Iraq's National Security Council, headed by the prime minister, has decided to mandate the oil ministry in Baghdad to coordinate the energy portfolio with the semi-autonomous Kurdistan Regional Government as well as concerned companies and countries, following the Federal Supreme Court ruling against independent Kurdish crude exports.
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"The council has decided to mandate the oil ministry to communicate and coordinate with the Kurdistan Regional Government and concerned companies and countries to prepare the mechanisms and steps to manage this [oil] file in accordance with the provisions of the constitution and the higher national interest," the media office of Prime Minister Mustafa al-Kadhimi said in a Feb. 16 statement following a council meeting.
The Kurdistan Regional Government has developed its own oil and gas sector independently from Baghdad based on a 2007 law and started to independently export crude oil through Turkey in 2014. The KRG oil policy led to disputes with the Baghdad government, which has cut the budget of the region.
The council also authorized the oil ministry to work with consultants and experts from Iraq and abroad to develop a technical roadmap and time-frame in this regard, the statement added.
A KRG spokesman could not immediately comment on the decision, but said a statement may be issued later.
The decision comes after the KRG rejected the top court's ruling against independent Kurdish exports and vowed to take legal and constitutional measures to protect its oil and gas contracts as the dispute between Erbil and Baghdad escalates.
Iraq's Federal Supreme Court ruled on Feb. 15 that the 2007 oil and gas law in the Kurdistan region is unconstitutional and ordered the Kurdish government to hand over its oil operations to Baghdad in an escalation in a long-standing dispute over Erbil's independent energy sales. The decision came amid political disputes in Baghdad between Iraqi parties over formation of the federal government following the October parliamentary elections.
"This decision by the Federal Supreme Court is unjust, unconstitutional, and violates the rights and constitutional authorities of the Kurdistan Region," the KRG said in a Feb. 15 statement. "It is unacceptable and the Court must investigate further and consider the requests of the Kurdistan Region."
"The Kurdistan Regional Government will take all constitutional, legal, and judicial measures to protect and preserve all contracts made in the oil and gas sector," it added.
A number of international oil companies and traders have contracts with the KRG, including Chevron, Oslo-listed DNO, Russia's Rosneft and Gazprom Neft and the UK's General Energy and Gulf Keystone Petroleum.
"The Kurdistan Regional Government will not forfeit the rights of the Kurdistan Region as codified in the Iraqi Constitution and will continue its attempts to reach a constitutional solution with the federal government on this matter," it said. "This decision was reached in spite of the Kurdistan Regional Government's request that the case be adjourned to allow the opportunity for an agreement to be reached with the federal government."
The ruling may undermine investor confidence in Kurdistan, which wants to attract foreign capital to further develop its oil and gas industry. Kurdistan pumped 425,000 b/d out of the country's total of 4.162 million b/d in January, according to figures from State Oil Marketing Organization.
"International investments and cargoes of independently-sold crude are unlikely to be affected unless the federal government uses the ruling to restart the kinds of international enforcement actions it attempted when the KRG's independent oil exports first began in 2014," said Patrick Osgood, a senior analyst at Control Risks Middle East.
"The ruling is nonetheless likely to materially adversely impact investor perceptions of regulatory risks in the sector. The legal status of the region's oil sector had never been dispositively settled. It is open to significant challenge now, should the next federal government pursue it."
The ruling comes amid tensions in Baghdad over the candidate for the Iraqi presidency after the supreme court dismissed on Feb. 13 the Kurdish nominee Hoshyar Zebari. The ruling Kurdistan Democratic Party supported Zebari as a candidate, while the Patriotic Union of Kurdistan, or PUK, backs Barham Salih, the current Iraqi president.
The KDP is allied to the populist cleric Muqtada al-Sadr, the winner of October's parliamentary elections, and Sunni parties, who hope to form a majority Iraqi government without Iranian-backed groups.
The Iran-backed Coordination Framework, an alliance of Shi'ite-parties close to Tehran, has backed Barham Salih as a candidate and wants a consensus government. The Coordination Framework includes former Iraqi prime minister Nouri al-Maliki, whose government has in the past opposed Kurdish oil exports.
The ruling could further complicate tense ties with the federal government amid the prolonged government formation process.
"Government formation negotiations remain febrile, and the incumbent prime minister is beholden to an alliance of parties that includes the Kurdistan Democratic Party, which dominates the region's oil sector policy and management," Osgood said.