these would be best served by maintaining close relations with Iraq and this means Kurdistan remaining an autonomous part of Iraq. This view is also shared by both Iraq and Iran.

    On the other hand, the United States has at one point promised to support Kurdistan’s full independence from Iraq but this will never pass.

    Turkey, on the other hand, always bends with the wind looking where its economic and strategic interests are.

    The real solution for a resumption of Iraqi oil exports via Kurdistan to the Turkish port of Ceyhan on the Mediterranean Sea is for the Kurdistan Regional Government (KRG) to accept irrevocably that Kurdistan oil is Iraqi oil and therefore any development of these resources or exports should always be coordinated with and approved by the Federal government of Iraq in return for a revenue share as stipulated by the Iraqi constitution.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment

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