Adherence to Baghdad-Erbil Oil Deal is Essential to National Unity

In December 2014, Iraq’s central government in Baghdad signed an oil agreement with the Kurdistan Regional Government (KRG) that was widely seen as a major breakthrough for Iraqi unity. The agreement formalized a trade-off: In exchange for the KRG channeling 550,000 barrels of oil per day (bbl/d) through Iraq’s State Oil Marketing Organization (SOMO) for export, consistent with the Iraqi Constitution, the government would ensure that the KRG received its share of the federal budget, as also mandated by the Constitution. Today, the agreement is at risk of unraveling because the KRG is bypassing SOMO to independently export oil — and not just oil produced in the Kurdish region, but also oil produced from the oil fields surrounding Kirkuk, which the December 2014 agreement did not recognize as Kurdish oil.

Oil agreement strikes balance between sovereign, regional priorities

Under the landmark agreement, which eased a decade-old stalemate, the KRG agreed to provide Baghdad with 550,000 bbl/d — 250,000 from oil fields in the three Kurdish provinces (estimated reserves of 4 billion barrels) and 300,000 bbl/d from oil fields in Kirkuk (estimated reserves of 9 billion barrels). The agreement temporarily set aside a longstanding dispute over who controls Kirkuk and its oil resources, which Kurdish forces took over from the central government during the chaos surrounding Daesh’s invasion last summer.

In return for shipping oil through SOMO, the central government agreed to provide the KRG with its share of the Iraqi budget. In accordance with the Iraqi Constitution and the 2015 budget approved by the Council of Representatives in January, the KRG is entitled to 17% of government expenditures after the payment of sovereign expenses. In addition, the budget contemplates an increase or decrease in total federal budget outlays based on changes in the price of oil, and it allows the Minister of Finance to alter payment to the KRG in proportion to such changes.

Between January and June, the KRG has provided about 57% of the agreed-upon oil to SOMO (an average of about 313,500 bbl/d instead of 550,000 bbl/d, a 236,500 bbl/d shortfall). Moreover, at the same time that the KRG was failing to meet its oil delivery obligations to SOMO, it was directly exporting increasing amounts of both Kurdish and Kirkuk oil, in violation of the oil agreement.

In contrast, Prime Minister Haider al-Abadi and his government have faithfully fulfilled their obligations under the oil deal, transferring funds generated by the sale of oil to the KRG at the end of each month relative to the oil received. From January 1 and June 23, the KRG provided a total of 28.561 million barrels of oil to SOMO from oil fields in the Kurdish region, worth $1.407 billion. The central government in turn transferred $2.015 billion to the KRG.

  • Additionally, the KRG provided to SOMO 20.846 million barrels (valued at $1.026 billion) from the Kirkuk oil fields—oil which is not recognized as Kurdish—for a total of transfer to SOMO of 49.407 million barrels of oil, with a total value of $2.433 billion.
  • At the same time, the KRG independently exported $1.304 billion worth of oil through channels other than SOMO, in violation of the oil agreement.

When revenue generated by the KRG through its independent oil sales is combined with the revenue transferred to the KRG pursuant to the oil agreement, the total is $3.049 billion – or 35% of the central government’s total budget (exclusive of sovereign expenses) during this period. When independent Kurdish oil exports are taken into account, therefore, oil revenue to the KRG significantly exceeded its entitlement to 17% of the federal budget.

Dissolving financial links between Baghdad and Erbil weakens national unity at a critical time. The oil agreement between the central government and the KRG serves as an example for how a federal system with decentralized decision-making can work in Iraq and serves as the strongest link between the central government and Erbil. Strengthening cooperation between Baghdad and provincial capitals will help stitch back together seams in society that Daesh has been able to exploit. Federal, provincial and local unity will best enable Iraqis to defeat Daesh and protect Iraqi lands and Iraqis from terrorists in the future.