Iraqi oil case against Türkiye, pipelines and Kurdish question

First, let us try to explain why Türkiye lost an arbitration case brought by the Iraqi government in 2014, which resulted in Türkiye being ordered to pay 1.4 billion US dollars in compensation. We should add that he International Chamber of Commerce’s International court of Arbitration in Paris also found the Iraqi government guilty of failing to repair sabotage damages to the Iraqi-Turkish oil pipelines over the years.

According to energy sources who spoke to YetkinReport on condition of anonymity, the Iraqi government expected the Arbitration Court to impose a fine of around 30 billion dollars. Ankara, on the other hand, was worried that it might be fined $10 billion. King & Spalding, the US law firm representing Türkiye in the case, is preparing an appeal.

The Arbitration Court found Iraq’s expectations exaggerated, but nonetheless imposed a $1.4 billion fine and announced it on Saturday, March 25, when the stock markets were closed.

According to the same sources, this fine might not have been imposed if Türkiye had not agreed upon a clause to the 1973 Iraq-Türkiye Pipeline Agreement in 2010 when the agreement was extended until 2025. The sentence read: “Türkiye buys oil only from the Iraqi State Oil Marketing Organization (SOMO)”. The Energy Minister at the time was Taner Yildiz, and it was Iraqi Energy Minister Hossein al-Shahristani who insisted on this clause and has now won the case for his country.

Pipelines shut down

Following the Arbitration Court’s decision announced on March 25, two pipelines carrying Iraq’s Mosul and Kirkuk oil to Adana’s Ceyhan-Yumurtalık terminal were shut down at Ankara’s request. A Turkish delegation travelled to Baghdad to resolve the issue. According to energy sources, the pipeline is expected to open in a few days.

It is noted that the stoppage of 500 thousand barrels of oil per day from Ceyhan to the world markets, while the Russia-Ukraine war continues on the one hand, has already pushed oil prices above $75 a barrel.

The situation is further complicated by the fact that a few days before the Arbitration Court ruling, Iraqi Prime Minister Mohammed al-Sudani was in Ankara at the invitation of President Tayyip Erdoğan and signed cooperation agreements. During these meetings, both sides knew that the Arbitration Council could announce its decision at any time. Nevertheless, Erdogan said that extra water would be released from the Tigris for a month in response to the threat of drought in Iraq.

According to diplomatic sources, Sudani also asked Erdogan to make Türkiye’s gas deal with Iraq directly with Baghdad and not with the Iraqi Kurdistan Regional Government (KRG) in Erbil.

In fact, the Iraqi government, while disappointed with the amount of the fine, may have gained some room to manoeuvre with this obstacle out of the way.

Tanker trade is not the real problem

In the three-year Iraqi budget adopted before Sudani’s arrival in Ankara, the KRG was allowed to sell oil directly, but its share of Iraqi oil was reduced from 17 percent to 12.67 percent. In return, Baghdad agreed to pay the salaries of the KRG security forces, the Peshmerga. This meant an increase in the Kurdish region’s economic autonomy but a decrease in its political autonomy.

In fact, this case was filed 9 years ago, in 2014, because Türkiye intervened in the dispute between Baghdad and Erbil in favour of the KRG due to security concerns over the PKK. As reported in the press, the real problem was not the transportation of oil by tanker as well as pipelines or its being declared illegal. The primary importance of tanker trade, which at the time was carried out by PowerTrans, a company owned by businessman Ahmet Çalık and managed by President Erdoğan’s son in law Berat Albayrak, seems to have lost after 2012, albeit still continuing, due to the Syrian civil war and the involvement of ISIS.

The main problem stemmed from the division of the profits of the oil sold through Türkiye pipelines between Baghdad and Erbil. Let’s take a closer look.

Kurds enter the oil game

The lines, the first of which was used by BOTAŞ in 1977 and the second in 1987 to transport oil to Ceyhan, run largely through the Sunni region of Iraq but enter Türkiye through the borders of the federal Kurdish region for the last 30 kilometers. Fishabur pumping station is on the Iraqi side and Silopi pumping station is on the Turkish side.

In Iraq, which was invaded by the US in 2003, the adoption of a new constitution in 2005 led to the unification of the Kurdish administrations, which until then had appeared to be two-headed under the leadership of Masoud Barzani, leader of the Kurdistan Democratic Party (KDP), and Jalal Talabani, leader of the Patriotic Union of Kurdistan (PUK), as the KRG, and Iraq became federal.

The Kurdish federal region’s entry into the oil game changed when Ashti Hawrami, a petroleum engineer who is also a British citizen, came from London to become the KRG’s Minister of Natural Resources. In 2011, Hawrami announced the signing of 10 separate exploration and production agreements with the US oil giant Exxon in both the Arab and Kurdish regions, which led to an influx of oil investors into the Kurdish region, from Chevron to Total, with Turkish companies such as Turkish Petroleum (TPAO) and Genel Enerji joining the bandwagon. Finally, in 2012, Hawrami came to Ankara and signed a “Memorandum of Understanding” with the KRG.

Baghdad-Erbil oil war and the PKK

The real importance of this deal was more political than economic.

It is because the Iranian-influenced Shiite Iraqi Prime Minister Nouri al-Maliki was not giving the Sunni and Kurdish regions their share of the total oil sales. This led to a financial crisis in the Kurdish region under Barzani’s rule, whose only source of income was oil, and even the salaries of the Peshmerga, let alone the salaries of civil servants, could not be paid. This situation worried Ankara, which attached importance to cooperation with Barzani in the fight against the PKK.

At that time, the Syrian civil war had accelerated and the AKP government, which had taken sides against Bashar al-Assad, started indirect dialog with the PKK through National Intelligence Organisation MİT, Kurdish-issue-focused People’s Democratic Party (HDP) and imprisoned leader of the PKK, Abdullah Öcalan in Imrali prison. One of the aims of this was to create a “security belt” on the Syrian border as a precaution against a Shiite belt stretching from Iran to Lebanon. On the other hand, the rift between Erdoğan (then prime minister) and Fethullah Gülen, his ally since 2007, began to widen after the arrest of Hakan Fidan, Undersecretary (now President) of the Turkish National Intelligence Organization (MIT).

Halkbank, ISIS, Mosul

Five agreements were signed with the Barzani administration in November 2013. According to these agreements, oil revenues from Ceyhan would be kept in an account at Halkbank (*) but 17 percent would be transferred to the Iraqi Kurds in accordance with the Baghdad-Erbil agreement. This relieved Barzani, but angered Maliki, who cut off the share of oil going to the Kurds altogether.

Meanwhile, sabotage attacks on Iraq-Türkiye pipelines began to increase, first by al-Qaeda and then by ISIS after they seized oil wells in Syria.

ISIS entered Iraq in early May 2014 and headed towards Mosul. On May 29, Ankara for the first time authorized the sale of oil that had been held in Ceyhan storage facilities; if Barzani’s peshmerga were further weakened, both the pipelines and the fight against the PKK would be at risk. ISIS entered Mosul on June 11. It invaded the Turkish Consulate General in Mosul and took 49 people hostage, including Consul General Öztürk Yılmaz.

But the turning point came a few days later when ISIS attacked the town of Gwer near Erbil. The town was in Kurdish territory and was on the road to the oil fields of Erbil. The US began aerial bombardment that day: They could not allow ISIS to enter Kurdish territory.

Baghdad resorts to Arbitration

This led the US administration of Barack Obama to emphasize the need to strengthen Kurdish areas in Syria against ISIS. The Kurds living in Syria near the Turkish border were mostly under the control of the PYD, the Syrian branch of the PKK, and its armed force, the YPG. The AKP government’s indirect dialog with the PKK began to falter. The first sign of US cooperation with the PYD/YPG appeared in Gwer.

Maliki filed for arbitration with the International Chamber of Commerce in Paris on June 29, about two weeks after the ISIS invasion of Mosul, while the group was still holding Turkish hostages, citing Türkiye’s decision to allow oil sales from Ceyhan to empower Iraqi Kurds. It argued that by allowing the sale of oil from Ceyhan, Türkiye had made a purchase outside SOMO, thus violating the 1973 agreement, which was extended by an annex in 2010.

Pipelines are of strategic value

A lot of water has passed under the bridges in the intervening nine years. This includes Barzani’s independence referendum in 2017, despite opposition from Türkiye, the US, Germany and Iran. In the meantime, Türkiye’s dialogue with the PKK ended in 2015, and after the July 15, 2016 coup attempt, the Turkish army began a military operation in Syria to establish its own “security zone”. Ten days after Barzani’s independence referendum, a joint exercise was held with the Iraqi army; Erdoğan declared, “We will close the valve if necessary.”

Among the agreements signed with Iraqi Prime Minister Sudani on March 20, just before the 1.4 billion fine, was a joint anti-terrorism agreement.

If the US has not yet intervened in the Iraq-Türkiye oil dispute, it surely will. It is not in the interest of the US and the western world for this dispute to continue, not only in terms of oil markets but also in terms of strengthening Iran. And just when China is trying to drive a wedge between Saudi Arabia and Iran.

The strategic importance of the pipelines is likely to prevail and lead to the establishment of new balances in the region.

Note

(*) At the time, no one could have predicted that a month later, Halkbank’s Iranian connections would lead to the dismissal of 4 ministers from the Erdoğan government, the complete severing of the ties between the AKP and the Fethullahists, and the December 17-25 corruption allegations.