Iraq’s oil wealth is reigniting tensions between federal agencies and the autonomous Kurdish region, in a series that could threaten the lifeline industry and keep investors away, analysts say.
The long-simmering dispute came to a head in February when the Supreme Court ordered Kurdistan to hand over oil extracted from its territories to federal authorities.
Then, earlier this month, a commercial court in the Iraqi capital nullified contracts between the Kurds and foreign firms after a court complaint was filed by the Oil Ministry in Baghdad.
Authorities in the Kurdish capital of Arbil have shouted, accusing Baghdad of putting “unfair pressure” on them and announcing their own legal action.
Iraq, the second largest producer in the Organization of Petroleum Exporting Countries, has enormous oil reserves and revenues from this sector feed 90 percent of the national budget.
It exports an average of 3.3 million barrels of crude oil per day (bpd), while production in Kurdistan is just over 450,000 bpd.
The February ruling found that an oil and gas regulation law passed by Erbil in 2007 was unconstitutional.
But analysts say politics is playing a major role in the dispute in Iraq, whose political barons have been unable to agree on choosing a president and prime minister since October’s general election.
“When it comes to oil, each side uses their respective powers like carrots and sticks, depending on the political atmosphere of the day,” said Bilal Wahab of the Washington Institute for Near East Policy.
“In times of political unity, the courts were rather calm. In the case of political disagreement, however, it was the other way around,” he told the AFP news agency.
– “Reputation will be damaged” –
The cancellation of oil contracts between the Kurds and four international oil companies (IOCs) from Canada, Britain, Norway and the United States in early July sparked the dispute.
“Baghdad’s chasing IOCs out of Iraqi Kurdistan does not serve to portray Iraq as a major producer that welcomes foreign investment,” warned Yesar al-Maleki, an analyst at the Middle East Economic Survey.
In return, the Kurdish regional authorities initiated court proceedings against the federal government in June.
A lawsuit has been filed against Oil Minister Ihsan Ismail, who the Kurds have accused of trying to “intimidate” foreign firms operating in the Kurdistan region of northern Iraq.
The Kurdish autonomous government accuses Baghdad of “illegal” and “politically motivated” measures.
For Wahab, Kurdish and government officials don’t realize “how much they are damaging the overall reputation of Iraq’s energy industry.”
“Challenging the sanctity of contracts … adds legal risk to a number of other regulatory and governance risks plaguing Iraq’s energy industry,” he added.
The dispute, he said, is “repelling much-needed foreign investment.”
Oil revenues are vital to Iraq, a country that faces widespread corruption but is also mired in a financial crisis and needs funds to rebuild infrastructure after decades of conflict.
– ‘Compromise’? –
Despite legal action, Kurdistan says it is open to a negotiated settlement.
It is working to set up two companies specializing in oil exploration and marketing, which would coordinate with Baghdad, an Arbil government spokesman said.
Baghdad’s Oil Ministry, meanwhile, marked a small victory after oil giants Baker Hughes, Halliburton and Schlumberger pledged not to initiate new projects in Kurdistan.
The ministry says the companies are also working to “liquidate and finalize” existing contracts.
Baghdad has struggled to regain control over the production of lucrative oil fields in Kurdistan since the autonomous region began independently marketing oil more than a decade ago.
But under a recent deal, the Kurdish region is shipping 250,000 barrels a day to Baghdad in exchange for a portion of federal funds to pay Kurdish officials’ salaries.
Tensions have continued to rise in recent weeks following a series of unalleged rocket attacks on oil and gas facilities in Kurdistan.
Experts say the attacks are aimed at putting pressure on the Kurdistan Democratic Party (KDP), the largest in Kurdistan.
The KDP is allied with Shia leader Moqtada Sadr, whose bloc won 73 seats in October’s elections, making it the largest faction in parliament with 329 seats.
The party is targeting the Iraqi presidency for one of its members, although the post has traditionally been held by a member of the rival Patriotic Union of Kurdistan.
“The timing of events obviously shows that this whole crisis started because the KDP sided with the Sadrist movement…against the Iran-backed Shia coordination framework,” Maleki said.
He expects a “compromise” to solve the oil dispute because “Iraq is a country of compromises.”
“Until then, the Supreme Court’s verdict will hang like the sword of Damocles over the Kurdish regional government,” he said.
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