The U.S. has recently intervened in the ongoing dispute between the Baghdad-based Federal Government of Iraq (FGI) and Iraq’s semi-autonomous Kurdistan Region (KRI), which has been embroiled in a long-standing oil export embargo. The halt to oil flows into Turkey, which began on March 25, 2023, came after the International Chamber of Commerce (ICC) ordered Turkey to pay $1.5 billion in damages for what it deemed unauthorized oil exports from the KRI.
Matthew Miller, a spokesperson for the U.S. State Department, told local Iraqi news outlets that Washington has urged both Erbil (which is more aligned with the West) and Baghdad (which has closer ties to China) to reach a sustainable agreement on budgetary issues, which could ensure stable oil production in the Kurdistan region. The U.S. also emphasized the importance of forming an inclusive government in the KRI, which would contribute to the region’s stability and economic growth. However, despite the region’s parliamentary elections on October 20, no consensus has been reached on how to establish a functioning government.
Iraq’s Foreign Affairs Committee member, Mukhtar Al-Mousawi, sharply criticized the U.S. involvement, describing it as a direct interference in Iraq’s internal matters. He argued that external involvement in financial and oil disputes only worsens the situation, and that the U.S. should refrain from meddling.
The complexities of Iraq’s politics often obscure the path forward, but Baghdad has made its goals clear. In August 2023, Iraqi Prime Minister Mohammed Al-Sudani announced that a new unified oil law would oversee oil and gas production throughout Iraq, including in the Kurdistan region. This law aims to bring all oil operations under Baghdad’s control, marking a clear move towards ending the Kurdistan region’s oil independence. The ultimate goal is to consolidate Iraq’s resources and end the political and legal disputes over oil exports. Both China and Russia reportedly support this approach, seeing it as a step toward reducing Western influence in the region.
The roots of the dispute trace back to 2003, after the fall of Saddam Hussein, when the Kurdistan Regional Government (KRG) was allowed to export oil through Iraq’s State Organization for Marketing of Oil (SOMO). In exchange, Baghdad promised to share a portion of Iraq’s central budget with the KRG. However, the agreement was never fully adhered to, with both sides accusing the other of failing to meet their obligations.
In 2014, a new deal allowed the KRG to export up to 550,000 barrels per day (bpd) of oil, with Baghdad promising to send 17% of the national budget to the KRG. But this agreement, too, faltered. By 2018, a revised agreement between the KRG and the Iraqi federal government required the KRG to deliver 250,000 bpd of crude oil to SOMO in exchange for funding to cover salaries for KRG employees. This arrangement also became unreliable.
The situation grew more complicated in 2017 after the KRG held a referendum for independence, which was followed by the FGI reclaiming control over key oil fields, including those in Kirkuk. From this point on, Baghdad argued that the oil fields in Kirkuk were illegally occupied by the Kurds. The FGI then insisted that any future budget allocations to the KRG should reflect the region’s share of Iraq’s total population—12.67%, down from the 17% stipulated in the 2014 deal.
The issue of budget allocation was largely resolved in the 2023-2025 Budget Agreement, which set the KRI’s share at 12.67%. However, when related sovereign expenses were added to this, the KRI’s effective share increased to 14.76%. The KRG has since objected to this change, claiming that the budgetary review process will be biased in favor of Baghdad.
In November 2023, the FGI approved a proposal to amend the budgetary process, including new guidelines for determining oil production and transportation costs, which would be reviewed by an internationally designated consulting entity. The KRG, however, remains skeptical about the outcome of this review, fearing it will be skewed against their interests. As a result, there appears to be little chance for a lasting resolution to the dispute, and the embargo on oil exports from Kurdistan to Turkey may persist.
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