The Arbitration Ruling & the Erbil-Baghdad Oil Agreement – Reactions

The International Court of Arbitration (ICC) ruled on March 23 that Turkey had breached a 1973 pipeline agreement when it facilitated independent Kurdish oil exports in 2014. Following the ruling, Turkey closed the pipeline that has enabled such exports over the past decade, after which Prime Minister Sudani and Prime Minister Barzani signed a landmark agreement to resume the Kurdistan region's oil exports. In response to the agreement, Prime Minister Barzani asserted that the agreement was temporary but that "all its principles will be reflected in the federal budget and the oil and gas law", while Prime Minister Sudani noted the "importance of an agreement that will pave the way for the passing of a federal budget".

To assess the dynamics and implications of these developments, IPG has convened a group of experts for their reactions and analysis.

Baghdad must not weaponise the constitutional win in Paris & continue to negotiate with Erbil in good faith

The arbitration ruling in Paris was a significant but not fatal development for Kurdistan’s energy sector, the relationship between Erbil and Baghdad, and the relationship between Iraq and Turkey. Firstly, because the ruling represented only a partial victory for Iraq: Baghdad claimed breach of contract under five categories, including storage, transportation, exclusive use, access claim and loading but was only able to win its claim for loading. Secondly, the fate of Kurdish oil exports through Turkey will be determined by the politics of Erbil’s relationship with Baghdad, and Baghdad’s relationship with Ankara. Turkey can still refuse to abide by the ruling, which was narrow in its scope, and does not preclude Turkey from facilitating exports by truck or through an alternative pipeline.

The more significant development was the agreement between Prime Minister Sudani and Prime Minister Barzani to resume oil exports, which constitutes a landmark moment for Erbil-Baghdad relations that should be capitalised on to pave the way for a lasting settlement to the long-standing dispute. Both sides must now continue to negotiate in good faith, and Baghdad must engage Erbil as an equal partner. Baghdad must not weaponize the constitutional win it secured in Paris, and it may be a short-lived win: firstly, since Iraq is embroiled in a series of tensions with Turkey, including water and the PKK presence in Iraq. Secondly, the enunciations of the court relate only to the Iraq-Turkey Pipeline Agreement, which expires in 2025 and will most likely be re-negotiated.–––– Dr. Ranj Alaaldin, Middle East Council on Global Affairs; World Bank

The agreement signed by Prime Ministers Barzani & Sudani will boost Kurdistan's economy & instil confidence in the energy sector

The arbitration ruling by the Paris-based court undermines the Kurdistan Region's ability to sell its oil independently in the short-term, which, in turn, undermines its ambitions to achieve economic autonomy. The court's ruling actually represented what observers have called a hollow victory, since it was only a partial victory for Baghdad. Further, the current agreement between Baghdad and Erbil is temporary and will remain so until the Iraqi Parliament passes a comprehensive oil and gas law that has been overdue for a long time. It is worth noting that the Kurds now have a well-established energy sector and the authority and capacity to manage it jointly with the government in Baghdad. This constitutes a significant milestone, and provided Erbil and Baghdad demonstrate good faith and implement the agreement signed by Prime Minister Sudani and Prime Minister Barzani, it could substantially boost Kurdistan's economy and instil confidence in the energy sector.

There are wider unresolved issues, which stem from the wider context for recent developments: the Baghdad government has traditionally strongly resisted Kurdistan’s autonomy in the energy sector but was actually uncertain that the Paris-based court would rule in its favour. Amid this uncertainty and concern, in February 2022, during the government formation process and the weakened position of Iran-aligned groups, Iraq’s Supreme Court ruled that the KRG’s oil exports was unconstitutional, which strengthened Baghdad's attempts to weaken the KRG. With the change in the Supreme Court's composition in mid-2021, Kurdish parties will struggle to prevent the court from making further rulings against its autonomy. As a result, the Kurdish leadership may have to maintain positive relations with the ruling Shia powers in Baghdad, re-evaluate their approach to the decision-making process in Baghdad and negotiate with one voice. –––– Dr. Kamaran Palani, Leiden University

The arbitration ruling ultimately revolves around questions over KRG sovereignty; the KRG must manage the malicious intentions of some in Baghdad

The arbitration ruling, and the agreement that followed between Prime Minister Sudani and Prime Minister Barzani, highlights that the conflict over oil between the KRG and the Iraqi government ultimately revolves around sovereignty, as much as it does monetary or technical questions. The ruling in Paris undermines the KRG’s independent energy policy and could weaken the KRG’s domestic sovereignty, at least in the short-term, since the KRG will be dependent on Baghdad to export its oil. Baghdad could use this as leverage against the KRG in the future and there will be some groups in Baghdad who may now feel empowered and aspire to further weaken the autonomy of Kurdistan, including control of its borders. This highlights some of the existential and malicious intentions and challenges that Baghdad presents and that the KRG leadership has to manage.

While Turkey respects the outcome of the arbitration ruling, which represented only a partial victory for Baghdad, it does not mean that Turkey will accept and enforce its outcome, or accept defeat. Turkey controls the headwaters of the Tigris and Euphrates, which gives it the capacity to cut off water supplies to Iraq, which has been a major source of tensions between the two countries. Turkey can leverage this strategic advantage in the dispute over Kurdish oil exports. In the long-term, and in the most extreme of circumstances, Turkey and the KRG may find other alternatives, such as building a new pipeline but this will be costly and fraught with domestic and geopolitical challenges. The KRG has also been weakened because of ongoing internal challenges, including heightened tensions between the KDP and PUK. Kurdish disunity weakens Kurdistan’s energy policy and has to be addressed. –––– Dr. Shwan Sharey, Kent University

The Baghdad-Erbil oil agreement represents a genuine attempt to resolve a long-standing oil dispute & can unify energy policies

The agreement between Prime Minister Sudani and Prime Minister Barzani represents the first genuine attempt to resolve outstanding issues in the oil and gas sector. Despite the declaration of both that the agreement represents a “temporary” formula for the dispute, it could pave the way for a unification of efforts between the two prime ministers in the energy sector, providing a sense of direction and purpose that will bring several advantages in the short and long-term. Regardless of the technical and procedural aspects of this agreement, the positive reverberations of the agreement will be felt at the domestic level for the economies of both Iraq and the Kurdistan region. Globally, it will be welcomed by the global energy market and by international investors who have maintained their stakes in Kurdistan's energy sector. The halt in exports has significant repercussions. The KRG's estimated 450,000 bpd of exports through the Turkish port of Ceyhan constitutes 0.5% of the world's daily oil exports, and the halt contributed to the 5.7% increase in the price of oil, which coincided with the reduction package approved by OPEC that same week, and Iraq's decision to reduce exports by 200,000 bpd.

Baghdad and Erbil need to stabilize their economic conditions and address domestic demands for economic growth, especially in the coming period, and this should drive further negotiations and goodwill between Prime Minister Sudani and Prime Minister Barzani. Sudani’s policy agenda depends on greater expenditures, and the budget has been designed to cover three years of public sector expansion and expenses. This will require capitalising on the rise in energy prices, which will also help the government reduce the deficit. Therefore, the agreement with Erbil will give the country an outlet to relieve pressure, and form a strong, stable and sustainable base for revenues and growth. Moving forward, the agreement should pave the way for Erbil and Baghdad to unify their energy policies, in respect of production, export policies, and prices. –––– Dr. Salam Jabbar, Iraq Policy Group

The shutdown of Kurdish exports through Turkey endangers Italy’s energy security

Over the last year, Iraq became a significant element of the Italian energy diversification strategy to cut its dependence on Russian hydrocarbons, meeting 13.3% of the Italian national demand for crude oil for 2022. In this equation, oil from the semi-autonomous region of Kurdistan and the Kirkuk fields accounted for over half of the crude oil imported from Iraq. Unsurprisingly, Italy is growingly concerned that the ongoing blockade of Iraqi Kurdistan’s oil exports from Ceyhan may drag on for a long time, potentially threatening Rome’s energy security. Against this backdrop, Italy-KRG energy cooperation was one of the main topics addressed during President Barzani’s latest visit to Rome on April 13.

Although it could not be excluded that Italy may also offer its diplomatic assistance in the future thanks to its positive relations with the parties involved in the dispute, these would be an intricate knot to untie for a country primarily looking at the matter through the lens of its national energy security. –––– Francesco Salesio Schiavi, Italian Institute for International Political Studies