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Untangling the threads of the Baghdad-Erbil oil deal

The announcement of last month’s breakthrough oil deal between Baghdad and Erbil was widely greeted with positive murmurings in the Western press. The deal, which came into effect on the first of this month, marked a watershed moment in relations between Iraq’s capital and the semi-autonomous northern region of Kurdistan, and a thawing of political and strategic ties that have been under strain since January 2014.

The Kurdish Regional Government (KRG) controls around one fifth of Iraq’s territory and more than a quarter of its oil fields, but until recently Baghdad has attempted to prevent the sale of Kurdish oil on the open market, accusing the KRG of plundering Iraq’s natural resources. In June 2014, the KRG succeeded in selling a reported one million barrels of crude oil piped through Ceyhan in southern Turkey. In effect, despite Baghdad’s protestations, the Kurds had little difficulty in finding commercial buyers for their oil, and indeed even succeeded in undercutting Baghdad’s prices.

As a result, Baghdad and the KRG were until recently locked in a political and economic stalemate, with former prime minister Nouri Al-Maliki refusing to make concessions and even imposing sanctions on the Kurdish region while Kurdish president Masoud Barzani continued to profess that the export and sale of Kurdish oil was a fundamental right and in keeping with Iraq’s constitution.

The New Oil Deal

Kurdish exports to Baghdad
250,000 barrels of oil a day, plus a further 300,000 from Kirkuk.

Baghdad’s remunerations to the KRG:
17 per cent of government budget expenditure, plus dispersal of the estimated $10 billion it has withheld since January 2014. In addition, Bagdad has agreed to make direct payments to the Peshmerga to cover expenses in the fight against ISIS.

This new deal, then, is significant in that it institutionalises the export of Kurdish oil and sets up what is essentially a trade agreement between Baghdad and the KRG. The inclusion of oil from the contested city of Kirkuk is particularly interesting, since this suggests that Baghdad has admitted political defeat in control of the city’s oil fields. Also of interest is the fact that as well as patching over relations through the lifting of sanctions, prime minister Haider Al-Abadi has agreed go one step further by paying the Peshmerga, the Kurdish military forces, as a way of expressing his support for their fight against the terrorist group known as the Islamic State of Iraq and Syria (ISIS).

Unsurprisingly, perhaps, the deal has been widely celebrated in Western media and policy circles, with US Secretary of State John Kerry calling it “a very significant step forward” in a statement made at a NATO conference in early December 2014. It has even been seen in some circles as the litmus test of Abadi’s new premiership, and a sign that Iraq’s new leader is striving to distance himself from the unpopular policies of his predecessor by seeking a rapprochement both with the Kurds and with Sunni factions in the country.

But beneath all the rhetoric and political back-patting, what does the deal really represent? Some analyst have suggested that the impact of such an agreement may in reality be minimal, especially since Kurdistan is already exporting in excess of 300,000 barrels of oil a day. In crude economic terms, the influx of a further 250,000 b/d of Kurdish oil onto the market may actually have a negative effect on the Iraqi economy, essentially flooding an already collapsing global oil market. With oil prices at a five-year low of around $50 a barrel, pumping more Iraqi oil into an already saturated market may drive them down even further.

Market Data - OilSo what’s really going on here? On an economic level, the deal doesn’t seem to make sense for either party: Baghdad is gaining an influx of oil that will result in driving down global prices and hence undermine its own stockpiles; while the KRG is sending Baghdad oil they could probably (and more lucratively) sell elsewhere.

On a political level, however, it is a very different story. Superficially at least, the deal has temporarily repaired Baghdad’s relations with its troublesome northern region, and has cast Haider Al-Abadi as Iraq’s new and improved reformist Da’wa Party politician. It has also served US interests in establishing concrete links between the two governments and of bolstering financial and political support to the Peshmerga. Under the surface, however, it seems that it is the KRG, and not Baghdad, who has ultimately benefited from this deal.

Rather than reinforce ties between Erbil and Baghdad and promote a unified Iraq, as some have claimed, the deal serves to institutionalise Kurdish control of Kirkuk and other disputed territories, and effectively sets it up as a trade partner to Baghdad as if it were its own fully-functioning state. Considered against the background of Iraqi regional instability and Kurdish gains over the past year, the oil deal represents Baghdad’s resignation to the inevitable Kurdish secession and gives the KRG the political and strategic tools it needs in order to push for full independence.

Consider the following passage, published in The Economist just under six months ago:

“As the balance of power has tipped in favour of the Kurds, they are sure to press forcefully for three big concessions from Baghdad. They want a law to legitimise the export of oil from the Kurdish region and to allow them to benefit directly from contracts with foreign companies for managing and extracting new finds. They want Mr Maliki to hand over their full share of the federal budget. And they want the Peshmerga to be paid from central government coffers.”

Tick, tick, tick. The new deal between Erbil and Baghdad, under this reading, seems little more than a rehashing of Kurdish demands and re-casting them under the guise of economic benefit. The deal also has the added dimension of depriving Turkey (which notoriously has problematic relations with its Kurdish minority in the East) from potential revenues gained from piping and shipping Kurdish oil.

Perhaps this is an over-simplistic reading of the cards, and ultimately only time will tell what manner of intra- (or inter-) country relations are established through this new deal. But at the moment at least, it seems that the Kurds have succeeded in sweet-talking Baghdad into getting what they want, and that a fully autonomous Kurdish state may not be too far away on the horizon. That being said, considering the KRG’s reputation for efficiency, military prowess and relatively low corruption, that may not necessarily be such a bad thing.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.

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