With Iraq's new budget, Baghdad goes after Kurdish oil

On June 21, 2023 Iraqi President Abdul Latif Rashid ratified the country’s long-awaited three-year federal budget bill. On June 11, the bulk of MPs had voted for a three-year budget bill of around 198.9 trillion dinars (USD 153 billion), the highest in Iraq’s history, after several weeks of tense debates.

For each year covered by the federal budget, total revenues will amount to USD 103.4 billion, based on an oil barrel sold at USD 70, which accounts to around 90% of the country's income.

Of this sum, 12.67% goes to Kurdistan Regional Government’s (KRG) coffers.

There are different political and economic dynamics within this budget, but one clear one is the restraining of the dominance that the Barzani-led KRG on oil produced in Kurdistan Iraq.

The newly voted budget provides the Iraqi central government in Baghdad with further control over KRG’s oil. The domination over oil reserves and distribution has been one of the main roots of regular political tensions between Baghdad and Erbil.

"The domination over oil reserves and distribution has been one of the main roots of regular political tensions between Baghdad and Erbil"

Iraq is the second-largest crude oil producer in OPEC after Saudi Arabia, and the KRG areas are estimated to hold around 30% of the country's oil reserves. In 2007, the KRG exploited the weakness of the Iraqi central government to adopt an oil and gas law that was declared unconstitutional by the supreme court in February 2022.

Since 2013, Erbil also had been exporting approximately 450,000 barrels a day to the Turkish port of Ceyhan, where international oil companies, such as Vitol, Trafigura or Cargill, were waiting to sell it on the regional and global markets.

According to the new budget, Erbil will now have to deliver no less than 400,000 barrels of oil per day to Baghdad before it can receive its share of the federal budget. Prior to this the KRG only delivered around 75,000 barrels of oil to Baghdad.

Revenues from these oil sales will have to go through the Iraqi State Oil Company in a soon-to-be-established bank account in the Central Bank of Iraq.

Against this backdrop of fragile political consensus, a spending spree on infrastructure projects with no proven benefit for national income or the people will continue to fuel opposition in Iraq. @NazliTarzi explains how: https://t.co/Q9kCk7ct8b

— The New Arab (@The_NewArab) June 22, 2023

This constituted a clear setback for the KRG, which had concluded a temporary agreement in April 2023 with Iraqi Prime Minister Mohammed Shia al-Sudani in which revenues from the sale of Kurdish oil abroad were expected to be deposited in a bank account managed by Erbil and only supervised by Baghdad.

Similarly, oil exports to Turkey have not resumed, even after the visit of KRG’s Prime Minister Masrour Barzani to Turkish President Recep Tayyip Erdogan in Ankara on June 20th to discuss bilateral relations.

Oil exports had ceased after the House ruled in favor of Baghdad against Ankara in March 2023 regarding a complaint.

In a case dating back to 2014 when the Iraqi government had submitted a complaint to the International Chamber of Commerce against the Turkish pipeline operator, accusing it of sidestepping its authority in exporting oil. According to this decision, Ankara must pay USD 1.5 billion to Baghdad.

Ankara will likely try to negotiate the amount it was ordered to pay in the arbitration case and solve other issues relating to other open arbitration cases before starting once again to the resumption of flows.

The KRG is highly dependent on oil revenues and its economy has been severely affected by the incapacity to sell its oil. Since March 2023, the KRG has lost more than USD 2.2 billion according to Reuters estimates, making it unable to pay outstanding debts.

The voting of this budget at the expense of KRG’s interests came after the ruling of the Iraqi Federal Supreme Court in May 2023 against the self-extension of the KRG’s parliament by another year, calling it “unconstitutional”.

In addition to this, the Iraqi defense ministry confiscated lands of Kurdish and Turkmen farmers in Kirkuk, who have asserted that they belong to them and have called on the ministry to cancel its decision.

These latest decisions of the Iraqi central authorities are rooted in two main elements. First, the erosion of KRG’s power has accelerated since the failure of the independence referendum in 2017.

Following the referendum, Iraqi forces and Iran-backed Iraqi Shia militias of the Popular Mobilization Forces (PMF) took over the city of Kirkuk and its surrounding oil fields from the Kurdish Pershmerga forces.

"In the midst of this division within the Kurdish political scene and the weakening of the KRG, Iraq’s central government has wasted no time reasserting its authority over Kurdistan’s liquid gold"

Capturing the city swiftly, the KRG lost approximately 40% of its formerly held territories as its military troops pulled out from the disputed areas. According to the constitution, people living in these areas should have had the right to decide freely whether or not they belong to the Kurdistan region, and suffered significant economic losses.

Secondly, current tensions are reinforced by the continuous political divisions within the Iraqi Kurdish political scene, most significantly between the KDP and the PUK, which have historical roots.

In fact, the PUK actually included an item in the recent budget bill allowing any province in the Kurdish region to demand its share of the federal budget and without consulting with the KRG in Erbil. With this, the PUK successfully sidesteps the KDP-led Kurdish authorities, which it has accused of unfair distribution of the region’s revenue.

In the midst of this division within the Kurdish political scene and the weakening of the KRG, Iraq’s central government has wasted no time reasserting its authority over Kurdistan’s liquid gold.

Joseph Daher teaches at the University of Lausanne, Switzerland, and is an affiliate professor at the European University Institute in Florence, Italy, where he participates in the "Syrian Trajectories" project. He is the author of "Syria after the Uprisings, The Political Economy of State Resilience".

Follow him on Twitter: @JosephDaher19

Have questions or comments? Email us at: editorial-english@newarab.com

Opinions expressed in this article remain those of the author and do not necessarily represent those of The New Arab, its editorial board or staff.