After months of acrimony, Baghdad and Erbil are taking steps to sort out the oil-fueled dispute that threatened to tear Iraq to pieces.
- By Keith JohnsonKeith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career.
The Islamic State and the threat it poses to Iraq’s survival have unleashed a torrent of nightmares and horror, but there may be one apparent bright spot: The terrorist group’s steady advances appear to be pushing Baghdad and Iraq’s restive Kurdish minority closer to a resolution of the oil disputes that have bitterly divided them for years.
Late last week, Baghdad and Erbil reached a breakthrough of sorts, announcing a preliminary deal under which Iraqi Kurdistan will give the Iraqi government about 150,000 barrels of oil a day in exchange for $500 million in immediate cash payments. Kurdish officials said the deal, which became effective Wednesday, Nov. 19, paves the way for further talks in Baghdad as soon as next week to address the real nub of the question that has long poisoned relations between the two sides: How should the revenues from Iraq’s oil income be shared among the different regions?
"We opened the door so that we can start negotiations," Fuad Hussein, the chief of staff to the president of the Kurdistan Regional Government, said on Thursday during a visit to Washington, D.C.
To be sure, it’s a short-term fix for a long-term problem because billions of dollars in oil revenue are at stake, as well as the trappings of Kurdish independence. One big complicating factor: the fate of Kirkuk and its oil. The city’s ownership has been disputed between Arabs and Kurds for centuries and the Peshmerga seized it this summer.
Still, the preliminary deal wouldn’t have happened at all without the threat from the Islamic State. The whole country is threatened by the terrorist group, and Kurdish and Iraqi forces — which worked together to take back the strategically important Mosul Dam — are preparing to mount a joint offensive against the Islamic State early next year. The Kurdish region, for its part, is terribly cash-strapped, in large part because it has to care for more than 1 million refugees created by the Islamic State’s rampage. And Iraq’s finances are reeling, in part because it lost the ability to export crude oil from the big fields around Kirkuk in the wake of the Islamic State’s summer offensive.
"This is a place-holder deal, but a meaningful one. What matters is that money and oil are moving — and that’s a significant achievement," said Matthew Reed, vice president at energy consultancy Foreign Reports.
Baghdad and Erbil have been at each other’s throats for years. The Kurds believe Baghdad has shortchanged them on their share of Iraq’s oil revenues and have sought to increase their own oil production and start exporting their own crude. In response, Baghdad cut off cash transfers to the Kurdish region at the beginning of the year, leaving the semi-state’s civil servants and soldiers scrambling for pay. Under the Iraqi Constitution, the Kurdish region is meant to receive 17 percent of Iraq’s revenues from oil exports; in reality that figure had been closer to 12 percent in recent years.
Tensions spiked after the Islamic State’s offensive began this summer. Iraqi military forces melted, while Kurdish troops held the line and, with the help of U.S. airstrikes, repelled the Islamic State’s push into their territory. The collapse of the Iraqi military allowed Kurdish Peshmerga forces to grab the long-disputed city of Kirkuk, with its big oil fields. That prompted more open talk by Kurdish officials of independence.
This isn’t the first time the two sides have seemed close to an oil deal. Compromise seemed possible in April, but then Prime Minister Nouri al-Maliki’s hard-line sectarian policies made any long-term agreement difficult. His successor, Haider al-Abadi, has proved more conciliatory; in particular, Adel Abdul-Mahdi, the new oil minister, has shown himself to be more willing to work with officials in the semiautonomous region. With the old administration, for instance, Kurdish efforts to sell oil were met with threats and lawsuits; today, they are met with negotiations.
Still, the biggest and toughest issues still remain to be resolved. Hussein, of the Kurdistan Regional Government, said that includes the fate of the estimated $10 billion that Baghdad owes the Kurdish region, as well as the Kurds’ ability to legally export their own crude production in the future. Iraqi Kurdistan in recent years has enticed plenty of Western firms, such as Exxon Mobil and a host of smaller operators, to drill for oil by dangling more advantageous terms than Baghdad does. But the Iraqi government considers those deals by the regional government to be illegal.
"I think Iraq and Erbil pulled back from the brink" after Kurdish threats to leave the coalition government, said Marina Ottaway, a Middle East expert at the Wilson International Center for Scholars. "The big problems have not been tackled. However, it looks to me that neither side wants to provoke a crisis now, so they will go on for a while with temporary half-solutions," she said.
If both sides appear more willing to talk now, it’s not solely because of the departure of the fiercely pro-Shiite Maliki. Both the central government and the regional government have financial pressures that are pushing them closer together by necessity.
Iraq’s crude oil exports, the main source of government income, have suffered both because of lower oil prices and because of the inability to export hundreds of thousands of barrels a day from the country’s northern oil fields. Iraq slashed spending by more than $30 billion this year, and it still faces a shortfall of more than $20 billion. It is currently trying to prepare a budget for next year.
"Ramping up joint exports through the north — including Kirkuk and Kurdish oil — would help dig Iraq out of its financial hole faster," Reed said.
The Kurds, meanwhile, are trying to wage a war even as their own budget has withered in the absence of their constitutionally mandated funding and while their expenses have soared. Although the Kurds began exporting their own crude in January, they have faced a host of legal uncertainties and have not been able to make up the financial shortfall so far.
"The oil volumes just aren’t there. They can’t export enough oil soon enough to cover their expenses, especially when fighting a war. And so they’re better off reaching a deal with Baghdad if they get steady, sizable payments, as promised," Reed said.
The resilience of the Islamic State, while at first seeming to bolster the Kurds’ hopes for independence, now seems to be pushing such dreams to the side. Kurdish leaders started tamping down independence talk this autumn. And the Kurdistan Regional Government’s Hussein stressed that, given the long-term nature of the fight against the terrorist group, also called ISIS, Kurdish independence may take a back seat for now.
"Our priority is defeating ISIS. Until we defeat ISIS, we cannot talk about something else," he said.