Kurdistan and the Iraqi central government have reached an important agreement over oil.
Although the deal is only an interim agreement, leaving larger issues unresolved, the two sides forged a short-term compromise. The accord calls for the payment of $500 million from Baghdad to the Kurdish Regional Government (KRG). In return, the Kurds will turnover around half of their daily oil production – 150,000 barrels of oil per day.
The two sides have been at an impasse since the beginning of the year. The KRG began exporting oil through Turkey without the approval from the central government in Baghdad. Under Iraqi law, oil must be exported under the auspices of a state-owned company. In retaliation for trying to sell oil on its own, Baghdad cut off the periodic revenue sharing payments to the KRG, which under Iraq’s constitution, amounts to 17% of the national budget. (Related: World War III: It's Here And Energy Is Largely Behind It)
But the decision to cut off funds to KRG only emboldened the Kurdish government in Erbil to get its oil exports up and running. Then came the lightning advance of ISIS in June 2014, which exposed the profound cracks in the Iraqi state. After the Iraqi military ceded large swathes of territory to the Sunni militant group, the Kurds moved to take control of Kirkuk and its surrounding oil fields.
Armed with new territory and the oil production base to underwrite a new country, the KRG inched closer to independence. Kurdistan successfully delivered an oil tanker to Israel, a move denounced by Baghdad. And despite threats of legal action against any buyer of Kurdish oil, Kurdistan tried an even bolder move – sending an oil tanker to the United States. The U.S. government had been pressuring the Kurds to work with Baghdad to keep the Iraqi state together, but the KRG believed it was on the verge of building a de facto independent state if it could convince buyers to take its oil.
However, the KRG ran into a roadblock when a Texas judge blocked the docking of a Kurdish oil tanker at a port on the U.S. Gulf Coast. The ship has been sitting off the Texas coast since July, unable to make its delivery.
The episode, and the failure of the KRG to legally sell more of its oil on the open market stalled plans for independence. It highlighted the possibility that the KRG had overreached.
The interim deal between the KRG and Baghdad on November 13 had its roots in that failure. The deal was nearly unimaginable only a few months ago, but with the inability to strike out on its own, the KRG slowed its bid for independence. The Kurds willingness to deal with Baghdad was also reinforced by the threat to Kurdish lands from ISIS, as well as the recent drop in oil prices, which has threatened to spark an economic crisis throughout Iraq. (Related: Saudi Cut In Oil Price For US May Lead To Price War)
The interim deal has benefits for both sides. The KRG could use the cash infusion, allowing it to pay government salaries, and the Iraqi government achieves a success by bringing the country’s oil production back under one umbrella, at least partially.
The two sides will follow up almost immediately to work on outstanding issues, with a Kurdish delegation led by its Prime Minster traveling to Baghdad for further negotiations. They will still need to work out months of payments that the Iraqi government did not send to Erbil, as well as how Kurdistan will sell its oil.
But the deal could contribute to political progress and help rebuild the state of Iraq, at least that is what the U.S. government is hoping. “This is the first of many steps that will be required to reach a comprehensive agreement,” U.S. State Department spokeswoman Jen Psaki said. “The United States will continue to serve as a neutral broker and facilitator to the extents desired by the leadership of both Iraq and the KRG.”
By Nick Cunningham of Oilprice.com
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