Iraqi federal court ruling deals another blow to Kurdistan regional government's oil autonomy

The Federal Supreme Court of Iraq has ordered the semiautonomous Kurdistan Regional Government to hand over all oil and non-oil revenues to Baghdad, in another step towards federalizing the region's hydrocarbons-dependent economy and changing how international oil companies operate there.

The oil companies have been pushing federal Iraqi authorities to honor the production sharing contracts they had previously signed with the KRG, but Baghdad has said those contracts are invalid and has sought to negotiate new terms under a previous Supreme Court ruling from 2022 that gave federal marketer SOMO control over Kurdish oil production.

The new court decision, issued Feb. 21, will in effect give the federal government full control of the KRG's finances, with Baghdad now covering public sector salaries in the region. In a separate ruling, the court also removed 11 minority quota seats from the Kurdistan Parliament, reducing its size to 100 seats.

The KRG did not respond to a request for comment, but the ruling Kurdistan Democratic Party said in a statement Feb. 22 that the "decisions are contrary to the spirit of the constitution, the constitutional rights of the Kurdistan Region, the principles of federalism and the principle of separation of powers enshrined in the Iraqi constitution."

Since 2014, the Iraqi federal government has from time to time withheld the KRG's share of the budget, as Baghdad contested the legality of the region's independent crude sales via an export pipeline to Turkey. In February 2022, the Supreme Court ordered the KRG to hand over its oil to Baghdad and ruled the region's 2007 oil and gas law, which paved the way for independent oil exports, unconstitutional.

Then in March 2023, Turkey halted some 400,000 b/d of Kurdish crude exports, after a Paris-based arbitration court said Ankara had violated the 1973 Iraq-Turkey pipeline agreement by allowing the independent Kurdish sales.

Furthermore, in June, the Iraqi parliament passed a budget law that obliges the KRG to export up to 400,000 b/d through SOMO in order to receive 12.6% from the Iraqi budget.

With the pipeline still shuttered, the KRG has not come anywhere close to the obligated volumes, as the international oil companies operating in the region have been limited to local sales of crude at significant discounts.

"The central government has been trying to get the KRG to hand over oil and non oil revenues for some time now but given the federal government's lack of control over the KRG, these measures have not amounted to much but caused issues for the KRG, especially when it came to selling oil in the past," Shwan Zulal, managing director of Iraq-focused Carduchi Consulting, told S&P Global Commodity Insights. "The oil sector in the KRI (Kurdistan Region of Iraq) is on its knees as exports have been halted for 11 months. A deal between the two to restart oil and agreement on budget would improve and revitalize the economy."

Iraqi officials have previously complained that Erbil has failed to hand over its oil and non-oil revenues. For their part, Kurdish officials have said Baghdad has not sent enough money from the Iraqi budget to pay the salaries of civil servants, and underline that they have handed over oil revenues.

Mohammed Salih, senior fellow at the Philadelphia-based Foreign Policy Research Institute, said the Supreme Court ruling "is all part of a larger scheme by the establishment in Baghdad to reduce the powers and autonomy of the Kurdistan Region by emptying out the notion of federalism from any significant and serious meaning by subduing the KRG oil sector completely to Baghdad."