The series of attacks against oil fields in the semi-autonomous Kurdistan Region of Iraq (KRI) last week underlines OilPrice.com’s long-stated view that the dispute between this Region and the Federal Government of Iraq (FGI) is not really to do with oil at all – it is all about sovereignty. The FGI in Baghdad does not want the KRI in Erbil to have any independence from it, and the KRI wants to have more. The FGI’s stance aligns perfectly with that of its key

sponsors China and Russia. This was relayed to OilPrice.com some time ago by a senior energy source who works closely with Iran’s Petroleum Ministry: “By keeping the West out of energy deals in Iraq, the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.” The KRI’s view also equally reflects the view of its principal sponsors – the U.S. and its key allies. This is that they want the Kurdistan Region to terminate all links with Chinese, Russian and Iranian companies connected to the Islamic Revolutionary Guards Corps over the long term. The U.S. and Israel also have a further strategic interest in utilising the Kurdistan Region as a base for ongoing monitoring operations against Iran. Once these basic elements are understood, then everything that has happened, is happening, and will happen, makes perfect sense.

Related: Global Natural Gas Production Dropped in May

Money is the key to success for any state large or small, and both the KRI and FGI have spent years doing their utmost to assert control over the semi-autonomous state’s finances. In 2013 – on 23 April – the Kurdistan Region’s government passed a bill that would allow it to independently export crude oil from its fields and those of Kirkuk in the event that Baghdad failed to pay its share of oil revenues and exploration costs for crude found in the Region, as analysed in my latest book on the new global oil market order. A corollary bill to create an oil exploration and production company separate from the Federal Government in Baghdad and a sovereign wealth fund to take in all energy revenue was approved at the same time. At that point, the Kurdistan Region was producing around 350,000 barrels per day (bpd) – out of a total 3.3 million bpd across Iraq — and planned to increase this to 1 million bpd by the end of 2015. In sum, the Region intended the 2013 bill to give it complete financial independence from the rest of Iraq as a precursor to total political independence shortly thereafter. The next phase — after independent oil sales were assured by the Kurdistan Region — was a planned referendum on independence. The Federal Government correctly saw this as an existential threat to its future, given the U.S.’s promise to the Kurds that they would gain full independence for their vital help in defeating Islamic State. Efforts to put these new measures towards greater independence into practice were hampered by overt and covert pressure from Baghdad’s key regional sponsor Iran. And when the independence referendum finally did take place – in 2017 – and the result was a resounding vote in favour, it was Iran that moved quickly and forcefully into the Kurdistan Region to quell any idea of full independence being granted.

A year after the Kurdistan Region had made its move in 2013 to secure more independence, Baghdad suggested that instead of independent oil sales for the Kurdistan Region, the two sides instead agreed to a deal. The 2014 ‘Budget Payments-for-Oil Deal’ focused on the south paying the north a certain amount of its budget each month in return for a certain level of oil pumped in the south then being sent in return. Specifically, the original deal involved the Kurdistan region exporting up to 550,000 bpd of oil from its own fields and Kirkuk via the Federal Government of Iraq’s State Organization for Marketing of Oil (SOMO). In return, Baghdad would send 17% of the federal budget after sovereign expenses (around US$500 million at that time) per month in budget payments to the Kurdistan region. From the outset, each side tried to gain an advantage, with the Kurds either failing to send the required amount of oil (while also attempting to sell some of it independent of Baghdad), and the Federal Government failing to send the required levels of budget payments. Russia’s effective takeover of the Kurdistan Region’s key oil infrastructure in 2017 after the independence referendum was aimed at further sowing discontent between the two sides – and it worked – as also detailed in full in my latest book on the new global oil market order.

These themes have consistently continued to play out in the country, all centred on maximising control over the money from the Kurdistan Region’s oil sales, which in turn is a proxy for the level of independence it has from Baghdad. Matters have been complicated by a lack of clarity in the 2005 Iraqi Constitution. According to the Kurdistan region, 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. In addition, the Region 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 Region 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. Additionally, it argues the Con­stitution provides that, should a dispute arise, priority shall be given to the law of the regions and governorates. However, the Federal Government maintains 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 and should therefore be handled through Baghdad.

The upshot of this impasse was the 25 March 2023 embargo placed on all independent oil sales from the Kurdistan Region which is still in place. As this issue of independent oil sales is actually about the sovereignty – and geopolitical alignment – of a key piece of land in the heart of the Middle East, it should come as no surprise to anyone the lengths to which the interested parties will go to make sure their side wins. It is apposite to note that around the same time as the U.S. was stressing again that both sides – the Kurdistan Region and the Federal Government – should redouble their efforts to find a negotiated settlement to the long-running oil embargo, a series of attacks from ‘unknown assailants’ occurred at multiple oil fields in the Kurdistan Region. Among these key oil sites affected were Sarsang, Tawke, Peshkabour, Khurmala, and Ain Sifni, resulting in the Kurdistan Region’s crude output dropping by around half, to 150,000 bpd. All these sites were operated by foreign firms, which the Federal Government of Iraq has long maintained should not be dealing direct with the Kurdistan Region but should instead be dealing with the central government in Baghdad. Indeed, May saw Iraq’s federal authorities file another complaint against the Kurdistan Region for signing gas contracts with two U.S. companies, including HKN Energy (the operator of the Sarsang site).

So who possibly could have been behind the attacks? Unsurprisingly, given the pinpoint accuracy of U.S. laser-guided missile technology, no group has claimed responsibility, but the Kurdistan Region’s authorities have questioned whether it could be Iran-backed Iraq paramilitaries. Again unsurprisingly, the Federal Government in Baghdad has rejected this idea. Whether it was one of these many such groups that have attacked foreign targets in Iraq for years remains to be seen. But what is clear is that a very clear link has now been established between foreign powers seeking to up the pressure on Baghdad to resume negotiations on ending the ban of oil sales from the Kurdistan Region and wide-ranging attacks on the very oil fields from which that oil comes. At the same time, the Federal Government of Iraq has refloated a variation of the original 2014 ‘Budget Payments-for-Oil Deal’. This latest manoeuvre saw the Iraqi Cabinet approve the immediate transfer of all oil produced in the Kurdistan Region to the federal Government of Iraq-controlled State Organization for Marketing of Oil (SOMO) for export. This time around, Baghdad has offered to provide the KRG with an advance of $16 pb (cash, or in-kind benefit), based on a minimum delivery of 230,000 bpd, with any additional production to be included under the same mechanism. This, of course, is aimed at wresting control of the Kurdistan Region’s oil sales — and therefore finances – away from its de facto authority in Erbil and firmly to the Federal Government of Iraq in Baghdad.

By Simon Watkins for Oilprice.com

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