Baghdad has threatened legal action against international buyers of oil from Iraq’s Kurdistan region, the latest step in an escalating dispute over oil exports.
A warning letter this week to buyers from state oil trader SOMO is part of efforts to stop the semi-autonomous region exporting oil independently of Baghdad. This follows a February decision by the Iraqi Supreme Court, which declared Iraqi Kurdistan’s energy industry unconstitutional.
Since then, Baghdad has taken an increasingly aggressive stance towards international companies operating in the region, threatening to cancel existing contracts and prevent the brokering of future deals.
The oil ministry has launched lawsuits against at least nine international companies in recent months over their dealings with the Kurdistan Regional Government (KRG), which is seeking to cancel their contracts. Among those summoned to appear in court in Baghdad are UK-listed Gulf Keystone, Norway’s DNO and Russia’s Gazprom.
The latest move comes amid concerns over rising oil prices and tighter global energy supplies following Russia’s invasion of Ukraine. “This is becoming quite serious and it casts a dark cloud over the energy sector,” said Shwan Zulal of Carduchi Consulting, which specializes in Iraqi Kurdistan. “It can no longer be ignored – it will cause problems for the future of the industry: we are talking about the short to medium term, in the next few months, when production will eventually fall because the oil companies will hold back new development.”
On Friday, the KRG condemned Baghdad’s letter to oil buyers, saying it was “part of a political struggle”. It also said in a statement that its oil production and trade were not affected by the dispute, that “investment interest remains and production is expected to increase.”
Iraq is OPEC’s second largest producer and currently exports about 3.3 million barrels per day (b/d). The Kurdistan Regional Government (KRG) keeps its production figures secret, but industry experts estimate its production at around 440,000 b/d, most of which it exports.
KRG officials have repeatedly dismissed the Iraqi Supreme Court’s decision as a political move. It launched several legal proceedings against the Ministry of Petroleum and its minister Ihsan Ismail. It refers to Baghdad’s attempts to cancel the contracts of four companies, a KRG official told the FT.
For years, the KRG has used ambiguities in the Iraqi constitution to export oil and maintain revenue to maintain some financial independence from Baghdad. While the Supreme Court’s decision will be difficult to implement, it will have an impact on foreign investors, analysts say.
“This is by far the worst crisis between Baghdad and the Kurds since 2003,” said one senior Kurdish official, “born of bitter rivalry during the government formation process.”
Iraq was without a functioning government since last October, when Shia cleric Moqtada al-Sadr’s movement won parliamentary elections. At the time of the February court ruling, Erbil’s ruling Kurdistan Democratic Party (KDP) aligned itself with Sadr as he sought to form a government that would exclude factions more closely aligned with Iran.
As state spending has been curtailed by the political deadlock, Baghdad stopped paying Erbil its share of the federal budget in May. Analysts speculate that Kurdish support for the Iran-backed government could speed up the resolution of the oil dispute.
“They could find a way around the judgment or temporarily ignore it. But is there political will for it? Baghdad still has a caretaker government with limited powers. Can a deal be made with this government and followed through with the next one?,” said Sajad Jiyad, a Baghdad-based fellow at The Century Foundation.
Iraq’s low production costs at a time of high global oil prices are another incentive for companies to stay. “Right now, with these prices, it’s too tempting for traders not to do business with KRG.” And for the buyers – they just need the oil,” said Alan Mohtadi, who heads T&S Consulting Energy and Security, which advises companies in the Kurdish oil and gas sector.