The final verdict by the International Court of Arbitration in Paris against Türkiye has further complicated the de facto controversial situation regarding the Kurdish oil exports since the creation in 1992 of the Kurdistan Regional Government (KRG), both in Erbil, Ankara and Baghdad. as well as for foreign oil companies operating in the region.
Now, the search for a “new mechanism” based on compliance with the law, respect for sovereignty, fair income sharing, assurance to companies and geopolitical interests has begun. I can confidently say as a former diplomat who served on the board of an important oil company in this region for about 9 years and knows the region, the changing dynamics and the leading players well, that the solution will be found one way or another .
“Give and take” between Ankara and Erbil
The flow of approximately 450 thousand barrels of Kurdish oil every day from northern Iraq to international markets would not have been possible without the independent pipeline facilitated by Türkiye, the storage and loading in Ceyhan, a critical Halk Bank special account in money traffic, and strong political support. In this respect, Erbil is grateful for this opportunity, even though its dependence on Ankara has increased and its manoeuvrability has been relatively eroded, and it pays the price as needed.
In turn, Ankara has gained leverage over the Iraqi Kurds, bought some of the oil, earned transit fees, if the investments would be made on time, maybe it could bring the cheapest natural gas from KRG (compared to Russia, Iran and Azerbaijan), and moreover, it seems to have found a solid ally against the hostile PKK.
The Kurdistan Regional Government sits on nearly 3.7 billion barrels of oil resources. I remember once, with Kirkuk production, that 1 million barrels of oil per day was poured into world markets via Ceyhan. That is, even more than the Azeri oil coming from the Baku-Tbilisi-Ceyhan pipeline.
According to calculations made at the time, KRG needed to achieve a production level of at least 1 million barrels to sustain its ultimate ambition for independence, which it never concealed. That is, if we calculate the barrel at an average of $83, $83 million per day, $2.5 billion per month and $30 billion per year. Since exports are currently 450,000 barrels per day, they can earn $37 million a day, $1.2 billion a month, and $13.5 billion a year, if unexpected problems and interruptions do not occur. Of course, nearly half of this goes to production companies and expenses.
In the first half of last year – if we deduct the money paid to oil producers, transportation and storage – KRG earned $3 billion thanks to the sale of oil to the outside world through Türkiye. Assuming that the same performance continues in the second half, its annual total net income will be beyond $6 billion.
The agreement between SOMO and Kurdish government
According to the agreement reached between the Iraqi oil company SOMO and the Kurdish government during the term of Haider al-Abadi and McIrvin Barzani, an additional 150,000 barrels of Kirkuk oil per day was flowing to the north, and it was decided to share its revenue 50-50. However, Iraq withdrew from this agreement after the Kurdistan independence referendum.
The Kurdish government acts like an independent state, it has a government, parliament, judiciary and diplomatic missions abroad.
It serves a population of 6.2 million with its revenue from oil, keeping the economy alive, and feeding the armed forces (Peshmerga). In order to maintain the political balance, some of the earnings must be shared with the big tribes in Erbil and Sulaymaniyah. It also has a debt of approximately 5 billion dollars to be paid to Türkiye, oil producers and traders.
Iraq’s legitimate concerns
Of course, the fact that this region constitutionally under the sovereignty of Federal Iraq trades oil with the outside world against the consent of Baghdad, uses the money it earns on its own without transferring it to the federal budget, and acts as an independent state, Iraq’s Sunni and Shiite Arab population and leaders are deeply disturbed. The US, UK and Israel strategically attach great importance to an independent Kurdish presence as a buffer entity here sandwiched between Türkiye, Iraq, Syria and Iran.
For this reason, Iraqi Prime Minister Nuri al Maliki at the time of the Arbitration in Paris in May 2014 claimed that the oil trade between Erbil and Ankara was a violation of both the sovereignty rights and the 1973 agreement signed between the two countries, which made SOMO the sole partner in trade. He filed a lawsuit against Türkiye through SOMO in the arbitration court. As expected, Ankara lost the nine-year trial and was ordered to pay a fine of $1.4 billion.
The story isn’t over yet
This is just the first phase, covering the period 2014-2018. Arbitrators are also working on the 2018-2023 period. The judges I spoke with in Paris say that this too will be finalized in two years and that a similar sentence is highly likely. So, another $1.5 billion penalty is on the way. Ankara’s hand is weak in terms of international law, and it will have to pay the fine, which is actually lower than the expected astronomical $30 billion expectation.
We will see if penalty payment is going to be shared with Erbil. It is also possible that Türkiye will appeal the court decision.
Geopolitical reality forced the Turkish government to act in this way. The Barzani government needed Ankara’s support to survive after creating an autonomous region by joining forces with Talabani, with whom he had been in conflict throughout history, after the US invasion of Iraq.
Barzani was supported by Ankara on the basis of its motives of neutralizing the PKK, having a powerful presence in northern Iraq that it could control along its borders, and creating business opportunities for Turkish companies. Genel Energy and other Turkish companies were given the green light. Credit lines were kept open whenever KRG fell into financial trouble.
“Candy Apple” to Ankara
Of course, Barzani also made gestures for businessmen and family members close to the government in Ankara. He tried to create a strong Turkish business and politicians lobby that would support him when needed. Previously, the prime minister of the time and the president would not meet him; even ministers avoided and then top state leaders became his interlocutors in Ankara.
Behind the scenes, operations and business connections, which have not seen the light of day yet, were engineered and executed with the MIT, special forces, Ministries of Foreign Affairs, Energy and Natural Resources, National Defence and Economy.
I remember years ago, when I was traveling on the same corporate plane with the prime minister of the Kurdish region, he said to me: “We are surrounded by Arab, Persian, Turkish hostile countries, but our favourite enemy, I must say, are the Turks”!
Only during the ISIS attack, Ankara acted late in providing support, lagging behind Iran. Confidence was shaken to some extent in Erbil. In addition, Türkiye acted jointly with Iran and Iraq to punish KRG and force it to take a step back in the Kurdish independence referendum (where almost everyone agreed on the timing error, except Israel) declared as a fait accompli without consulting Türkiye.
Is PKK oil also allowed?
A significant part of Syria’s oil fields was under the control of ISIS. Later, with the support of the US, ISIS militants were removed from these regions and replaced by the PKK-led PYD. It now controls 70 percent of oil production. Some of this oil is sent to Syria, ruled by the Damascus government, even though it has serious disputes, the rest of the unconsumed part is mixed with Kurdish oil by crossing the Iraqi border and loaded into the pipeline from KRG to Ceyhan. Both the PKK, the KRG leaders and possibly some people in Türkiye benefit from this transaction somehow.
In short, KRG and Türkiye also contribute to the creation of indirect income for the PKK, if the claims of Western oil companies and Damascus to the UN Security Council, stating that the hydrocarbon assets in Syria have been plundered, are true.
“The blood to flow does not stop in the vein”
At the point reached today, oil traffic originating from the Kurdish region has been temporarily suspended in Ceyhan in order to evaluate and consult the arbitration court decision. The KRG delegation went to Baghdad (let’s not forget that Iraqi president Abdul Latif Rashid is of Kurdish origin), while the Turkish government sent its negotiators to the capital to create a “new mechanism” with Iraq.
It is interesting that a series of cooperation and investment agreements signed by Iraqi Prime Minister Mohammed Shia Al Sudani on March 28 in Ankara came to an arbitration decision before the ink dried on the agreements. It is not possible that this matter has not been discussed between them before, because as far as I know, the arbitration decision was made back in May 2022, it was just announced because the approval process got longer. There was ample time for negotiations.
Indeed, we are faced with a complex equation, but in the light of past experiences, I believe that a solution will be found, although it is not easy, because “blood to flow does not stop in the vein”, that is, oil will continue to flow as long as it is produced. I heard a “courtesy” phone call from the White House to Ankara to take a stand with the Kurds on this issue and to allow the tankers to be loaded.
For now, the oil that continues to be produced will be parked in the storage facilities in KRG and Yumurtalık, within the limits of possibilities, and will be exported to the international markets again after the solution flare is fired, via Ceyhan. Ankara feels the need to follow an approach that will not violate the fine line between international law and realpolitik, without offending either Erbil or Baghdad.
Baghdad using carrots
Iran, whose influence has increased in Baghdad, is trying to increase its weight on KRG in Northern Iraq and to reduce the excessive dependence of the region on Türkiye in its favour. It brings to the table some initiatives such as making some of the KRG oil export through himself, and even transporting it through the Syrian territory to the Mediterranean.
Meanwhile, the Russians began to hold important bridgeheads and buy energy infrastructure in KRG through Rosneft.
Talabani’s party PUK, which controls the south of the region, is moving towards both Baghdad and Tehran, causing differentiation within the regional Kurdish movement. The new political power Goran also complicates the situation.
Father Mesut Barzani has resigned to his corner, stepping in where necessary as an honorary leader. Jalal Talabani passed away, his children Qubad Talabani and Bafel Talabani cannot show the same charisma and agility. Currently, there is also a political rivalry between President Nechirvan Barzani and Prime Minister Masrour Barzani, which sometimes leads to tensions, but they managed to develop a reasonable division of duties between them.
Erbil faces economic difficulties
Erbil faces economic difficulties due to the fact that oil production cannot exceed the current level, the prices are below the market (due to heavy discounts), the difficulty in finding new investors, and the security risks created by ISIS and PKK. Companies are having difficulty paying their debts. The bribery corruption virus could not be reduced. Refugees fleeing Syria and finding safe haven in KRG also pose a heavy burden.
Asserting that the agreements of foreign oil companies such as Genel Energy, Chevron, Gulf Keystone, HKN, DNO, Danagas operating in the Kurdish region are legally invalid, the Iraqi Oil Ministry made direct contact with these companies for the first time last year and asked for a renegotiation of the existing agreements with them within the framework of the decision taken by the federal constitutional court.
Baghdad announced that 16 percent of the nationwide oil revenues (determined in the constitution but not implemented so far) will be left to KRG, and that the technical service contracts it uses are more favourable than the production sharing agreements provided by Erbil. None of the companies bypassed Erbil and approached to negotiate directly with Iraq. However, uncertainty is of no use to anyone; neither new investors can be attracted nor production can be increased. Access to international financial markets is still expensive and difficult.
What will the new mechanism be like?
Iraq’s problem is not just transferring the revenue from KRG oil exports to its own coffers. It is already the largest oil exporter after Saudi Arabia with 3.5 million barrels in OPEC, and it is targeting to export 6 million barrels by 2017.
Actually, Baghdad thinks that the sovereignty and territorial integrity of the country is at risk, and considers that this harms the national honour and emphasizes that in the long run it will not allow the Arab lands to pass to the Kurds. In this regard, it finds support from the Arab League and Iran.
I believe the following six tentative steps could contribute to overcoming the current problem:
- Iraq withdraws its second arbitration case against Türkiye, whereas Türkiye and KRG agree to pay the current fine,
- Strong affirmation by Ankara and Erbil of respect for Iraq’s sovereignty and territorial integrity over the KRG territory,
- Initiating joint work with foreign companies in KRG to align oil contracts with Iraq’s technical contracts,
- Ensuring that Kurdish oil is brought to Keshabir via an independent pipeline, sent to Ceyhan from there, and a representative from SOMO is involved in the payments mechanism,
- Developing a formula to balance Baghdad’s 16 percent share of revenue with the KRG’s revenue from oil exports, and
- Selection of an independent mediator acceptable to all three parties to supervise the functioning of this mechanism between Baghdad-Ankara-Erbil.
The energy-rich Kurdish region and Türkiye
Considering both these developments and the approaches of Iran, the US and Russia, which are quite far from the Ankara line, in the coming period, it is necessary to construct and play a very careful and clever chess game that does not exclude anyone. Otherwise, Türkiye may stay out of the vitally important “Great Game” right next to its borders, let alone the new global order.
In terms of Türkiye, the position of the Kurds in Syria, Iraq and Iran, good neighbourly relations on both sides of the border, extinguishing the flame of Kurdish independence in the region, but strengthening the autonomous regions and working closely with them without neglecting Baghdad, Damascus and Tehran, ensuring the waters of the Tigris and Euphrates are shared equitably, Iran’s ambitions for an expanded sphere of influence thwarted, and Israel neutralized are vitally important.
Undoubtedly, Türkiye’s “elder brother” role in opening up to the world and protecting the energy-rich Kurdish regions will indirectly contribute to reining in domestic ethnic problems, enhancing its energy security and critical infrastructure.