Iraq is finally clearing some key energy policy hurdles, but bigger challenges may lie ahead, writes Bachar Halabi
Iraq, Opec's second-largest producer, has this week announced breakthroughs that could consolidate its control of oil and natural gas resources and open a new chapter in foreign investment in its energy sector.
Following 10 days of turmoil after an arbitration ruling in Baghdad's favour effectively shut down all crude exports from the semi-autonomous Kurdistan region of northern Iraq, a deal signed on 4 April between the Kurdistan Regional Government (KRG) and the federal government has cleared the way for the resumption of KRG crude exports.
But the latest agreement between Baghdad and Erbil, albeit a "temporary" one, as KRG prime minister Masrour Barzani announced, goes well beyond the full resumption of Iraq's northern crude exports. It could lead to the resolution of a long-standing dispute over control of Iraq's oil and gas sector, the confirmation by parliament of the federal budget and the passing of a long-awaited hydrocarbons law. The deal is "part of the [two parties'] promise to settle the 18-year-old oil and gas dispute," Barzani's deputy chief of staff Aziz Ahmad says. The deal remains temporary until the Iraqi parliament approves the hydrocarbons law.
Control of the country's energy sector and northern oil exports has been effectively split between Baghdad and Erbil since 2014, through a combination of ambiguities in Iraq's post-war constitution of 2005 and the KRG's control of a pipeline giving it independent access to Iraq's Kirkuk-Ceyhan crude export pipeline. But over the past 15 months, Baghdad has gained important legal leverage in its push to retake control of the KRG's oil and gas resources.
A ruling by Iraq's federal supreme court in February last year deemed the KRG's 2007 oil and gas law "unconstitutional", invalidating upstream contracts that Erbil had signed with foreign oil firms. And a ruling by the International Court of Arbitration of the International Chamber of Commerce on 24 March — first reported by Argus — forced Turkey to halt KRG crude exports through the Kirkuk-Ceyhan pipeline that it has allowed without Baghdad's consent.
Now holding a trump card over Erbil, the federal government appears ready to compromise by making the restart of KRG exports a matter of national interest. "Any delay in exports will clearly impact forecast revenues in this year's budget, increasing the deficit, which will harm all Iraqis," Iraq's prime minister Mohammed Shia al-Sudani says.
Spirit of compromise
Al-Sudani hopes a similar spirit of compromise will enable parliament to pass promptly a law proposed by the government last month for a three-year budget that would entail record spending of around $153bn/yr. Baghdad hopes that spending at this level will help bring stability by underpinning critical infrastructure investment, not least in the energy sector.
Oil revenues typically account for 90pc of federal government income, and totalled a record of almost $116bn last year, thanks to surging oil prices after Russia's invasion of Ukraine. Iraq's budget plans reinforce its need for resuming northern exports at the same time as aiming to support oil prices by participating in the surprise Opec+ cut announced this week, with a 211,000 b/d contribution.
If the deal between Baghdad and Erbil holds and the budget passes, the Iraqi parliament is expected to prioritise passage of a national hydrocarbons law, which al-Sudani says will address all the sector's constitutional loopholes. His government hopes that doing so will help revive investor confidence, which could also receive a boost from another compromise made by Baghdad this week, in cutting the stake demanded by the state in a giant diversified energy deal led by TotalEnergies.
