Tension between Baghdad and Kurdistan region has reached its peak since the Iraqi PM, Nuri AL-Maliki ordered the removal of Kurdish flags from government buildings in Khanaqin in Diyala province, which is in the disputed territories defined under Article 140 of the Iraqi constitution.
Since the directive was issues by the Iraqi PM, many protests in Diyala province and elsewhere in Kurdistan region have taken place. The demonstrations were highly charged with nationalistic slogans and even one protester is reported to have set himself alight. The head of Diyala province also refused to comply with the order from the PM to remove the Kurdish flag from government buildings.
The focal point of the incident was in Khanaqin, in an area which has been the subject of ethnic cleansing and arabization for decades by the former regime. The Iraqi PM's latest decision to remove Kurdish flags has evoked painful memories from the past, and brought the simmering ethnic disputes and mistrust to the surface.
Maliki's directive is seen as a symbolic move by Baghdad to assert control over the areas, which is still disputed and successive Iraqi government after 2003 failed to deal with it. Kurds does not see areas like Khanaqin as a disputed territory but as part of Kurdistan region, which is waiting to be annexed back to the region if and when the long-awaited article 140 of the Iraqi constitution is implemented.
It is needless to say that areas like Khanaqin and Kirkuk which falls under the "disputed territories" are strategically very important for whoever controls it, because it has abundant hydrocarbon reserves and Kirkuk has one of the largest giant oil filed in Iraq.
Resentments and tit for tat politics are on the increase between the central government and the KRG (Kurdistan Regional government). Oil output from Kurdistan region is decreasing as payment issues is still not being resolved.
Companies like DNO international ASA and others operating in the region have been pumping oil to the northern Iraqi pipelines and they have been increasing their output in the last year after an agreement was reached to be paid the cost by the Iraqi government. However, after a couple of payments, the central government reneged on its undertaking and no further payments being made since September and oil export from Kurdistan through Iraq has slowly but surely fallen.
It has been reported that the fall in production is due to technical glitches but it is odd that as soon as payments stopped from the central government the productions has withered away. Moreover, DNO announced on Monday that it has reached a deal to supply the domestic market in tune of 675000 barrel of oil at the rate of 10.000 bopd at $50, and made it clear that it will receive payments in advance.
Although DNO has said that it has had a go-ahead from the authorities, it is not clear if this has been cleared with the central government. Furthermore, it remains to be seen if the revenue generated by this deal would be taken into account when Baghdad allocate KRG budget.
It is a known fact that Iraq and Kurdistan has a deficit in refining capacity and Turkmenistan's surplus refining capacity along with Turkey and other neighbouring nations has been used to supply the domestic market.
Many oil companies in Kurdistan region are reaching the final stages of their initial exploration programs and are in a position to start selling oil to create a revenue stream in order to continue their programs and balance their books. However, limited access to the much-need funds and obstruction by Baghdad will not make it easy for them and compel them to find other ways to sell their oil.
DNO has been one of the early entrants to region and has made an early move to switch to local market, which means trucking the oil rather than sending it through the central government's pipelines.
What is happening in Kurdistan oil market feels as if the region is under a sanction imposed by Baghdad that laves KRG no choice but to improvise and sell the oil to alternative markets.
The indiscretion by the Iraqi government towards Kurdistan region is alienating the Kurds further. The battle over the control of the oil and revenue sharing is one which will determine the shape of Iraq and the level of Kurdish independence from central government, but tactics deployed by Maliki's government is pushing the parties further apart.
Unless the Iraqi government change its stance and wake up to the fact that Kurdistan region is not willing submit to central government's authority like before, the KRG would find other ways to sell the oil and generate a revenue stream. Meanwhile, KRG will continue demanding its 17 per cent of the overall Iraqi budget, which is entitled to under the Iraqi constitution. Iraq depends on oil for 95 per cent of its income and as the disputes escalates and KRG redirect its oil supplies, the rest of Iraq will be the net loser as a direct consequences of Al-Maliki's government.