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Erbil and Baghdad: An Interim Arrangement for Oil Exports
By DAVID ROMANO 8 hours agocolumn 27/03/2014
The Kurdistan Regional Government recently announced that as of April 1st, it would begin pumping 100,000 barrels of oil per day into the Iraqi national export regime, controlled by Baghdad’s State Oil Marketing Organization (SOMO). This is despite the fact that no agreement between Baghdad and Erbil regarding oil exports has been reached yet. Kurdistan still insists that it enjoys the constitutional right to export its own oil and gas, collect the proceeds of their sale, and forward money owing to Baghdad after deducting its share. The Maliki government in Baghdad, in contrast, still insists that it has sole authority over oil and gas exports.
As I discussed in previous columns, Baghdad has no real constitutional basis to claim monopolistic authority over Iraq’s, much less Iraqi Kurdistan’s, oil industry. The Constitution only gives the central government in Baghdad joint authority with the producing regions and governorates over “present fields,” meaning those fields producing in 2006. Baghdad also enjoys the sole authority to sign international treaties, however, which means governorates or the Kurdistan Region wishing to export their own newly discovered oil and gas without Baghdad’s consent would need to do so with something short of a new treaty with the receiving state – perhaps an “agreement,” an “understanding” or simply a sales contract.
Without real legal authority to claim complete control over the entire Iraqi oil industry, officials in Baghdad often try to claim a sort of ethical or utilitarian authority: they argue that they insist on deals with the oil companies that are more beneficial to Iraq, and they remain the government body with the authority and responsibility to spend the oil revenues on all of Iraq. They also reason that if the Kurds get too much control of their oil, they will use it as an economic base with which to secede from Iraq.
Let us look at what has actually happened so far, however. Kurdistan’s authorities attracted over 50 international oil companies to invest in what was, at the time, unproven oil and gas reserves, while Baghdad mostly just relied on the very big existing fields in the south. With the revenues and the production deals it got from oil companies, Kurdistan went on to provide electricity seven days a week and 24 hours a day to its people, as well as services from roads and healthcare to good security. Baghdad “spent” some 30 billion dollars on the electricity grid, yet much of Iraq remains in the dark more often than not. Services and security in general remain abysmal. And just two years ago, Kurdistan was pumping its oil into SOMO’s network, but Baghdad refused to remit the money needed to pay oil companies operating in Kurdistan, which is what led the Kurds to pursue a more independent hydrocarbons sector in the first place. By now cutting off the Kurds from the budget they are entitled to, Baghdad thus encourages secession rather than preventing it.
For a little while longer, however, Kurdistan’s government appears willing to try and work things out. Kurdistan’s civil servants need their paychecks, and responding to Baghdad’s blackmail with similar tactics – such as withholding water from Dukan dam – would just punish average Arab Iraqis just as Baghdad now toys with average Kurdish Iraqis. Authorities in Erbil thus described the move to begin pumping some oil into into SOMO’s network as “a goodwill gesture” while negotiations with Baghdad continue. The Kurdistan Region is supposed to have a sub-account established at the New York bank where SOMO deposits its oil revenues, and the Region’s share of oil sales will supposedly be deposited there. This "sub-account" would of course still be vulnerable to Baghdad not making the deposits as automatically as it promises, if at all. It also remains unclear whether or not the operating expenses and revenue shares of the international oil companies producing in Kurdistan will be included in what is deposited in the sub-account.
Maliki will claim this as a victory to his constituents, which is important to him ahead of the upcoming elections. The Kurds, on the other hand, need the revenue now and may have calculated that this will allow them to bide their time until after the elections -- when Maliki will not need to look so tough to his voters, but will likely need Kurdish support to form a new government. That's when the Kurds are probably calculating that they can wrest recognition of their own full control of their hydrocarbons from Baghdad -- and they undoubtedly intend to drive a hard bargain aimed at securing immediate gains, rather than the vague (and mostly broken) promises Maliki gave them in 2010.
The Kurds can also claim a sort of victory: if one thinks back to just a few years ago, even the contracts they signed with IOCs were contested by Baghdad. Today if Baghdad continues to accept the oil they produce, it implicitly accepts the legitimacy of those contracts. The issue today is about control of exports and bank accounts rather than the contracts, which is a major change really.
If they prove wise enough, Kurdistan’s leaders might also draw a lesson from this latest crisis and make some real efforts to reduce the size of government in the Kurdistan Region. A leaner, more efficient government, a more diversified economy and a portion of future oil revenues invested into a sovereign wealth fund for all of the Region’s people would promote true independence and prosperity.
David Romano has been a Rudaw columnist since August 2010. He is the Thomas G. Strong Professor of Middle East Politics at Missouri State University and author of The Kurdish Nationalist Movement (2006, Cambridge University Press).
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By DAVID ROMANO 8 hours agocolumn 27/03/2014
The Kurdistan Regional Government recently announced that as of April 1st, it would begin pumping 100,000 barrels of oil per day into the Iraqi national export regime, controlled by Baghdad’s State Oil Marketing Organization (SOMO). This is despite the fact that no agreement between Baghdad and Erbil regarding oil exports has been reached yet. Kurdistan still insists that it enjoys the constitutional right to export its own oil and gas, collect the proceeds of their sale, and forward money owing to Baghdad after deducting its share. The Maliki government in Baghdad, in contrast, still insists that it has sole authority over oil and gas exports.
As I discussed in previous columns, Baghdad has no real constitutional basis to claim monopolistic authority over Iraq’s, much less Iraqi Kurdistan’s, oil industry. The Constitution only gives the central government in Baghdad joint authority with the producing regions and governorates over “present fields,” meaning those fields producing in 2006. Baghdad also enjoys the sole authority to sign international treaties, however, which means governorates or the Kurdistan Region wishing to export their own newly discovered oil and gas without Baghdad’s consent would need to do so with something short of a new treaty with the receiving state – perhaps an “agreement,” an “understanding” or simply a sales contract.
Without real legal authority to claim complete control over the entire Iraqi oil industry, officials in Baghdad often try to claim a sort of ethical or utilitarian authority: they argue that they insist on deals with the oil companies that are more beneficial to Iraq, and they remain the government body with the authority and responsibility to spend the oil revenues on all of Iraq. They also reason that if the Kurds get too much control of their oil, they will use it as an economic base with which to secede from Iraq.
Let us look at what has actually happened so far, however. Kurdistan’s authorities attracted over 50 international oil companies to invest in what was, at the time, unproven oil and gas reserves, while Baghdad mostly just relied on the very big existing fields in the south. With the revenues and the production deals it got from oil companies, Kurdistan went on to provide electricity seven days a week and 24 hours a day to its people, as well as services from roads and healthcare to good security. Baghdad “spent” some 30 billion dollars on the electricity grid, yet much of Iraq remains in the dark more often than not. Services and security in general remain abysmal. And just two years ago, Kurdistan was pumping its oil into SOMO’s network, but Baghdad refused to remit the money needed to pay oil companies operating in Kurdistan, which is what led the Kurds to pursue a more independent hydrocarbons sector in the first place. By now cutting off the Kurds from the budget they are entitled to, Baghdad thus encourages secession rather than preventing it.
For a little while longer, however, Kurdistan’s government appears willing to try and work things out. Kurdistan’s civil servants need their paychecks, and responding to Baghdad’s blackmail with similar tactics – such as withholding water from Dukan dam – would just punish average Arab Iraqis just as Baghdad now toys with average Kurdish Iraqis. Authorities in Erbil thus described the move to begin pumping some oil into into SOMO’s network as “a goodwill gesture” while negotiations with Baghdad continue. The Kurdistan Region is supposed to have a sub-account established at the New York bank where SOMO deposits its oil revenues, and the Region’s share of oil sales will supposedly be deposited there. This "sub-account" would of course still be vulnerable to Baghdad not making the deposits as automatically as it promises, if at all. It also remains unclear whether or not the operating expenses and revenue shares of the international oil companies producing in Kurdistan will be included in what is deposited in the sub-account.
Maliki will claim this as a victory to his constituents, which is important to him ahead of the upcoming elections. The Kurds, on the other hand, need the revenue now and may have calculated that this will allow them to bide their time until after the elections -- when Maliki will not need to look so tough to his voters, but will likely need Kurdish support to form a new government. That's when the Kurds are probably calculating that they can wrest recognition of their own full control of their hydrocarbons from Baghdad -- and they undoubtedly intend to drive a hard bargain aimed at securing immediate gains, rather than the vague (and mostly broken) promises Maliki gave them in 2010.
The Kurds can also claim a sort of victory: if one thinks back to just a few years ago, even the contracts they signed with IOCs were contested by Baghdad. Today if Baghdad continues to accept the oil they produce, it implicitly accepts the legitimacy of those contracts. The issue today is about control of exports and bank accounts rather than the contracts, which is a major change really.
If they prove wise enough, Kurdistan’s leaders might also draw a lesson from this latest crisis and make some real efforts to reduce the size of government in the Kurdistan Region. A leaner, more efficient government, a more diversified economy and a portion of future oil revenues invested into a sovereign wealth fund for all of the Region’s people would promote true independence and prosperity.
David Romano has been a Rudaw columnist since August 2010. He is the Thomas G. Strong Professor of Middle East Politics at Missouri State University and author of The Kurdish Nationalist Movement (2006, Cambridge University Press).
See more at:
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