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Barzani Goes to Baghdad: Trouble in the Kurdish Oil and Gas Sector

A recent Federal Supreme Court decision in Iraq has put a legal stake in the heart of Kurdistan’s oil and gas sector — the financial lifeline of the region. Only one man has the power to fix this. Masoud Barzani — the 75 year-old former president and de facto patriarch of the Kurdistan region — must go to Baghdad and cut a political deal. Only Kak Masoud has the gravitas, the relationships, the respect, and the political capital to make this happen. Should Masoud choose not to take this opportunity or — worse yet — should his health begin to fail him, it is difficult to see how the crisis in this critical sector will be resolved.

The Kurdistan region of Iraq has had a bumpy history with its parent government in Baghdad. Though the Kurdish provinces have been de facto separated from Iraq since the end of the first Gulf War in 1991, the 2005 Iraqi Constitution established it as a semi-autonomous region. That document left a great deal of ambiguity as to exactly which rights and privileges would be accorded to the region, a lacuna that resonates to this day.

 

 

The rocky relationship has been highlighted by continual fighting — usually rhetorical but occasionally literal — on issues such as the so-called “disputed territories,” most notably the oil-rich province of Kirkuk, relations between the Kurdish Peshmerga and the security forces of federal Iraq, budget sharing from the federal budget for the Kurdistan region and, most bitterly, the legal standing of its oil and gas sector.

The disputes with Baghdad have also been deeply contoured by various international interests. The United States has been generally supportive of the Kurdistan Regional Government and especially the ruling Kurdish Democratic Party — though not to the point of independence, as painfully demonstrated in 2017 when federal Iraqi forces retook control of Kirkuk from the Kurdistan Regional Government’s Peshmerga forces that had assumed control as part of the fight against ISIS. Turkey has been deeply conflicted, as it has a historic suspicion of the federal arrangement of the Kurdish Regional Government but is also the largest benefactor of its oil and gas sector. In fact, Turkey exercises almost total control over the Kurdistan region’s oil and gas sector, as it owns the pipelines inside Turkey and the exporting port of Ceyhan, an important source of hard cash as the Turkish lira continues to collapse. Iran maintains deep ties with both the major Kurdish parties, but is deeply hostile to the Kurdish Democratic Party’s rumored ties with Israel — to the point of using missiles for emphasis. Finally, both China and Russia see the area as a possible point of expansion into the region. Russia owns much of the Kurdistan region’s internal pipeline and Chinese firms appear anxious to engage in projects in the region. Of course, international sanctions on Russia complicate their involvement.

The Kurdistan regional oil sector was primarily built under Masoud’s nephew, former Prime Minister Nechrivan Barzani from 2012-2019 and pumps between 400-500 thousand barrels per day of oil. But the status of the Kurdish oil and gas sector is now complicated by two legal difficulties. The first — an arbitration challenge by Baghdad at the International Chamber of Commerce with Ankara about the legality of the Kurds putting oil into the international pipeline without approval from the Iraqi State Oil Marketing Organization — is still pending. But the second, a lawsuit brought in 2014 by the federal Government against the constitutionality of the region’s oil law, was finally decided by the Supreme Court in February of this year. Why the decision — pending for years — was made at this particular moment remains a point of argument and speculation. But the Supreme Court has declared the Kurdish oil law unconstitutional, mandating that the Kurdistan Regional Government turn over all oil produced to the federal government, giving Baghdad the right — though not the obligation — to invalidate contracts entered between Irbil and various oil and oil services companies.

Legally, this decision turned on the interpretation of Articles 110 and 111 of the Iraqi constitution, which deal with ownership and control of the production and export of Iraq’s natural resources — most notably oil. Without getting too deep into a contested constitutional question (those who wish to dig further may read here), both sides have legitimate arguments. The Federal Government’s case rests on the clear mandate given in Article 110, while the Kurdish case rested on its interpretation of exceptions to the rule given in Article 111. In short, the constitution is very ambiguous on this matter, probably by design, and the court had to choose which article — and therefore which government — to favor in its decision.

The decision also occurs in the shadow of the Kurdistan Regional Government’s ill-fated 2017 Independence referendum. In the wake of an overwhelming victory in the non-binding referendum, Baghdad used federal Iraqi forces to re-establish control over Kirkuk province — technically part of federal Iraq but disputed. The loss of this province made independence non-viable, particularly as Baghdad, with Turkish cooperation, demonstrated how quickly the KRG could be isolated.

The court has since made a series of other decisions implementing the February ruling. Just days ago, four oil contracts signed by the Kurdistan Regional Government were quietly annulled. Further, many corporations are responding to the change in the legal status quo and numerous western firms — Baker Hughes, Schlumberger, and Halliburton prominently among them — have begun to disentangle themselves from Kurdish oil projects. Other national firms — most prominently Turkey’s Genel, but also Russian and Chinese firms — may use a different calculus, but for those firms that are from part of the “liberal world order,” Baghdad’s decision is the relevant legal framework. The exception here is Chevron, which continues to operate in the region. As a super-major, it may either be willing to ride out the legalities and continue to work in a gray market situation, or it may simpler be taking a slower, wait-and-see approach to decision making.

Despite a countersuit by the Kurdistan Regional Government and supportive rulings in its own provincial courts, the consequences of the legal ruling by the Supreme Court are now beginning to multiply, threatening the long-term viability of the entirety of the Kurdish oil and gas sector. While Baghdad does not have the ability or desire to send police forces into the north to enforce its decision, it has no need to. As the pre-emptive actions of the oil services companies show, the combined threat of international legal action and “blacklisting” from the (much larger) oil sector of southern Iraq will quickly result in many, perhaps most, international firms departing the region. While the legal regime has not yet threatened the transporters and buyers of Iraqi Kurdish oil with legal action, there can be little doubt that will be coming soon. The actions of these firms also reflect pre-existing concerns that had already made an investment in the Kurdistan region of Iraq less attractive — including both a less stable security situation and serious issues with payment from the Kurdistan Regional Government.

The Kurdistan Regional Government — especially the ruling Barzani-led Kurdish Democratic Party — and their Western supporters have reacted to this court decision by maintaining to all listeners that the decision is a political one, wrapped up in government formation, longer-term anti-Kurdistan region sentiments, and Iranian influence. Only the judges know what was in their hearts, but this charge — even if true — is irrelevant to the facts at hand. From an international standpoint, the decisions of the Supreme Court represent the final interpretation of the internationally recognized Iraqi constitution, which is why oil and gas firms are quickly falling in line.

As a matter of legality, the death knell for the legitimacy of the Kurdish oil sector seems to be final. This does not mean that gray market export cannot continue, as Turkey seems to have no desire to sever this revenue source, and there are plenty of non-Western oil servicing companies that will be happy for the business. But moving to such gray market options removes much of the upside potential and further depresses revenues.

However, legalities do not prevent either side from entering a political deal that rewrites the Iraqi oil and gas law. Now obviously, the legalities contour the art of the possible in a political deal. Let’s be clear — in the Baghdad vs. Irbil contest over the legality of Kurdish oil contracts and exports, Baghdad has won. But that does not mean an end to the political negotiation. Keeping the Kurdistan Regional Government relatively satisfied — and, for that matter, keeping the 400-500 thousand barrels per day of Kurdish oil on world markets — is in Baghdad’s interest. A political deal can yet be reached.

The Kurds could send — and doubtless, have sent, though without fanfare — a lower level, more technocratic team to Baghdad to negotiate. But this approach is unlikely to produce any result, let alone the sort of result that offers real possibilities to the Kurdistan region. A technocratic team is simply not empowered to make binding decisions, and Baghdad knows that.

The Kurds have one great but as yet untapped asset — the person of Masoud Barzani, the former president and de facto patriarch. Only Masoud can go to Baghdad and hope to truly achieve a favorable result, as whatever Masoud legitimates will be unconditionally accepted by the Kurdistan region of Iraq’s citizenry.

It is difficult to overstate the gravitas and political capital that the eldest Barzani holds throughout all of Iraq. While Arab Iraqi leaders have had numerous confrontations with him over the years, he is still held in the highest respect. This point was made very powerfully to me once, when an Arab Iraqi friend of mine went to Irbil to see Masoud Barzani. When I saw pictures of the meeting, I asked my friend why he had paid such a public visit, during a politically sensitive period in which their sides were not aligned. My friend replied, “The man is a historical and important friend to me, and I am more confident in his patriotism than his Kurdishness.”

This deep regard that Arab Iraq holds for Masoud Barzani is singular, at least since the death of his political counterpart, Jelal Talabani. No other living Iraqi Kurd has this kind of gravitas, or commands this much respect from his Arab counterparts.

The legal decision against the Kurdistan Regional Government has put the Kurdistan Region of Iraq in a position of existential danger. But Masoud — and only Masoud — has an opportunity to go to Baghdad and cut a political deal. No other figure will be so welcome in Baghdad, and no other figure has the standing to make the decisions required to reach a compromise. And frankly, only Masoud himself could get a deal that would be acceptable to Masoud. Sending a lesser emissary is a guarantee of failure.

In short, there is an opportunity here, once Baghdad forms a government, to cut a grand bargain. This grand bargain will inevitably involve compromise. While such a bargain may give the three Kurdish provinces an unequal share of revenues that the Arab provinces may find unfair, it will almost certainly involve a degree of entanglement with the Federal Oil Ministry that will make Irbil uncomfortable. It will also force a degree of transparency on the Kurdistan Regional Government’s oil policies that some interests may find awkward.

“Only Nixon can go to China” metaphors are overused. But this instance may be a valid comparison. Only the author of the Kurdish independence referendum can go to Baghdad to salvage the best deal that can be had for the Kurdish oil project. As court decision after court decision begin to cascade against the Kurdistan Regional Government’s oil ministry, Barzani should make it clear that he wants to personally negotiate and then codify the inter-relationship between Baghdad and Irbil in the light of these decisions. That said, I do not believe Masoud has even been to Baghdad since the days when he sat on the Iraq Governing Council. His coming down from Irbil would be a major change in pattern — but it is from this that the gesture would draw its power. His absence from personal involvement “in the fray” for decades will highlight the seriousness of the moment in which he re-engages.

Masoud Barzani has an opportunity to cement a legacy. It may not be the legacy of Kurdish independence that he dreamt of five years ago. But a legacy of securing a privileged place for the Kurdistan region inside a unified Iraq is not nothing. Kak Masoud can still be a hero to Iraq’s Kurds by cementing their long-term financial future. It is hard to see another such opportunity on the horizon. Former President Barzani should gather all his chips, all his political capital, all his personal markers and go to Baghdad at the height of his considerable power, to cut a deal.

 

Douglas Ollivant is a former NSC Director for Iraq. He is a senior fellow at New America and managing partner at Mantid International, which has U.S. and Western clients in Federal Iraq. Follow on Twitter at @DouglasOllivant.

Image: U.S. Army photo by Sgt. Gustavo Olgiati

Read More: Barzani Goes to Baghdad: Trouble in the Kurdish Oil and Gas Sector

2022-07-18 02:54:04

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