Dec 2, 2014 | 22:32 GMT

5 mins read

Iraq: Baghdad-Arbil Agreement Sidesteps Major Frictions

Kurds Use Oil Tankers to Challenge Baghdad's Control
(Muhannad Fala'ah/Getty Images)

Following negotiations in Baghdad, Iraq's central government and the Kurdistan Regional Government have broadened an agreement to stabilize northern oil exports and to distribute the revenue from those exports.

The agreement stipulates that the Kurdistan Regional Government, known as the KRG, will export 250,000 barrels of oil per day from the Kurdish region, as well as 300,000 barrels per day from disputed Kirkuk oil fields using a pipeline running through KRG territory into Turkey. Rather than build a pipeline to unilaterally export this oil, as the KRG had originally hoped, the central government in Baghdad will sell the oil through its State Oil Marketing Organization, and Baghdad will be in charge of distributing revenue from those exports. In return, Baghdad has pledged to distribute 17 percent of its federal budget to the KRG in addition to an annual sum of $1 billion for peshmerga salaries. The peshmerga funds will be drawn from the Iraqi Ministry of Defense's budget and will be critical to ensuring Kurdish support for Baghdad's ongoing fight against Islamic State militants.

As Stratfor anticipated, the deal means the KRG has to abandon its earlier goal of establishing a unilateral export policy aided by Turkey. The plan failed because of the KRG's heavy financial constraints and Ankara's concerns that any Kurdish independence could influence separatist factions within Turkey's borders. When Arbil and Baghdad signed a preliminary agreement in November, Stratfor forecasted that the central government would not make a final deal unless the KRG agreed to sell Kurdish oil through the State Oil Marketing Organization and allow Baghdad to control the funds from exports. Under these constraints, the burden of compromise lay on the KRG.

The status of Kirkuk was a critical aspect of these negotiations. Its vulnerability has both facilitated the current arrangement and will likely threaten it in the future. The KRG, led by President Massoud Barzani's Kurdistan Democratic Party, took advantage of the Islamic State's summer siege by deploying Kurdish peshmerga to occupy the Kirkuk fields, specifically the Baba and Avana domes of Kirkuk field and the nearby Bai Hassan field. The Kurdistan Democratic Party's leaders have since attempted to politically integrate these areas into the KRG so they can export from these fields and effectively claim them as their own. The KRG, however, does not have exclusive control over Kirkuk. In striking this agreement, the KRG has tacitly acknowledged this by consenting to allow the State Oil Marketing Organization to sell the oil.

This role for the State Oil Marketing Organization has been a key demand for Baghdad, which needs to maintain the power of the purse and its authority over Kirkuk, even if it is not physically in control of the fields at this time. Baghdad would also benefit from increased production out of the north given that oil prices are now depressed and the central government is spending heavily on its military campaign against the Islamic State.

The KRG pipeline to Turkey has been operating at a capacity of close to 300,000 barrels per day, but the government is working to increase pipeline capacity to 400,000 barrels per day by the end of year. This, however, will most likely occur in a couple of months. To fulfill the agreement's targeted output of 550,000 barrels per day from the north, Kirkuk production would also have to increase from the roughly 120,000 barrels per day coming from the Avana dome and Bai Hassan field. The Kurdish occupation of Kirkuk fields may have given Baghdad more incentive to negotiate, but the shaky status of Kirkuk could also seriously hamper this arrangement down the line.

Baghdad will seek to undermine Kurdish political influence in Kirkuk through Arab and Turkmen resistance to the KRG. It will also do so by using pending contracts with international oil companies such as BP to raise production in the Kirkuk fields. The blurry line between what the KRG has authority over in Kirkuk versus what Baghdad has authority over — from deciding political rights of local Kirkuk officials to energy contracts with international oil companies — will create a more ambiguous political and legal environment for companies operating in the disputed territories.

The current arrangement also lacks an enforcement mechanism. Baghdad will have the right to restrict budget allocations at any time, using any shortfall in production or output to justify cuts, and the KRG will retain the option to divert crude flows through a pumping and metering station it controls on the border with Turkey. These options leave the agreement vulnerable to future disruptions, especially as the Kirkuk fault line remains wide open.

For now, both sides will play nice. So long as the arrangement remains in place, buyers of KRG crude have legal cover to buy Iraqi crude exported through the Turkish port of Ceyhan and will be expected to send payments through Baghdad. The security environment will also underpin the arrangement because the Iraqi army will have to rely on the Kurdish peshmerga to uproot Islamic State militants from key urban areas such as Mosul. These situations are not static, however. The fight over Kirkuk and both governments' lack of ability to enforce this energy compromise means Stratfor will closely watch for the inevitable ruptures to come.

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