Iraq’s High Federal Court (HFC) last week ruled that the lucrative trade in crude oil and gas drilled from fields in the northern self-ruled Kurdish enclave of the country is illegal and ordered the federal government to review all contracts signed by the Kurdistan Regional Government (KRG) with foreign firms.
The ruling rejected the “oil and gas law” passed by the KRG regulating the energy sector in the region as unconstitutional and demanded that the Kurdish authorities hand over their crude supplies to the federal Iraqi government.
The landmark decision is expected to open a highly volatile chapter in Baghdad’s long-standing dispute with the KRG, which has cost the country dearly in terms of lost revenue and damage to its strategic oil industry.
It will also underscore the plight unleashed by the US invasion of Iraq in 2003 and raise questions as to what has happened to the country’s oil wealth, which has remained threatened by theft, fraud, smuggling, money laundering, and corruption.
In post-invasion Iraq, hydrocarbon theft, in all its forms, became a significant threat not only to economic and social prosperity, but also to national stability and security.
The HFC said that it had relied on several articles of the Iraqi Constitution in making its judgement, with these giving the federal government in Baghdad exclusive power to control the country’s national resources “to the benefit of all the Iraqi people”.
In a 15-page document, the court ruled that a KRG oil and gas law passed in 2007 giving the region’s Ministry of Natural Resources full authority over its oil resources was unconstitutional and should be annulled.
The tribunal also recalled that a US court had ruled in favour of the Iraqi Ministry of Oil in a lawsuit it had filed against the KRG Ministry of Natural Resources in its verdict. In 2015, Iraq’s government won a case in the US courts to block crude oil sales from the northern autonomous region.
The present ruling obliges the KRG in Erbil “to hand over all the production from the oil fields in areas under its control to the federal government” and renders the production-sharing contracts that it has signed with foreign companies vulnerable to legal action by Baghdad.
As expected, officials in Iraqi Kurdistan have dismissed the HFC judgement. Kurdistan Democratic Party (KDP) leader Masoud Barzani blasted it as “completely political,” and the KRG slammed it as “unjust, unconstitutional, and violating the rights and constitutional authorities of the Kurdistan Region.”
In Baghdad, where hectic efforts are underway to form a new government amid much political wrangling, the court ruling has rattled Iraq’s fragile political establishment, which has been generally reticent about the divisive issue.
The government of Prime Minister Mustafa Al-Kadhimi has mandated the federal Ministry of Oil to “communicate and co-ordinate” with the KRG, foreign firms, and foreign countries to “manage this [oil] file in line with the constitution.”
Iraq’s Kurdish President Barham Salih, who faces an uphill battle with Barzani’s party for reelection, urged Baghdad and Erbil to resolve the dispute “through serious and urgent dialogue”.
Reactions from Iraqi political and ethnic groups on the court ruling differed from group to group depending on their relationship with the Kurdish leadership, though most agreed that the decision could mark a watershed in Iraq’s security.
It is clear, however, that the court’s decision could trigger an existential crisis and force a seismic shift in the balance of power in the country.
Ever since the Iraqi Kurds started to focus on breaking away from the rest of Iraq, their key leverage has been oil.
After the fall of Saddam Hussein’s regime in 2003, the Iraqi Kurds, who were given an autonomous region in the north, were quick to exploit the oil and gas assets that lie in the enclave and have been reluctant to give up the revenue they generate.
The law to develop Iraqi Kurdistan’s own oil and gas industry independently of Baghdad in 2007 was a further effort by the Iraqi Kurds to wean their region away from the central government in Baghdad as they pursued outright independence from the rest of the country.
The KRG’s justification is that Baghdad has floated a constitutional article that stipulates that a new federal hydrocarbon law be enacted that would set new rules for sharing oil revenues.
Under its unilateral measures, the KRG signed multi-billion dollar deals with international oil consortiums to develop fields in Iraqi Kurdistan. It also launched crude exports via a purpose-built pipeline running to loading terminals on Turkey’s Mediterranean port of Ceyhan.
Iraq sits on top of the world’s fifth-largest oil reserves, and the KRG estimates that Iraqi Kurdistan may have 45 billion barrel of oil and some 25 cubic feet of gas in reserves. Yet, no one is sure how much the KRG produces and sells.
A report by Deloitte, a leading global auditor, released by the KRG, stated that Erbil exported 77.35 million barrels of oil through the Kurdistan Export Pipeline during the first half of 2021, in addition to 3.95 million barrels produced and allocated to local refineries.
The report said that during that period the KRG generated revenues of $4.1 billion from crude oil exports and that after making production and export payments it had retained net revenues from crude oil sales of $1.737 billion.
What the report reveals is that most of the proceeds from the oil contracts go to foreign and local oil businesses owned by the Barzanis and their cronies.
Given the historical context, the contours of hydrocarbon activities in Iraqi Kurdistan seem at first glance to be related to the ambiguity of the legal framework and regulations of the national energy industry.
But a closer look shows they are a typical case of the spillover of insurgency or separatism when natural resources provide both the motive and the opportunity for conflicts and instability.
Instead of trying to embed a national strategy such that both the KRG and the Baghdad government can benefit equally from the resources, the Kurdish leadership has resorted to advancing its independence agenda, raising the level of political instability and confrontation in Iraq.
Moreover, the “rentier model” established in Iraqi Kurdistan after the US-invasion has produced an authoritarian regime, poor economic performance, and endemic corruption, which has created a political class of ruling families and cronies.
It has made the Iraqi Kurdistan Region more vulnerable to a perpetual crisis with the federal government in Baghdad and a source of considerable controversy between the Kurdish parties and other ethnic groups in the region.
While, the HFC has upped the ante regarding Iraqi Kurdistan’s illegal hydrocarbons sector, it has also underscored Iraq’s larger oil problem. Since the US-invasion, reports have often surfaced about missing oil, other than that lost to corruption, smuggling, or just bad accounting.
In the fallout from the subsequent US occupation, most of Iraq’s factional leaders and militias have set their sights on the country’s lucrative oil business, competing with various rivals for power and for the foreign exchange generated by the country’s oil reserves.
Reports have occasionally unveiled illicit hydrocarbons activity in many parts of the oil-rich south, including crude and refined oil products being stolen with relative ease and sold at a discount from market prices with little fear of punishment.
In 2016 a Fairfax Media and Huffington Post investigation of Unaoil uncovered an extraordinary case of bribery and corruption in Iraq’s oil industry by the Monaco-based company.
The probe revealed how foreign oil companies had carved up Iraq through cultivating “an astonishing web of influence in the upper echelons of Iraq,” including the Oil Ministry, through bribes.
Last year, President Salih said in a statement that an estimated $150 billion of stolen money had been smuggled out of Iraq in shady backroom deals since the US-led invasion in 2003.
Other reports about Iraq’s plundered wealth have put the figure much higher, with some estimating it at nearly one trillion dollars in lost revenues, the lion’s share having been siphoned off from the oil sector in both Iraqi Kurdistan and areas under the rule of the Baghdad government.
*A version of this article appears in print in the 24 February, 2022 edition of Al-Ahram Weekly.