Erbil-Baghdad tensions escalate over oil production

The Iraqi Federal Ministry of Oil called on the Kurdistan Regional Government (KRG) to immediately hand over regional oil production on June 5, accusing the KRG of smuggling oil from the region to countries outside of Iraq.

"The Ministry reaffirms the urgent need to immediately begin the delivery of oil in accordance with the amendment to the Budget Law, which was enacted in agreement with the KRG, and emphasizes that the KRG must not avoid its obligations," the Iraqi Ministry of Oil said in a statement.

"The Ministry is monitoring information indicating the continued smuggling of oil from the Region to destinations outside Iraq, and holds the KRG fully legally accountable for this."

Baghdad has complained that ongoing oil exports have resulted in revenue losses, forcing it to reduce production from other oil fields outside the Region to comply with Iraq's OPEC quota because the "oil produced in the Region is counted within Iraq's total production quota regardless of any violations," the Iraqi Ministry of Oil said.

Iraq's federal crude production in May fell 59,000 b/d month over month to 3.605 million b/d on lower exports, a senior official at state oil marketer SOMO said on June 2, following a decision by Iraq's government to trim crude exports below 3.2 million b/d in May and June in a bid to comply with its OPEC quota.

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

The KRG's Minister of Natural Resources Kamal Mohammed said during an energy conference on May 22 that 400,000 b/d were being exported.

The KRG's Ministry of Natural Resources (MNR) has accused Baghdad of violating Iraq's Constitution and obstructing the passage of the Federal Oil and Gas Law for many years.

"You persist in clinging to the outdated legislative framework of the former regime, especially the 1976 law, which clearly and explicitly contradicts the principles of a federal system and the provisions of the current constitution," the KRG's MNR said.

In 2007, the KRG passed its own oil and gas law after the Iraqi Parliament failed to pass a new oil law. But in 2022, the Iraqi higher court deemed the law unconstitutional.

"Holding the Region accountable for OPEC overproduction is your fault—because you are selling others' oil in the name of Iraqi oil," the KRG MNR statement added.

"As for the accusations of oil smuggling from the Region, they are a transparent attempt to distract from the widespread smuggling and corruption occurring in other parts of Iraq," the KRG's MNR statement also said.

"The statement from the Iraqi Oil Ministry is filled with deception, as it is not the Kurdistan Region that is stopping the oil process," KRG spokesperson Peshawa Hawrami told Commodity Insights.

"In fact, the Kurdistan Region and Turkey are ready to start exporting oil. It is the federal government in Baghdad that is causing disruption and violating our agreements. At the moment, there are no technical reasons to hinder the export process. Rather, it's Baghdad's known behavior of creating obstacles."

Furthermore, the KRG accused Baghdad of cutting the salaries and livelihoods of the Kurdistan Region's citizens as part of "a systematic starvation policy."

On May 30, the Iraqi Federal Finance Ministry informed the KRG that it decided to suspend salary transfers to the KRG for failing to hand over oil and non-oil revenues to Baghdad.

Baghdad's decision came after the KRG signed $110 billion energy agreements with HKN Energy and WesternZagros on May 19, which Baghdad has called illegal.

In response, the KRG complained that they had delivered over 11 million barrels of oil to Baghdad without any financial compensation.

Shwan Zulal, managing director at Carduchi Consulting, told Commodity Insights that the oil produced in the Kurdistan Region is sold by International Oil Companies (IOCs) to local traders.

"What happens to the crude after that is unclear, but there are large volumes of traffic on the Iranian border plus to other parts of Iraq. If by smuggling Iraq means the oil sold is not accounted for, then the statement is true unless the sales are audited and the destination of the oil is clear."

Mohammed A. Salih, a non-resident senior fellow at the Philadelphia-based Foreign Policy Research Institute, told Commodity Insights that "resolving the energy and financial disputes requires a genuine commitment to the letter and spirit of the Iraqi constitution, which grants the KRG significant autonomy and authority in these areas."

"Baghdad's selective interpretation of these powers will only deepen tensions. At the same time, the KRG must fulfill its obligation to hand over produced oil to Baghdad for international sale. The Oil Ministry, in turn, must act swiftly and seriously to recognize the KRG's contracts with IOCs and move the process forward."

However, he added that the "people in Kurdistan need their salaries especially for the Eid (Islamic) holiday and issuing statements and counter statements ultimately isn't going to resolve anything."