Oil and the Balance of Power in Iraq


On November 15, the Kurdistan Regional Government (KRG) issued a press release stating that it had signed an oil exploration contract with ExxonMobil, the largest American oil company. Authorities in Erbil noted that “The KRG has signed 45 contracts with companies from 17 countries. In 2012, Kurdistan will export 175,000 barrels of oil a day.” ExxonMobil is the first very large, “seven sisters” class oil company to enter Kurdistan, however. They do so in defiance of the oil ministry in Baghdad, which deems contracts awarded by the KRG illegal.

The dispute over oil between Erbil and Baghdad continues on since even before the ratification of the 2005 Constitution. Estimates put the reserves in Kurdistan at one fifth to over one third of Iraq’s total oil reserves. Iraq as a whole contains the world’s third largest deposits, which means that international actors pay close attention to the wrangling between the Kurdistan Region and the central government in Baghdad.

What many casual observers fail to understand, however, is that the KRG and Baghdad are not arguing over oil revenues. Leaders in both administrations agree that all oil produced anywhere in Iraq, including Kurdistan, will be marketed through the national-level State Oil Marketing Organization, with revenues divided equally within Iraq according to population. Kurdistan’s share of total revenues is set at 17%.

Instead of revenue sharing, officials in Kurdistan and Baghdad are arguing over who has the right to draw up and award oil exploration and production contracts, as well as manage oil production activities. Kurdish leaders claim this right for new fields located in Kurdistan, while government officials in Baghdad assert the central government’s right to manage all important aspects of the oil sector for the benefit of all Iraqis.

The Constitution seems to support the Kurdish position. Article 110 of the Constitution states that the federal (meaning Baghdad) government enjoys exclusive powers in three significant areas: Defence, fiscal policy and foreign relations, as well as more minor issues such as census taking, weights and measures management, and the drawing up of general investment and budget bills. Article 115 of the Constitution remains key to addressing this dispute: “All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organized in a region. With regard to other powers shared between the federal government and the regional government, priority shall be given to the law of the regions and governorates not organized in a region in case of dispute.”

In the case of oil, the Constitution’s only mention of the issue comes in Articles 111 and 112. Article 111 says that “Oil and gas are owned by all the people of Iraq in all the regions and governorates.” As I stated earlier, Baghdad and Erbil agree about that and the resultant formula of revenue sharing. Article 112, then, seems to form the whole point of the argument. It comes in two parts, and since it’s so contentious, I will quote the full passage:

First: The federal government, with the producing governorates and regional
governments, shall undertake the management of oil and gas extracted from
present fields, provided that it distributes its revenues in a fair manner in
proportion to the population distribution in all parts of the country, specifying an
allotment for a specified period for the damaged regions which were unjustly
deprived of them by the former regime, and the regions that were damaged
afterwards in a way that ensures balanced development in different areas of the
country, and this shall be regulated by a law.

Second: The federal government, with the producing regional and governorate
governments, shall together formulate the necessary strategic policies to develop
the oil and gas wealth in a way that achieves the highest benefit to the Iraqi people
using the most advanced techniques of the market principles and encouraging
investment.

Oil and gas are therefore clearly meant to be an area of joint, cooperative federal and regional authority. Oil Ministry officials in Baghdad, however, remained of the opinion that they must exercise the final say in the awarding of all contracts and the management of oil production anywhere in the country. Relying on their curious interpretation of the Constitution, Baghdad then blacklisted any companies willing to sign separate deals with authorities in Erbil.

Exxon’s entry into Kurdistan may throw this whole policy into disarray, however, given the company’s size and the very large stake it already holds in oil fields in southern Iraq – investments that Baghdad can scarcely afford to annul. The deal represents a significant victory for Kurdish leaders, as Exxon’s presence also increases the general stake of the United States in the stability and security of the Kurdistan Region. Also, Kurdistan’s Minister of Natural Resources, Ashti Hawrami, recently explained the urgency and importance of the Kurds’ determination to move forward with oil production: "Waiting for Baghdad to adopt a centralised oil and gas law was not an option for Kurdistan," he said. "We would have remained in the dark with two hours of electricity. We would have been without fuel for cars and factories. We would be still using not suitable drinking water and so on. This would have much bigger ramifications than things not being available for our people. All of that would have meant undermining the region's stability completely."

The cost of the Erbil-Baghdad oil law dispute, in foregone revenue for all Iraqis, has nonetheless been enormous. If they could have agreed on an oil law a few years ago, Iraq would have quickly attracted much more investment in its oil sector and signed all the oil production deals it needed - whether in the south, the north or the suspected fields of Anbar Governorate. It would be pumping millions of barrels of oil more a day. Hopefully the Exxon agreement will now force Baghdad to cede its poorly justified claim to exclusive authority on this issue.

But why did the argument drag on for so long, especially since authorities in Erbil and Baghdad agree about revenue sharing? The main answer centers on trust – agreements on paper are one thing, while actual control and management of production on the ground does more to guarantee receipt of oil revenues. Neither side trusts the other enough to let them run the whole show. The second answer may be even less generous: Whomever awards contracts and concessions tends to be in a position to demand bribes and kickbacks from the oil companies competing for them. When that kind of money is at stake, it’s hard to relinquish any authority...