Baghdad, Erbil relations on edge as both sides disagree over oil revenue

Relations between Iraq's federal government and the Kurdistan region continue to fester, with Erbil's embattled oil industry -- already reeling from the refusal of neighboring Turkey to reopen its port of Ceyhan to Iraqi crude exports -- caught in the power struggle.

The latest salvos have Baghdad and Erbil trading accusations that the other side is not living up to a budget agreement, in which the Kurdistan Regional Government is required to hand over 400,000 b/d of its crude production to Iraqi state marketer SOMO in order to receive its share of federal funding.

But with Ceyhan shuttered while Baghdad and Ankara work through a diplomatic and legal dispute involving the pipeline that connects the port with northern Iraqi fields, including most of Kurdistan's, the KRG has only provided between 50,000-60,000 b/d.

In August, Kurdish officials said the volumes were increased to 85,000 b/d.

Iraqi government spokesperson Basim al-Awadi said in a statement on Twitter Sept. 8 that Baghdad "has fully implemented its financial obligations" toward the Kurdistan region, including loans to pay salaries, while the KRG said it is the federal authorities who have not held up their end of the budget agreement.

A protracted dispute could see Baghdad squeeze Erbil financially, as it has done in the past during previous KRG sovereignty disputes. That would then impact the KRG's ability to pay international oil companies operating in the region, which have already warned that political instability and the lingering Ceyhan closure could cause their future upstream investment to dry up.

In early August, Chevron and partner Genel said they were relinquishing the Sarta license in Kurdistan.

"Remaining investors are struggling with the lack of payment, as well as legal ambiguity over future treatment of their contracts," S&P Global Commodity Insights analysts said in an August note.

Fingers pointed

The KRG has previously independently marketed its crude but in the past year and a half was ordered to give up control of its oil sector to Baghdad, which has wielded an Iraqi Supreme Court ruling in February 2022 that Erbil's oil sales were illegal.

That, along with a separate international court arbitration ruling in March essentially cutting off the KRG's access to Ceyhan, has made the KRG dependent on the budget deal to provide funds needed to pay government salaries and provide services.

Awadi, the Iraqi government spokesman, accused the KRG of a "lack of commitment" and "non-compliance" with the deal, saying that Erbil had failed to hand over its oil and non-oil revenues as required. Nevertheless, as a gesture of goodwill, he said that Baghdad would extend Erbil a loan to help pay salaries.

"Despite the regional government's lack of commitment, the federal government took it upon itself not to burden the Iraqi citizens of Kurdistan with KRG's non-compliance," Awadi said on X. "As the law permitted, the Council of Ministers decided to lend funds to the KRG until its financial problems were fundamentally resolved."

The Kurdish government has insisted it has met its obligations and that the loan is unfair, when it is the responsibility of Baghdad to provide the funding for salaries.

KRG spokesperson Peshawa Hawrami said in a statement Sept. 8 that contrary to statements from the Iraqi government's spokesperson, "Kurdistan's public sector employees have received only a portion of their rightful salaries, and they have not received their rightful salaries in recent months," adding that the KRG "faces unjust penalties."

The loan amount still does not cover the shortfall of what the KRG is owed, Hawrami added.

The Kurdistan region's Rudaw news channel reported Sept. 10 that Iraqi members of parliament had invited both the finance ministers of the KRG and Iraq to discuss the disagreements.

Ceyhan closure continues

The worsening dispute comes as talks between Turkey and Iraq over restarting crude exports from Ceyhan appear at a standstill.

Turkey suspended exports from Ceyhan on March 25, in the wake of a ruling by the International Chamber of Commerce's International Court of Arbitration that independent Kurdish exports through Ceyhan were in violation of a 1973 pipeline agreement between Iraq and Turkey, resulting in Turkey being fined $1.5 billion in damages.

Turkey is reportedly seeking to reduce the fine and also renegotiate the pipeline agreement, which expires in 2025.

Turkish President Recep Erdogan has been due to visit Baghdad for talks on the matter, but Arabic news outlet Asharq al-Awsat on Sept. 10 reported that the trip had been postponed due to the standoff between Erbil and Baghdad.

Earlier, Turkish Foreign Minister Hakan Fidan visited Baghdad and Erbil over Aug. 22-24 to discuss the resumption of oil exports.