Skip to content Skip to Search
Skip navigation

Iraq wins court battle to halt Kurdistan oil flow

Israeli gas exports Egypt Reuters/Azad Lashkari
Egypt's cabinet said that gas imports fell to zero from 800 million cubic feet per day, contributing to a deficit of power generation
  • Court rules only Iraq can export to Turkish city Ceyhan
  • Turkey immediately ceases imports from Kurdistan
  • All KRG’s contracts are invalidated

Iraqi Kurdistan’s control over its oil industry is in jeopardy following a landmark international court ruling in Iraq’s favour which has halted pipeline crude exports from the semi-autonomous region. 

Iraq had sued Turkey, arguing that only the Baghdad administration had the legal right to export oil via a pipeline to the Turkish city Ceyhan, not the Kurdistan Regional Government (KRG). 

The International Court of Arbitration agreed, prompting Turkey to immediately cease pipeline imports in a huge financial and political blow to the KRG, which as of December 31 owed $3.35 billion to oil buyers. 

The KRG in 2014 began exporting oil directly, signing production deals with international oil companies (IOCs), following a dispute that led the federal government to periodically withhold the region’s share of the national budget.

“This is a major setback for KRG’s oil and gas industry – it’s the culmination of a series of setbacks, but this one in particular has a sense of closure,” said Bilal Wahab, a Wagner Fellow at The Washington Institute For Near East Policy. 

In February 2022 Iraq’s federal court ordered the KRG to give all crude oil produced in the region and nearby areas to the Baghdad-based oil ministry.

The ruling also invalidated KRG’s oil contracts including agreements relating to exploration, extraction, exports and other sales, Reuters reported

The KRG, which did not respond to requests for comment, historically ignored adverse Iraqi rulings, arguing these were unconstitutional. 

“Now an international court has taken Baghdad’s side, the KRG’s position is severely weakened,” Wahab said. “It’s relying on Baghdad’s goodwill for the continuation of its key industry.”

The KRG produced about 437,000 barrels of oil per day in the three months to December 31, which is around one-tenth of Iraqi output. About 90 percent of Kurdish crude was exported via pipeline, according to a Deloitte report produced for the KRG. 

Kurdistan has storage capacity for a maximum of five days’ output, Wahab estimates. Production will likely reduce or stop by Wednesday unless Erbil and Baghdad can agree on a deal to resume pipeline-based exports.

“This ruling marks the end of the KRG’s oil and gas industry as we know it, so the question is what will it morph into,” said Wahab.

The KRG sells its oil at a big discount to market prices. Its average December price was $62.95 per barrel, while Brent crude averaged $80.92. 

This partly reflected the political risk to which such trading exposes buyers. An agreement with Baghdad would enable the KRG to charge a few dollars extra per barrel, closer to the market price, said Wahab, noting that will come at a cost of losing political autonomy. 

The KRG in 2007 passed a hydrocarbons law empowering it to sign exploration and production contracts with IOCs.

Iraq’s constitution afforded Kurdistan significant autonomy to convince the region not to seek independence following the fall of Saddam Hussein’s government.

“The Kurds were given more economic autonomy than many people in Baghdad were willing to accept,” Douglas Silliman, president of The Arab Gulf States Institute in Washington and the United States ambassador to Iraq from 2016 to 2019, said.

“Production sharing agreements with IOCs and other producers was the biggest of them.

“Most economic activity in Kurdistan over the past 15 years has been based on legal terms that would not be acceptable in Baghdad but were in Erbil and Sulaymaniyah.

“So the (federal) ruling is a threat to foreign investment in Kurdistan beyond just oil and gas.”

The dispute will impact confidence in the KRG, said Fernando Ferreira, director of geopolitical risk Service at US-based Rapidan Energy Group. 

“The KRG is getting squeezed. It is already several months behind on oil payments to the IOCs and that affects companies’ willingness to invest because they don’t have confidence they’ll be paid on time,” he said

Pressure from Baghdad led three US oilfield services companies – Schlumberger, Baker Hughes and Halliburton – to pledge to withdraw from Kurdistan, Reuters reported.

In March oil trader Trafigura terminated its contracts with the KRG, a spokesperson told AGBI.

Baker Hughes declined to comment, while Halliburton and Schlumberger did not respond to requests for comment.

In the longer term Wahab foresees Erbil and Baghdad finding a compromise despite the federal court invalidating KRG oil contracts. 

“There has to be a deal where these contracts are grandfathered,” Wahab said. 

Grandfathering is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases.

One option would be to pause the federal court ruling, although the ideal solution would be for Iraq to pass a national hydrocarbons law, Wahab added. Such a law has been pending since the drafting of the Iraqi constitution, with the oil and gas industry governed mostly according to Ba’athist era rules. 

“Somehow there has to be an article that bestows legitimacy on all these oil and contracts the KRG signed that leaves it – and not Baghdad – liable for the [money] it owes,” Wahab.

“The KRG has to admit that it lost, so it can move forward. Kurdistan’s mistake was to approach oil primarily as a geopolitical asset, rather than an economic one.”

Latest articles

Rothschild Saudi

Edmond de Rothschild to run funding vehicle for Saudi projects

The Edmond de Rothschild Group is establishing a funding vehicle for infrastructure projects in Saudi Arabia along with the local firm SNB Capital, as part of a deal in which the Swiss investment bank will set up offices in the country.  Saudi Arabia’s massive economic diversification programme has run into financial obstacles as it faces […]

Turkey foreign property sales

Foreigners turning back on Turkish real estate

Foreign buyers are increasingly shunning the Turkish property market, wary of high prices, the expensive cost of living and a less welcoming environment for overseas real estate investors. There were only 2,064 residential units sold to foreign buyers in May, 35 percent down on the same month last year, data issued by the state statistics […]

2KEY8G1 Emirates Airline Airbus A380 aircraft landing. Aerial view of Emirates Airlines A380-800 airplane. An Emirates plane coming in to land at LAX; a spokesperson for Emirates said the contraventions were for safety reasons

US fines Emirates for operating in prohibited airspace

Emirates has been fined $1.5 million by the US Transportation Department for operating flights carrying JetBlue Airways’ JBLU.O designator code in prohibited airspace. The transportation department said that between December 2021 and August 2022, Emirates operated a significant number of flights carrying the JetBlue Airways code between the United Arab Emirates and the United States […]

Egypt will use the US funding across a range of sectors including agriculture

US allocates $130m development funding to Egypt

The US has allocated funding of $130 million for a range of developmental projects in Egypt, it was announced on Thursday. In a press release published by the US Embassy in Cairo, ambassador Herro Mustafa Garg said that the money would go towards “advancing Egyptian efforts to achieve a brighter, healthier, and more prosperous future […]