The much-vaunted deal involving the transfer of oil from the semi-autonomous region of Kurdistan in Iraq’s north in exchange for budget disbursements from the federal government is in Baghdad in a lot of trouble for a lot of reasons. Not only are both sides of the country in the midst of enormous domestic political upheaval but also both find themselves in a tug of war between disparate foreign powers, each looking for a piece of the enormous oil and gas resources spread across the region. In fact, it will be Russia, China, and Iran that will decide whether the oil-for-budget-payments deal goes ahead.
Just a month or so ago, there was the usual fanfare of optimistic comments that accompanies the announcement of all resumptions of the oil-for-budget-payments deal. The longstanding framework for this was the deal struck between the two sides in November 2014 in which the government of the Kurdistan region (the KRG) agreed to export up to 550,000 barrels per day (bpd) of oil from its own fields and Kirkuk via Baghdad’s State Oil Marketing Organization (SOMO). In return, Baghdad would send 17 per cent of the federal budget after sovereign expenses per month in budget payments to the KRG.
Since then, both sides have relentlessly cheated on the deal. The KRG has at various times stopped all oil shipments to SOMO, preferring instead to try to sell it to a range of other countries, including much of the energy-starved Former Soviet Union states, Turkey, and Israel, among others. Baghdad has sought to take the KRG to court repeatedly to stop such activity on the basis that it is illegal.
In fact, it is absolutely unclear what the legal position of such unilateral sales is. According to the KRG, it has authority under Articles 112 and 115 of the Iraq Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 – the year that the Constitution was adopted by referendum. Baghdad, however, believes that under Article 111 of the Constitution, oil and gas are under the ownership of all the people of Iraq in all the regions and governorates and consequently the oil cannot be sold off and the proceeds kept by just one of those regions.
In the run-up to the latest ‘agreement’, Baghdad had come up with a particularly tricky new tactic on cutting back on the level of budget payments that were to have been made to the KRG. Rather than the previous 17 per cent share of the federal government of Iraq (FGI) in Baghdad’s budget in exchange for a full quota of oil – at least 250,000 bpd but up to the original 550,000 bpd – coming from the KRG, the offer from Baghdad was for just 12.67 per cent. Baghdad said this figure was more in line with the percentage population of the KRG area in Iraq’s as a whole.
For its part, under the advice of Iran, OilPrice.com understands from a senior source who works closely with Iraq’s Oil Ministry, the KRG was for a long time offering as a starting point in the negotiations with the FGI that the Kurdistan area received 40 per cent of the revenues for the oil that it sends to the south. Also, the KRG was suggesting an additional sliding scale of further payments to compensate it for the security for the fields that would be provided by the Kurdish Peshmerga. This would have brought the total up to between 55 and 58 per cent for the KRG.
The actual purpose of all of these helpful whispers by Iran was to sow complete mayhem in both north and south, allowing it to cement its power across the country. This power had been enormous ever since the end of the Iran-Iraq war and particularly after the removal of Saddam Hussein from Iraq. It reached its most obvious expression, perhaps, just after the Kurdistan independence vote in 2017 when, during widespread pro-separatist violent demonstrations, 3,000 of Iran’s crack Quds force (under the personal command of Iran’s top field commander, Major General Qasem Soleimani) moved into Kurdistan to ‘restore order’.
Iran, working with Russia, had a lot of leverage over the ruling Barzani family in Kurdistan, which it had been working to allow it and Russia to exploit this advantage to take control of various major oil and gas fields and infrastructure. This included allegedly hard evidence that Masoud Barzani and his son, Masrour (then de facto head of the KRG’s intelligence services and now prime minister) had stolen 28 per cent of all of the KRG’s entire oil export stock.
The resulting funds had then allegedly been deposited in an account in a bank in Northern Cyprus under the name of Masrour’s then-mistress, who, Iran said, was connected to Russia’s Sluzhba vneshney razvedki foreign intelligence agency. Shortly after this chat, Russian oil behemoth, Rosneft, signed a deal that basically gave it control over the Kurdistan’s oil industry and Masoud Barzani announced that he would be stepping down as President and leaving frontline politics altogether.
The plan then was for Russia to use this extremely solid base in the north to project its influence further into the south. This was the catalyst for Gazprom Neft to continue in Badra, and to look for further opportunities in the north and south of Iraq. Initially, Gazprom Neft began to operate Badra under the profoundly unpopular Technical Service Contract (TSC) that was the norm for Baghdad for many years. The Russian company took 30% of the field, with the other consortium members being South Korea’s KOGAS, Malaysia’s Petronas, Turkey’s TPAO and Iraq’s Oil Exploration Company. It also meant that, with Russia’s number one oil company, Rosneft, in control of all of Kurdistan’s pipeline infrastructure in the north, the stage was set for the entrance of Russia’s number one gas company, Gazprom, to exploit Iraq’s vast gas resources as well, given expectations that Gazprom’s monopoly on exporting Russian gas through pipelines is to end in 2020.
These plans, though, did not factor in the emergence of the firebrand ultra-nationalist cleric, Moqtada al-Sadr, and his Sairoon alliance as the dominant behind-the-scenes force in Iraq politics. Gaining the most seats at the last election, this power block has been ruling Iraq ever since, with the soon-to-depart Prime Minister Adel Abdul Mahdi acting as the public puppet. Crucially, it was with him (al-Sadr) that the latest KRG-Baghdad oil-for-budget-payments deal was made and it was not in the interests of Russia, or Iran, or China for that matter, which also seeks to expand its footprint in Iraq, as it is doing in neighbouring Iran.
“Russia wants a lot more from this understanding than was being conceded in that deal, and it will ultimately get it,” the Iraq source told OilPrice.com last week. “You just have to look at what it [Russia] had agreed with the previous [Iraq] government [of Haider al-Abadi] before al-Sadr did so well,” he added. At that time, Moscow had insisted through the KRG that oil flows would not restart until pipeline transit fees were paid to Rosneft including extensive back-payments, the amount of which was to be determined by Russia – which now has a 60% per cent stake in the Kirkuk-Ceyhan pipeline. Moscow also wanted Baghdad to look again at its decision to deem ‘invalid’ the assignment to Rosneft by the KRG of five exploration blocks in Kurdish territory. Not only were all of these points agreed by the al-Abadi government but also Rosneft was to have been awarded a greater pumping tariff and an accommodation with the Baghdad-controlled Kirkuk oil hub itself. “Russia is now demanding much greater representation for its companies in the south and the [oil-for-budget-payments] deal will not function in any meaningful way before that is agreed,” the Iraq source concluded.