Iraqi Kurdistan holds elections amid crude export deadlock, tense Baghdad relations

Iraq’s semiautonomous Kurdistan region holds parliamentary elections Oct. 20, with oil and gas policy among the growing divisions between its two main parties, as a critical crude export pipeline to Turkey remains closed.

The Kurdistan Democratic Party (KDP), which holds the president's and prime minister’s offices, controls the oil-rich Erbil and Duhok governates. The rival Patriotic Union of Kurdistan (PUK), which holds the parliamentary speaker’s seat and the deputy prime minister’s office, controls the Sulaymaniyah governate, including most of the region’s gas fields, such as Khor Mor, operated by UAE-based Dana Gas.

The KDP has been eager to reopen the Iraq-Turkey pipeline, through which some 400,000 b/d of medium sour Kurdish crude flowed prior to its closure in March 2023, but political and financial disputes between the federal Iraqi government and the Kurdistan Regional Government, as well as the oil companies operating there, have prevented exports from restarting.

The PUK has argued that crude exports have only benefitted the KDP, which has not responded to the allegations.

Opposition parties, such as the New Generation Movement and the National Stance Movement, have accused both ruling parties of stealing oil.

Meanwhile, KRG Prime Minister Masrour Barzani, the KDP vice president, in 2022 had suggested the region could export gas as an alternative to Russian supplies, drawing opposition from the PUK.

Depending on how the election results go, analysts say the divided region may face difficulty in forming a new government, which could exacerbate oil and gas disputes. The current parliament comprises 45 members from the KDP, 21 from the PUK, and 45 split between a multitude of smaller parties, ethnic minority groups and independents.

“Oil export and gas production is unlikely to change any time soon unless there is a big surprise in the election, which is unlikely,” Shwan Zulal, managing director of Kurdistan-focused Carduchi Consulting, told S&P Global Commodity Insights.

Pipeline dispute

The Kurdish economy suffered a huge blow when Turkey closed the pipeline to the port of Ceyhan following an international arbitration ruling that independent marketing of the region’s crude violated a bilateral agreement between Ankara and Baghdad.

That effectively nullified the KRG’s 2007 oil and gas law, under which the region had signed production-sharing agreements with international oil companies. Baghdad has long opposed Kurdistan’s autonomous oil exports, claiming sovereignty over the region, and has from time to time cut the KRG’s share of the federal budget to apply financial pressure.

The federal government has cited an Iraqi Supreme Court ruling from 2022 that ruled the KRG’s oil and gas law unconstitutional and ordered the region to hand over control of its energy sector to Baghdad.

The Iraqi oil ministry and federal marketer SOMO have since sought to change the production-sharing contracts to profit-sharing contracts that are less lucrative to the oil companies, which have protested the move.

In the face of the standoff, the oil companies have sold their crude at significant discounts to international prices into a growing local market, with dozens of simple refineries popping up in the region. That has enabled production to climb back to around 250,000 b/d, according to Commodity Insights estimates.

Iraq, which has overproduced its OPEC+ output quota for months and is facing pressure from other members to improve its compliance, has pressured the KRG to hold its production to 140,000 b/d.

“Although oil is not currently exported through pipelines, all signs indicate that production is nearing peak capacity. Despite being sold at steep discounts, such revenue could offer a much-needed economic uplift if properly managed,” said Yerevan Saeed, director of the Global Kurdish Initiative for Peace at American University.

“However, both the KDP and the PUK engage in oil production and sales with minimal oversight,” he added.

The PUK did not respond to a request for comment. The KDP could not be reached.

Gas supplies

The PUK has indicated it would be willing to seek a deal with Baghdad and enact a new Iraq oil and gas law.

PUK leader Bafel Talabani said Oct. 5 during the election campaign that he "will never hand over gas to an authoritarian government," criticizing the KRG's oil and gas policy.

The KRG did not respond to a request for comment.

Nadir Mahmoud Mohammed, a PUK parliamentary candidate, told the party’s official media that the PUK seeks to establish an agreement with the federal government.

As for Kurdish gas production, the PUK has been accused of using supplies to KDP-controlled areas, which are needed to keep local power generation plants operating, as leverage in negotiations with its rival party.

Disputes between the parties have delayed a 36-inch gas pipeline that was supposed to be constructed in 2022 from the Khor Mor and Chamchamal gas fields to Erbil, Saeed said.

“Sometimes even propane delivery from these fields is used as a bargaining chip in negotiations, further complicating the already tense relationship between the two parties,” he said.

Security concerns

Mohammed Salih, a senior Fellow at the Philadelphia-based Foreign Policy Research Institute, said the government formation process after the elections will likely be lengthy and tumultuous.

“This would, at least initially, adversely affect KRG-Baghdad oil talks,” he said. “The composition of the next KRG and Kurdistan parliament could also affect the trajectory of the talks depending on the strength of the KDP and its rivals.”

Salih said security could also be impacted, depending on how Kurdish parties react to the election results.

A deterioration in the security environment could hamper efforts to attract more investment into Kurdistan’s oil and gas sector following an exodus of international majors.

The Khor Mor field has been attacked several times over the past few years, with Iran-linked groups blamed.

Political infighting and a heated election campaign could hamper governance, Saeed said.

“The next government, if ever formed, is highly unlikely to possess any leverage to negotiate a new gas or oil deal if the KDP and the PUK do not prioritize collective interests over trivial personal politics,” he said.