In our 2018 Annual Forecast, we wrote that growing political divisions in Iraqi Kurdistan would undermine the autonomous region in negotiations with Iraq's federal government. Discord in the Kurdistan Regional Government, along with mounting financial strain, could work to Baghdad's advantage as the two try to hash out an agreement over oil exports.
Iraqi and Kurdish officials are still trying to work out their differences. Representatives from Iraq's oil ministry and State Organization for Marketing of Oil (SOMO) met with members of the Kurdistan Regional Government (KRG) on Jan. 15 in its capital, Arbil, to discuss a deal over oil exports. Though the meeting suggests that the two sides are inching closer to common ground, several points of contention remain between the Iraqi and Kurdish governments.
According to the secretary of the KRG Council of Ministers, the Jan. 15 meeting's main purpose was to hash out an arrangement in which SOMO would market and export oil produced in Iraqi Kurdistan. The KRG, in return, would receive fuel and a portion of Iraq's federal budget. Just how much of the budget Arbil would get is still up for debate, however. Baghdad contends that based on the autonomous Kurdish region's population, it should receive 12.6 percent of the budget, while Arbil argues that its population size entitles it to 17 percent. The KRG has held fast to that number, despite knowing the Iraqi government can't meet it, given Baghdad's obligations to the country's many other stakeholders and interest groups.
In time, though, Iraqi Kurdistan's leaders may have to give in. The region currently exports 300,000 barrels per day of oil, having lost about half its production capacity since Iraqi forces reclaimed much of its oil infrastructure in the wake of the controversial Kurdish independence referendum in September. At that rate, even with oil prices at $70 per barrel, Iraqi Kurdistan would earn only about $640 million each month. This sum — which doesn't take into account the payments the KRG would owe lenders and foreign oil companies producing in the region — is far less than what Baghdad has offered it to pay state employees. (The KRG hasn't been able to disburse full salary payments in more than three months.) To keep its financial problems from mounting — and from adding to the discord in Kurdish politics — the KRG eventually may yield to the Iraqi government. Baghdad, meanwhile, could be willing to take a financial hit in the interest of striking an export deal, which would further undermine Arbil's push for greater autonomy.