New Iraqi budget law strengthens Baghdad's hand over Kurdistan region's oil sector

Already reeling from the months-long suspension of its crude exports, Iraq's semiautonomous Kurdistan region may see its lifeblood oil sector further hemmed in with the passage of the federal budget.

The budget, passed June 12 following four days of late-night voting and intense debates within Iraq's parliament -- including on controversial amendments decried by Kurdish officials -- calls for $152 billion in spending, allocated for the years 2023, 2024 and 2025.

For Kurdistan, it essentially locks in the region to handing over 400,000 b/d of its crude production to federal oil marketer SOMO, in order to receive its agreed 12.6% of federal funding. To many Kurds, it paves the way for Baghdad to take more control over the region's oil exports and budget and could complicate plans to revive shuttered crude production.

As it stands, the Kurdistan Regional Government has no way of pumping anywhere close to 400,000 b/d, with its lone pipeline outlet, to the Turkish port of Ceyhan, shuttered over a political and financial dispute between Baghdad and Ankara.

"Regardless of what is agreed in the budget and the shenanigans in Parliament, resumption of oil export via Ceyhan is key for the Kurdistan Region of Iraq's oil sector," said Shwan Zulal, managing director of London-based Carduchi Consulting. "Needless to say, Iraq is losing an enormous amount of revenues and the KRG's deficit is only growing while the dispute over oil exports is unresolved."

The KRG had previously independently marketed its crude until an international arbitration ruling in March said such sales via Ceyhan violated a bilateral agreement between Turkey and Iraq.

Turkish authorities subsequently closed the pipeline, and Kurdish production has cratered as a result -- from a typical level of about 450,000 b/d to just 22,000 b/d in April, according to SOMO data.

As a result, the Mediterranean market has been deprived of a typically robust supplier of sour crude, with operators in Kurdistan having to turn off the taps as crude storage facilities reached maximum capacity. A prolonged standoff could further imperil oil and gas investment, many companies have said.

OPEC cuts

By conditioning the KRG's share of the budget on supplying SOMO with 400,000 b/d of crude, even with the restart of exports, Kurdistan could be vulnerable to disruptions, such as field outages or attacks. The region's oil and gas operations have been targeted several times by drone and missile attacks over the past few years, in strikes mostly attributed to Iranian affiliated groups opposed to Kurdish autonomy.

Lawk Ghafuri, a political analyst and former head of foreign media affairs for the KRG, said future OPEC cuts could make it difficult for Kurdistan to meet its 400,000 b/d target.

Iraq, which has often accused the KRG of not sharing the load on the country's pledged OPEC quotas, in April agreed to a voluntary 211,000 b/d production cut on top of its existing 372,000 b/d reduction from October levels, as the producer bloc and its allies seek to boost oil prices. That limits Iraq to a quota of 4.21 million b/d. For May, SOMO reported the country's output at 3.955 million b/d, which means a full resumption of KRG production would likely put Iraq above its quota.

"If there are more cuts by OPEC in the future and the KRG would be responsible to do the cuts and if KRG can not supply 400,000 b/d to SOMO, then the KRG would have trouble getting its budget," Ghafuri said.

The federal Iraq oil ministry and SOMO did not respond to requests for comment.

In a statement June 13, KRG president Nechirvan Barzani said the way the budget was passed "does not serve the political process, the situation and the future of Iraq."

Oil and gas law

Efforts to draft a comprehensive oil and gas law that would govern the KRG's crude sales have long been stalled, with no prospect of resolution. For now, the budget will stand in for the oil and gas law, weakening the KRG's hand, by putting its financing in the hands of SOMO, said Bilal Wahab, a senior fellow at the Washington Institute for Near East Policy.

The budget sets "unhelpful precedents for the KRG" with the requirement to hand over its crude to SOMO, Wahab said, and will "fundamentally impact the KRG's ability to make financial decisions."

The budget also includes a clause allowing Baghdad to intervene in intra-Kurdish disputes over funding allocations. The ruling Kurdistan Democratic Party controls Erbil and Duhok provinces, while the Patriotic Union of Kurdistan governs Sulaimani province.

Barzani expressed worries that Baghdad could make further budget cuts to the Kurdistan region in the future. From 2014, Baghdad has regularly cut budget allocations to the KRG to pressure the region over its independent oil exports.

"There must be full assurance that the financial entitlements and wages of the Kurdistan Region employees will not be delayed or neglected for political reasons," Barzani said.