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Iraq and the Kurds: The High-Stakes Hydrocarbons Gambit
Iraq and the Kurds: The High-Stakes Hydrocarbons Gambit
Table of Contents
  1. Executive Summary
On Third Try, a New Government for Iraq
On Third Try, a New Government for Iraq

Iraq and the Kurds: The High-Stakes Hydrocarbons Gambit

The political standoff between Iraq’s Kurds and the government in Baghdad has left pressing disputes over oil and territories unresolved, intensifying the likelihood of conflict.

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Executive Summary

A simmering conflict over territories and resources in northern Iraq is slowly coming to a boil. In early April 2012, the Kurdistan regional government (KRG) suspended its supply of oil for export through the national Iraqi pipeline, claiming Baghdad had not fully repaid operating costs to producing companies. The federal government responded by threatening to deduct what the oil would have generated in sales from the KRG’s annual budget allocation, potentially halving it. This latest flare-up in perennially tense Erbil-Baghdad relations has highlighted the troubling fact that not only have the two sides failed to resolve their differences but also that, by striking out on unilateral courses, they have deepened them to the point that a solution appears more remote than ever. It is late already, but the best way forward is a deal between Baghdad and Erbil, centred on a federal hydrocarbons law and a compromise on disputed territories. International actors – the UN with its technical expertise, the U.S. given its unique responsibility as well as strategic interest in keeping things on an even keel – should launch a new initiative to bring the two back to the table.

Each side has its narrative, based on history, accumulated grievances and strong sense of entitlement. For now, neither is inclined to settle the conflict peacefully through serious, sustained negotiations, as each believes its fortunes are on the rise, and time is on its side. They are wrong: time is running out, as unilateral, mutually harmful moves are pushing the relationship to the breaking point, with the hydrocarbons-driven stakes and attendant emotions so high that conflict looks more promising to them than accommodation and compromise.

The two unwilling partners in an Iraqi enterprise born of colonial machinations – Arabs and Kurds – have spent 90 years in unhappy cohabitation. Kurds have waited for the moment when they will succeed in removing the shackles of an overbearing, at times highly repressive, central state. They know that when Baghdad is weak, they can take steps to bring their dream of statehood closer to reality, but that when the centre is strong it will use its superior resources to push them back into their place – or worse. This is why the Kurds are so alarmed at attempts by Prime Minister Nouri al-Maliki to amass power at the expense of his rivals and rebuild a strong state, armed with U.S. weaponry, under his unchallenged control.

Ever since arriving in Baghdad on the coattails of the U.S. invasion in 2003, the Kurds understandably have used their new position and the centre’s weakness to develop their own region. They seek to reverse a legacy of discrimination and economic neglect but also to create an escape route should relations with Baghdad sour beyond repair. Yet, in many ways, this approach contains elements of a self-fulfilling prophecy: by pressing their advantage, Kurds inevitably aggravate matters, convincing the federal government that they are aiming for secession – and aiming to take with them a good chunk of disputed territory that Kurds claim as historically part of a notional Kurdistan but that also appears to be immensely rich in oil and gas.

Perhaps most worrying to Baghdad, Kurdish leaders have lured international companies to explore and exploit the region’s suspected hydrocarbons wealth. Nor have they stopped at the Green Line that divides their region from the rest of Iraq; instead, they have signed contracts for acreage located squarely in disputed territories. The latest (and largest) to agree to play this game was ExxonMobil, which arrived on the scene in October 2011, taking six blocks, two of which, along with a corner of a third, lie across the Green Line. It thus placed itself at the heart of the conflict, potentially accelerating the centrifugal forces that are tearing at the Iraqi fabric. While ExxonMobil may have calculated that by doing so it could help bring Baghdad and Erbil to the table and effect progress on a federal hydrocarbons law, the likelier outcome is that both sides will further entrench their positions, thus increasing the chances of violent conflict. From Baghdad’s perspective, the Kurds are making mincemeat of any attempt to have a unified federal oil strategy; increasingly, it views them as untrustworthy partners in government who are seeking to break up the country.

But the Kurds face a problem. While they pursue an independent oil policy and have taken important steps toward that end by drafting their own oil law in 2007 and signing over 40 contracts with foreign oil companies without Baghdad’s input or approval, they lack the means to export their oil without Baghdad’s help and therefore its permission. To date, the federal government has used its control over the national pipeline network, as well as its hold on the treasury and budget, to rein in the Kurds’ ambitions.

Hemmed in by Baghdad and anxious to become economically self-sufficient, Erbil is turning its eyes to another potential outlet for its oil: Turkey. Masoud Barzani, the Kurdish region’s president, reportedly told foreign visitors to his mountain redoubt that if Maliki remains in power beyond the 2014 parliamentary elections, the Kurds would go their own way. Not coincidentally, 2014 is when the Kurdish region expects to complete construction of its own strategic oil pipeline, one that skirts (federal government) Iraqi territory before reaching the border with Turkey. For Kurdish leaders, economic dependency on a democratic neighbour with an attractive window on the West is far preferable to a continued chokehold by a regime displaying authoritarian tendencies – all of which raises the question of what Ankara would do if the Kurds ask it to take their oil without Baghdad’s approval.

Turkey’s main objective in Iraq has been to keep it unified. To this end, it has undertaken economic steps since 2007 that would bind the country’s various parts into an economic union, hoping that politics, especially the relationship between Baghdad and Erbil, would follow suit. It also has encouraged both sides to agree to a federal hydrocarbons law, the added benefit of such legislation being that energy-poor Turkey could import oil and gas from Iraq’s immense southern fields, as well as from the Kurdish region, coming closer to fulfilling its aspiration of becoming a major transit corridor for regional hydrocarbons. The Kurds hope, however, that Turkey’s thirst for oil and gas will align with their own thirst for statehood.

Ankara is unlikely to shift course, frustration with its neighbour’s failure to agree on oil legislation and its eagerness to purchase oil and gas from the Kurdish region notwithstanding. Ideally, it would import Kurdish products without jeopardising its relationship with Baghdad, though that seems beyond reach.

The Kurds have not lost hope. As they see it, a regional crisis – such as war between Iran and the U.S. or the break-up of neighbouring Syria – might constitute a game-changing occurrence, persuading Ankara to risk its relations with Baghdad in exchange for energy security and a stable (Kurdish) buffer against an unpredictable, possibly chaotic, suspiciously pro-Iranian and increasingly authoritarian Arab Iraq. But such scenarios might not unfold and, for a multitude of reasons, one must hope they do not. The answer to the current impasse, in other words, is not to wish for a cataclysmic event with potentially devastating repercussions for all. It is not to bank on the central Iraqi government surrendering resource-rich territories it deems its own and has the means to hold on to by force. And it is not to gamble on a radical move by Turkey toward a separate deal with the KRG when Ankara has its own, deep-seated fears concerning a potentially newly invigorated Kurdish population on its own territory.

For Baghdad and Erbil, reaching a deal will be very difficult. But the alternatives surely would be far worse.

Baghdad/Erbil/Washington/Brussels, 19 April 2012

Iraqi PM-designate Mustafa al-Kadhimi who is at the parliament for vote of confidence in Baghdad, Iraq makes a speech on May 06, 2020. Anadolu Agency via AFP

On Third Try, a New Government for Iraq

The new Iraqi prime minister has several daunting tasks. Not only must he navigate the politics that delayed his cabinet’s formation, but he must also deal with plummeting state revenues, simmering public discontent and – last but hardly least – rising tensions between the U.S. and Iran.

On 6 May, after five months and two earlier failed attempts, Iraq’s parliament confirmed the – still incomplete – government of the new prime minister, Mustafa al-Kadhimi. The country had been without a functioning government since the resignation of Adil Abdul-Mahdi in late November 2019 following weeks-long mass protests against the ruling elite. Just like his predecessor, Kadhimi will preside over a broad coalition government that must cater to the interests of nearly all the country’s major political forces. He will be highly constrained in his ability to initiate long-overdue reforms, but having so many constituencies to satisfy may help preserve the precarious balance between the U.S. and Iran on which Iraq’s security relies.

A Convoluted Process

Iraq’s fractured political landscape has made government formation increasingly difficult over the years since the fall of Saddam Hussein in 2003. From the May 2018 elections, two rival blocs emerged, Binaa and Islah, each comprising a Shiite core with allied Sunni, Kurdish and minority parties. The Binaa bloc, which is dominated by the pro-Iranian Fateh coalition led by Hadi Ameri, brought in the Sunni Force Alliance of Parliament Speaker Mohammed Halbousi and the Kurdistan Democratic Party led by the Barzani family. The Islah bloc, centred around the Sairoun coalition led by Muqtada al-Sadr, was an unprecedented alliance of Islamist and secular parties of all ethnicities. Sairoun made common cause with the Iraqi Communist Party, the Sunni Muttahidoon alliance headed by Osama al-Nujaifi and the Kurdish New Generation movement led by Shaswar Abdulwahid, as well as several minority parties.

Fragmentation within and between the various party coalitions led to splits and defections, making the question of which bloc was the largest increasingly contentious.

According to the Iraqi constitution, it should be the prerogative of parliament’s largest political bloc to nominate the prime minister-designate, who then forms the government. But fragmentation within and between the various party coalitions led to splits and defections, making the question of which bloc was the largest increasingly contentious. After five months of wrangling, the two camps settled on a compromise candidate with no political affiliation and no party base of his own. Prime Minister Abdul-Mahdi, whose cabinet was only partially confirmed in October 2018, ended up heading a government that had to include all sides while respecting ethno-sectarian allocations (muhasasa), by which all major population groups expect to receive proportionate representation at the top ranks of state institutions. As a result, his new government was exceptionally weak.

When Abdul-Mahdi resigned, forming a new government once more required an elaborate balancing exercise between and within the two blocs to sift through the pile of suitable candidates for a new cabinet. The primary factor behind the scenes was the main party leaders’ desire to preserve their hold on ministerial portfolios as a way to consolidate their patronage networks. The arithmetic was made more difficult by the fact that the political players were weighing compromises on cabinet portfolios against prospects of securing other powerful or lucrative positions such as the prime minister’s chief of staff, the national security adviser and the heads of directorates such as customs and border control.

A winning candidate needed to be acceptable to Iraq’s two rival external partners, Iran and the U.S.

At the same time, a winning candidate needed to be acceptable to Iraq’s two rival external partners, Iran and the U.S., in order to garner enough votes from these powers’ Iraqi allies. This task became more delicate still in early January 2020, when the U.S. killed Iranian General Qassem Soleimani and the chief of staff of the paramilitary al-Hashd al-Shaabi (Popular Mobilisation) Abu Mahdi al-Muhandis with a drone strike near Baghdad’s airport, and Iran retaliated with missile attacks on Iraqi bases housing U.S. troops.

Neither of the two candidates who preceded Kadhimi was able to clear these bars. The first nominee, two-time minister of communications Mohamed Taufik Allawi, whose name was put forward on 1 February, insisted on appointing technocratic ministers of his own choice and thus ran afoul of the major parties’ desire for influential portfolios. Next up was the former governor of Najaf, Adnan al-Zurfi, who launched his attempt on 17 March but soon faced rejection, in particular by members of the Binaa bloc, for being too close to the U.S.

Kadhimi, for his part, had forged strong relations with both Iran and the U.S. in his position as intelligence chief since 2016. He was thus able to gain both sides’ approval. During cabinet formation, Kadhimi went out of his way to generate consensus, with the line-up presented on 2 May listing two, in some cases even three, candidates for key ministries, such as interior and defence, for the parties to choose from. Despite his efforts, Kadhimi will still have to find replacements for five of his chosen candidates who were rejected in the 6 May parliamentary session, while the vote on two so-called sovereign ministries, oil and foreign affairs, was postponed. Thus, the interim tally left Kadhimi with a measure of support that represents only a marginal improvement over the result achieved by Abdul-Mahdi in 2018, who had eight empty slots, including the important defence and interior portfolios. Meanwhile, the challenges facing the new government have grown dramatically.

A Bumpy Road Ahead: Economy and Security

An immediate challenge for Kadhimi will be the severe fiscal deficit that has resulted from tumbling oil prices.

Under a caretaker government, Iraq has been largely incapable of responding to a significant set of problems. Plummeting oil prices have led to a rapidly growing fiscal deficit, while the restrictions imposed to combat the COVID-19 pandemic have dealt a heavy blow to an already sluggish economy. The situation could get even worse if rancour between the U.S. and Iran were to spill over into the economy, for instance in the form of U.S. sanctions on Iraq. Having the apparent initial support of the U.S., Kadhimi will be better placed to mitigate this risk than his predecessor, who only gained Washington’s backing after its preferred candidate, then-Prime Minister Haider al-Abadi, lost the election. On the security level, tensions between the U.S. and Iran’s allies in Iraq heated up dangerously at the beginning of the year and continue to simmer, while insurgent attacks by remnants of the Islamic State (ISIS) are on the rise.

An immediate challenge for Kadhimi will be the severe fiscal deficit that has resulted from tumbling oil prices. While the budget is based on a per-barrel price of $56, oil was trading for half of that in April. State revenues, some 90 per cent of which come from oil sales, shrank from just over $6 billion in January to less than $3 billion in March and $1.4 billion in April. Public-sector salaries alone cost the state around $3 billion each month. Iraq’s already bloated government budget inflated to historic size in 2019 as the Abdul-Mahdi government resorted to creating even more public-sector jobs to placate protesters.

With a prolonged period of low oil prices now increasingly likely, Kadhimi may have to preside over austerity measures that will make it difficult to retain the broad political support he needs to govern. A harbinger of trouble to come was the most recent spat over the budget allocation for the Kurdistan Regional Government, after Erbil failed to commit its agreed share of oil exports to the State Organisation for Marketing Oil. While this problem has been recurrent in Baghdad-Erbil relations, it will be particularly difficult to resolve under the current economic strain as the KRG likewise struggles with dwindling revenues from its own oil exports.

When Iraq found itself in a similar situation in 2014, it was able to obtain external support, including from the International Monetary Fund, thanks not least to the exceptional challenge it faced with the fight against ISIS. Yet in the time of COVID-19, international credit may be in far shorter supply, and so may international good-will. U.S. intentions in particular remain a question mark, as over time Washington may be reluctant to lend full support to an Iraqi government that includes affiliates of parties aligned with Tehran.

So far, that has not been the case. The U.S. sent a strong signal of approval immediately after Kadhimi was sworn in as prime minister, announcing that it would extend its sanctions waiver for gas and electricity imports from Iran by 120 days. Continued waivers are crucial to Iraq, as a quarter of its electricity consumption depends on imports from Iran, which may take at least three years of uninterrupted domestic production capacity development to replace. Under Abdul-Mahdi, the U.S. had reduced the most recent extension to 30 days at a time, causing uncertainty that hurt the economy.

With the persistent danger of escalation between Washington and Tehran, Baghdad’s position remains precarious.

Yet with the persistent danger of escalation between Washington and Tehran, Baghdad’s position remains precarious. Two issues in particular loom. First, if at any given point, the Trump administration opts no longer to extend the sanctions waivers, the Iraqi Central Bank and Trade Bank could become direct targets for U.S. sanctions, with unforeseeable consequences for the Iraqi economy. Secondly, Iraqi groups sympathetic to Iran have been clamouring for a complete U.S. military withdrawal in the wake of the Soleimani and Muhandis killings and have been targeting U.S. forces in-country to that end.

Under Kadhimi’s leadership, the risk of U.S. sanctions is no longer immediate, but he should use a honeymoon in relations with the Trump administration to turn the economic crisis into a political opportunity to address both threats. The U.S. plans to hold a strategic dialogue with Iraq in June, in order to reset the 2008 Strategic Framework Agreement covering bilateral economic and security relations. Indeed, Iran, with a deteriorating economy of its own, may be loath to see its neighbour – the second biggest importer of Iranian non-oil products – suffer economic collapse. Some of Iraq’s pro-Iranian groups are strongly opposed to entering into a strategic dialogue with the U.S., and continue to push for a complete U.S. troop withdrawal, but their voices have lost in strength. By allowing Kadhimi to become prime minister, most in the ruling elite demonstrated an understanding of the even greater economic damage that a deterioration of Baghdad-Washington relations would cause. This may give the prime minister some extra flexibility in negotiating the two countries’ future security relationship, in a manner satisfactory to both Iran and the U.S.

The Trump administration’s main grievance over the last two years has been the Iraqi government’s inability to prevent Iran-aligned groups embedded in the Hashd from attacking U.S. forces. The Abdul-Mahdi government and most Shiite parties, by contrast, have accused the U.S. of breaching its sovereignty, notably in killing Soleimani and Muhandis. Pro-Iranian groups will likely continue to harass U.S. forces, actions that Kadhimi will find just as hard to curb as his predecessors. Yet the withdrawal of U.S. troops from several forward bases in the fight against ISIS has cut the number of targets for Washington’s enemies. Kadhimi can also help shift the anti-ISIS effort’s burden to other coalition members, giving an enlarged role to NATO, as was already under discussion before the COVID-19 outbreak, thereby allowing Iran and its allies to claim at least partial success in their endeavour.

Domestically, too, Kadhimi may have some manoeuvring room.

Domestically, too, Kadhimi has some manoeuvring room. Pro-Iranian groups have criticised Kadhimi for being “too vague” on the steps he intends to take to implement parliament’s January 2020 non-binding resolution to expel coalition forces from Iraq. Yet Shiite parties hold different views on this point as well. All except the Nasr coalition of former Prime Minister Abadi, which was part of the Islah bloc, endorsed the motion, which came as an expression of Shiite solidarity after the killing of Soleimani and Muhandis. But since then, some have signalled that they may support a continued limited coalition presence. Moreover, with resurgent ISIS activity, and Sunni and Kurdish parties dead set against a U.S. troop withdrawal, Kadhimi may be able to strike the delicate balance between Iraq’s rival partners on which the country’s security will depend.

A Looming Resurgence of Protest

Beyond the immediate economic and security challenges, Iraq’s political system is facing a grave crisis of legitimacy, which, after years of bubbling popular discontent and occasional flare-ups of unrest, reached an apex with the 2019 protests. Kadhimi is beholden to this very same system and depends on it for his survival. He is unlikely to be able to embark on serious reforms to tackle corruption and the ethno-sectarian allocation system. It is therefore unclear how he will manage the new wave of protests that is almost certainly coming in response to fresh austerity measures.

One way to accommodate a new surge of protests would be to finalise aspects of the electoral law that parliament passed on 24 December, including reforming the Iraqi High Electoral Commission, one of the protesters’ principal demands. Kadhimi has made early elections a top priority, an aim he is unlikely to achieve due to opposition by some blocs, which will use their parliamentary power to delay legislation. Keeping the process of electoral reform and early elections alive, however, may be just as important in gaining credibility in the street.

Another significant test for Kadhimi will be whether he can limit state violence if and when protests pick up again.

Another significant test for Kadhimi, who has been in communication with the protest movement (although he was rejected by some representatives for being part of the ruling elite), will be whether he can limit state violence if and when protests pick up again. In his first cabinet decision after assuming office, Kadhimi announced that detained protesters will be released and a committee set up to investigate crimes. He would do well to build on this momentum to create a platform for dialogue on the parameters of reform with the protesters, who are divided between those who reject negotiations with the government and those who are more amenable. After all, the protesters started calling for the fall of the entire political system only after the government responded to their non-violent methods with lethal force.

Kadhimi is facing an extraordinary set of challenges. His success in forming a government has given him the chance to do a reset of Iraq’s strained relations with the U.S., an important step to secure economic support. Iran and its allies are most concerned with the security relationship, and Kadhimi will have to use the benefit to both Iran and Iraq of keeping sanctions waivers and economic support as a means of balancing diverging opinions of the U.S. troop presence. If he can help keep a relative peace between Iran and the U.S. in Iraq, Kadhimi may have the space he needs to address the economic downturn, popular protests and resurgent ISIS activity. This task, which will require pragmatism in both Washington and Tehran, may be his toughest test of all.