Iraqi Kurds’ Oil Woes: A Story of False Hope

Photo Credit: Reuters

By Rachel Bessette, Columnist

2014 was widely trumpeted as the “year of the Kurds.” With Iraq unraveling and scholars hailing the end of Sykes-Picot, expectations were high for a resolution to the Iraqi Kurds’ long quest for independence. The outlook today is far bleaker. The Kurdish Regional Government (KRG) is fractured, insolvent, and drowning in debt. Public sector employees have gone up to a year without pay and even some Peshmerga, the Kurdish security forces, have gone several months without salaries.

Reports of Iraqi Kurdish prosperity were not baseless. After gaining regional autonomy in 2005, Kurdish leaders recognized the opportunity for expanded oil production as a means to lay the foundation for a future Iraqi Kurdish state. A 2007 production-sharing law drew in prospective buyers as the KRG signed several high-value oil contracts, including a substantial agreement with Exxon-Mobile in 2011. [i] By 2014, the KRG had increased its oil production nearly five-fold since 2011.[ii]

Subsequent agreements with Baghdad were a further boon to Kurdish oil production and KRG coffers. By leveraging the cash-strapped federal government’s need for a share of the region’s oil exports, the KRG secured $857 million from Baghdad in 2012 to pay oil companies operating in Iraqi Kurdistan.[iii] In 2014, the KRG gained the release of funds withheld by Baghdad while also maintaining the right to control oil exports and retain over 50 percent of its oil revenues.[iv]

With an increasingly willing partner in Turkey, the KRG is also finding new ways to get its oil to market. The KRG completed construction of a new section of pipeline to the Turkish port of Ceyhan in 2014 and is expected to expand production to one million barrels per day by 2016, up from 100,000 in 2011.[v]

Although the KRG only produced an average of 600,000 barrels per day in 2015, this still represented a 600% increase from its 2011 production.[vi] Yet the region finds itself $18 billion in debt, begging the question of why, despite exponential growth in oil production and revenues, the KRG remains effectively broke.[vii] The answer lies in the structural realities of the KRG’s relationship with Baghdad, which continually undermine Kurdish leaders’ ability to transform oil production into the economic self-sufficiency needed to pave the way for independence.

Baghdad depends heavily on the region’s oil production to meet its budgetary needs. The Iraqi federal government has therefore pursued all possible political routes to prevent the loss of Kurdistan and its oil. [viii] Likewise, the KRG and Baghdad frequently find themselves at loggerheads over an oil agreement in which the KRG is required to export 250,000 barrels per day through the state oil marketing company in exchange for 17% of the federal budget. Each side frequently accuses the other of reneging on its share of the bargain, stymieing Kurdish oil exports and causing Baghdad to periodically halt budget payments.[ix] These disputes compromise the KRG’s ability to pay salaries and undermine investors’ confidence, impeding the realization of financial and political stability.[x]

Furthermore, as of 2014 over two million barrels of Kurdish oil shipped through the newly constructed Ceyhan pipeline were sitting in storage due to a lack of buyers.[xi] Baghdad’s threats of legal action against Turkey, the KRG, and any states that purchase Kurdish oil have effectively deterred most would-be-buyers. Any oil that the KRG does sell is sold at a discount to compensate for purchasers’ fear of reprisal from the Iraqi government.

Politically, fear of the precedent of an independent Iraqi Kurdistan and reluctance to cross Baghdad will ensure that Ankara consistently stops short of supporting a bid for statehood.[xii] Instead, Turkey will use its leverage over the KRG’s oil production to ensure that just enough revenue flows to Arbil to maintain a stable buffer zone along the Turkish border while actively discouraging any moves towards independence.[xiii]

Oil prices hovering below $30 per barrel exacerbate already stunted revenues, burgeoning oil contract payments, a bloated government payroll, and continued conflict with Baghdad, leaving the KRG in a steadily worsening budget crisis. Growing financial pressure has triggered widespread popular protest and political infighting, leading to the breakdown of the government in October 2015.[xiv]

As a result, the future of the KRG’s quest for independence is far bleaker than it appeared in 2014. While an independence bid remains an option due to considerable doubts regarding Baghdad’s ability to pay the KRG’s share of the budget, any moves towards statehood will surely not proceed with the promise and fanfare predicted in 2014. Alternatively, should the Kurds reach an accommodation with Baghdad, one can only expect these geopolitical challenges to continue to undermine the KRG’s desire for the economic self-sufficiency necessary to pave the way for independence.

[i] “Kurdistan Oil Exports Increase to 100000 Bpd.” Al-Sumaria News. March 04, 2011. Accessed February 25, 2016.; Ottaway, Marina, and David Ottaway. “How the Kurds Got Their Way.” Foreign Affairs. April 17, 2014. Accessed February 25, 2016.

[ii] “Kurdistan Oil Exports Increase to 100000 Bpd.”

[iii] “Kurdistan Seals Oil Products Deal with Baghdad.” Al Arabiya. September 20, 2012. Accessed February 26, 2016.

[iv] “Iraqi Government Reaches Deal with Kurds on Oil, Budget.” Reuters. December 02, 2014. Accessed February 25, 2016. ; Ottaway and Ottaway

[v] Ottaway and Ottaway

[vi] “KRG 2015 Oil Report; $4bn in Independent Oil Sales.” Iraq Business News. February 17, 2016. Accessed February 25, 2016.

[vii] Zaman, Amberin. “Is the KRG Heading for Bankruptcy? – Al-Monitor: The Pulse of the Middle East.” Al-Monitor. January 20, 2016. Accessed February 26, 2016.

[viii] “Iraqi Kurdistan’s Financial Trap.” Stratfor. July 21, 2014. Accessed February 25, 2016.;uuid=f3be594f-7766-4de4-9d38-69dab5a414a4.

[ix] Fathallah, Hadi. “The Future of Kurdistan’s Oil Sector.” Carnegie Endowment for International Peace. September 29, 2015. Accessed February 26, 2016.

[x] Ibid.

[xi] “Iraqi Kurdistan’s Financial Trap.”; Lister, Tim. “Destination Unknown: Will Kurds Use Oil to Break Free from Iraq?” CNN. June 24, 2014. Accessed February 26, 2016.

[xii] “Iraqi Kurdistan’s Financial Trap.”

[xiii] Ibid.

[xiv] Salih, Mohammed. “Political Turmoil Grips Iraqi Kurdistan.” – Al Jazeera English. October 13, 2015. Accessed February 26, 2016.

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