Fight Over Kurdish Oil Spreads to Texas Court

The dispute between Baghdad and Erbil over Iraqi Kurdistan's oil exports has steadily ratcheted up this year. Now they are fighting in court over $100 million of oil anchored outside of Houston.

By Keith Johnson, a senior staff writer at Foreign Policy.
Safin Hamed - AFP - Getty
Safin Hamed - AFP - Getty

The age-old dispute between Iraq’s Kurds and its central government has found the unlikeliest of new battlegrounds: a Texas courtroom.

In a contentious lawsuit, Baghdad and its semiautonomous northern region are waging a legal battle that’s nominally about the ownership of a million barrels of crude oil sitting in a tanker parked outside the Houston Ship Channel. The real issue, however, is the future of the Iraqi state.

Simply put, the hard-pressed Kurds are desperate to sell their oil to replace revenue they used to receive from the central government. But Baghdad is doing everything in its dwindling power to prevent such self-sufficiency. Its legal threats have cast a pall of uncertainty over Kurdish oil, which is discouraging potential buyers around the world. And that is inexorably pushing the Kurds further away from reconciliation with the Shiite-led regime in Baghdad and closer to open independence.

So far, the United States government hasn’t done much to resolve the impasse. It urges the Kurds and Baghdad to work together and to maintain unity, especially in the face of the threat from rampaging Islamic militants. But Iraqi Prime Minister Nouri al-Maliki, a sectarian Shiite, isn’t offering any political concessions to Iraq’s other political groups, especially the Kurds, which is thereby inflaming tensions. For instance, earlier in July, Kurdish troops seized Iraqi oil fields after Maliki allegedly ordered the destruction of oil pipelines there.

The United States has somewhat sided with Baghdad by pushing the Kurds to market their crude through the central government, though it hasn’t actually told prospective buyers to stay away from the stuff.

People close to the Kurdish regional government in Washington, D.C., said that the Kurds will share future oil revenues with Baghdad. They also say that Maliki’s unrelenting stance on Kurdish oil exports is counterproductive for the whole country, especially during such a dire time.

Clarifying the legal status of Kurdish oil will only get more important: Goldman Sachs, the investment bank, said Wednesday that the Kurdish region could double its oil production to more than 500,000 barrels a day by the end of 2015 if it can sort out the legal quagmire.

The Texas case began when the United Kalavryta, one of four oil tankers filled with crude pumped in Iraqi Kurdistan this year, rounded the Florida Keys over the weekend and headed for Galveston, Texas. The ship, which had been wandering the waves for a month searching for a buyer for its cargo, seemingly had found one. Baghdad considers that both illegal and an affront to the nation’s unity, and quickly pounced.

The Iraqi Oil Ministry filed suit Monday in the Southern Texas District Court against two co-defendants: "the 1,032,212 barrels of crude oil" — worth $100 million — and the Natural Resources Ministry of the Kurdistan Regional Government (KRG). According to the suit, the oil was stolen from the people of Iraq. Under the Iraqi Constitution, all oil produced in Iraq must be sold through the federal government.

"Accordingly, the cargo belongs to the people of the Republic of Iraq," Baghdad’s lawyers argued before the court. They asked the U.S. judge to interdict the shipment. Late Monday, she did. U.S. marshals stand ready to seize the cargo as soon as the behemoth ship actually enters U.S. waters and tries to unload. As of Wednesday, the ship’s cargo remained in limbo.

Not so fast, countered the Kurdish regional government in a letter to the court sent late Tuesday. The oil was pumped in Kurdistan. According to Erbil’s reading of the Iraqi Constitution, that makes it Kurdish oil.

What’s more, lawyers for the Kurdish government said, U.S. courts have no jurisdiction to determine who owns what, especially since Iraq’s Supreme Court already smacked down the Oil Ministry’s attempts to stop Kurdish oil sales until internal Iraqi political disputes are settled. The long-simmering fight between the central government and the restive northern region has no place in a Texas courtroom, they said.

"The Ministry of Oil is seeking to export this internal constitutional dispute," lawyers for the Kurdish regional government wrote. "Given its significance and political implications, the KRG believes that this dispute cannot be resolved by a foreign court without the KRG’s consent."

The U.S. judge appeared to agree with that sentiment. "Seems to me this is not a matter for the U.S. courts to tell the government — the governments — of Iraq who owns what," said Judge Nancy Johnson. "This just seems way outside our jurisdiction," she said on Tuesday, according to the Wall Street Journal.

In the fight for the $100 million worth of crude, the Kurdish government is throwing down much, much bigger numbers at Baghdad and raising the stakes substantially.

Under the Iraqi Constitution, Baghdad must share revenue from oil exports with different regions of the country; the Kurds are entitled to 17 percent, which they say they haven’t seen. The Kurds say that Baghdad owes them $27 billion in back payments, including $7 billion for this year.

What’s more, the Kurds are still seeking compensation for damages incurred under the previous central government regime of Saddam Hussein, including "war crimes, genocide, and economic misery," their letter says. "The full damages suffered by the KRG and Kurdistan are not less than $384 billion."

Finding a way to finally sell its oil, especially the cargo in limbo, is crucial for the Kurds — and the rest of the country. The Kurdish regional economy is in a bind since Baghdad cut off the oil-revenue spigot. The financial strain of caring for more than 1 million Syrian refugees and internally displaced persons from the Islamic State rampage through parts of northern Iraq is seriously straining Erbil’s already precarious finances.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP