THE BLOG

Understanding the Kurdish Oil Dispute

02/06/2014 12:46 BST | Updated 30/07/2014 10:59 BST

The Kurds of Iraq cannot be accused of impatience over exploiting their energy riches. Oil has been underground for millennia and as it bubbled to the surface was used in traditional medical treatments. But those who ruled Iraq neglected it, apart from the Kirkuk region which was forcibly taken from the Kurds.

However, once the Kurds were finally able to establish an officially recognised autonomous region after the fall of Saddam Hussein, they didn't hang around. They decided to make up for lost time, make the most of their vast energy reserves and make it the foundation of a new society.

They have developed an oil and gas sector from nothing in under a decade. Its capital, Erbil is described as the oil exploration capital of the world via 50 production sharing contracts with companies from 23 countries including Turkey, America, Britain and France.

Their energy companies did so despite threats of being blacklisted by Baghdad. It beggars belief that so many companies would contemplate such investment if they thought that there was no legal base to these activities.

But Baghdad has shown either grudging approval or outright opposition, although it vastly increases the resources of Iraq as a whole. Baghdad has this year cut budget payments to the Kurdistan Regional Government (KRG) whose civil servants have gone without pay. Sadly, Britain, America and Middle East countries have made no public statements against Baghdad unilaterally cutting off Kurdistan's budget. In these circumstances, the Kurds need to explore all options for their stability.

The crucial issue is how to get their energy to market and monetise it. In recent years, a relatively small amount of oil was trucked to Turkey and Iran to be bartered for refined products. Obviously, this is expensive and environmentally damaging.

Last year, the Kurds and Turkish interests established a pipeline to the port of Ceyhan in Turkey, despite Baghdad claiming that this would be illegal. Turkey and the KRG wisely bided their time to avoid needless provocation but it was always clear that oil sales would come. The storage tanks only hold 2.5 million barrels of oil, which is currently flowing at the rate of 100,000 barrels per day. That day came last week when the United Leadership tanker started its westward journey, laden with a million barrels of oil. You can follow the tanker's progress online.

The timing is judicious. It falls between the Iraqi elections in April and the formation, probably after many months, of a new coalition government in Baghdad. This could once again allow the Kurds to be kingmakers as disparate forces opposed to a third term for Nouri al-Maliki as Prime Minister seek an alternative or ensure that Maliki keeps his promises this time. It is not just the Kurds who bridle at his centralisation, high-handedness and unconstitutional behaviour.

What would be Baghdad's reaction to this decisive move by the KRG and Turkey? It could, in extremis, have been armed. It could involve further financial sanctions. The specific reaction is a damp squib. Baghdad's Ministry of Oil has filed a Request for Arbitration against Turkey with the International Chamber of Commerce to prevent crude oil exports through the pipeline.

A battle of words has begun with a devastating Kurdish critique of the Ministry of Oil, MOO. The KRG's Ministry of Natural Resources (MNR) argues that "The MOO's behaviour is inconsistent with previously established and accepted practice," which includes exporting oil by trucking through Turkey and Iran for many years.

The MNR says that the MOO "threatens Iraq's oil export capacity and Iraq's global diplomatic standing." The MOO also threatens Iraq's relations with global oil traders and buyers. MOO actions violate the 2005 Iraq Constitution, Iraqi and international law. Its threats will fail, says the KRG.

The crux of the MNR case is that Baghdad agencies lack exclusive authority under the Iraqi Constitution over the exploration, production, or export of energy from the Kurdistan Region. Instead, the KRG has an exclusive authority to manage oil and gas in fields that were not in production in 2005. All its export oil comes from new fields.

KRG authority includes managing exports. Because oil export is not an exclusive authority of the Federal Government, it is, in relation to Kurdistan oil and gas produced from new fields, an exclusive authority of the KRG.

The Federal Government has the qualified right, if it is sharing revenue in accordance with the Constitution, to jointly manage oil produced from fields that were developed pre-2005 in Kurdistan with the KRG. In any case, the Federal Government has not been sharing revenue in accordance with the Constitution.

The KRG has the right to receive energy export revenues directly from purchasers. The KRG has been willing to be flexible in sharing revenues with Baghdad if it shares revenues in accordance with the Constitution, although it has no such constitutional obligation.

The MNR also details how an isolated MOO is misleading the Iraqi Federal Government and Parliament about Kurdish energy exploration and export. Furthermore, MOO's "illegitimate" arbitration effort tries to transform a matter of settled Iraqi constitutional law into an international dispute, although "the MOO has not even attempted to raise its concerns with the KRG or Turkey through polite dialogue as required under the Iraq-Turkey pipeline agreement."

The KRG says it will engage with responsible partners in Baghdad to resolve internal Iraqi oil and gas matters. This dispute must be resolved politically. Where there is a will, there is a way of finding a face-saving and permanent settlement of this pointless dispute and to allow these energy riches to boost the Kurdistan Region and Iraq as a whole. It is high time the MOO stopped barking at the Moon.