Baghdad, Iraqi Kurds strike far-reaching oil deal

The Iraqi government has agreed to share the country’s vast oil wealth with Kurdish regional authorities in a landmark deal that could repair long-broken relations and help unify the armed effort against ISIL insurgents in the country.

Under the deal struck on Tuesday, 300,000 barrels per day (bpd) of oil from Kirkuk will be exported via a pipeline through Kurdish territory into Turkey, in addition to 250,000 bpd from Kurdish oil fields. The crude will be sold by Iraq's state oil marketing organization (SOMO), representing a major compromise by the Kurds, who have long insisted the constitution entitles them to sell oil on their own terms.

In return, Baghdad will resume budget payments to the Kurdish regional government (KRG), which has faced a financial crisis ever since the federal government cut funding to them early this year. Baghdad will also disburse $1 billion toward salaries and equipment of the Kurdish peshmerga forces, who have proven more successful than the Iraqi army in fending off the Islamic State in Iraq and the Levant (ISIL) offensive.

The agreement will help Iraq boost crude exports at a time when its budget has been severely strained by tumbling oil prices and the steep costs of its war against ISIL, which has seized swathes of northern and western Iraq.

The deal was seen as the biggest political victory yet for Iraq’s new prime minister, Haider al-Abadi, who replaced sectarian predecessor Nouri al-Maliki in September.

The accord was also cheered in Washington, which has worked tirelessly to stave off the collapse of the Iraqi state as ISIL consolidates control over Sunni minority lands. In a Twitter post, U.S. Deputy Assistant Secretary of State for Iraq Brett McGurk called the deal an "important breakthrough.”

But it will not mend all ties between Baghdad and Erbil — the Kurdish regional capital — which in recent months has openly stated its intentions to secede from Iraq. The KRG has also angered the central government by trying to sell its own oil to Turkey, which it began doing back in May. Many saw the move as a way of testing the waters for the viability of an independent Kurdish petro-state.

Ayham Kamel, director of Middle East & North Africa at Eurasia Group in London, said the deal could still be derailed by political disagreements. That has happened the last few times Erbil and Baghdad announced oil revenue deals, such as in 2012. "Until there is a final oil and gas law, Baghdad could still turn off the (budget) taps on the KRG at any time if there's a new disagreement," Kamel said.

An early test will be whether Baghdad actually goes ahead and provides the payment to peshmerga forces, given how large a drain it poses for the overstretched Iraqi budget, said Richard Mallinson, an oil market analyst at London-based Energy Aspects.

“If we start to see the cabinet in Baghdad finding reasons to delay that payment, we may find ourselves back in a very familiar cycle," he said.

Overall, though, analysts have high hopes for Tuesday’s deal. “What feels different this time is that both sides are a lot more desperate for revenue than in the past,” said Mallinson. Baghdad is facing a substantial deficit, the dual product of stagnant exports and rampant spending to tackle the ISIL insurgency. But Baghdad has also realized that for all its protest, it can’t effectively stop the Kurds from producing and exporting oil right under its nose.

The Kurds, meanwhile, have not generated enough revenue through their independent oil sales, which are hampered by their legal ambiguity, to cover its own budget.

“Nothing is going to change the long-term ambition of many Kurdish politicians to achieve an independent state, but we’ve seen an overreach by Kurdish leaders in the wake of the ISIL assault,” Mallinson said. “They’ve had to accept they weren’t as close to independence as they thought they were back in June.”

But analysts said it was noteworthy that the KRG will only have to sell 250,000 bpd of oil produced in areas under its control to SOMO, leaving it free to sell any excess oil on its own. Since the KRG has said it plans to export as much as 1 million bpd by the end of next year, that apparent loophole suggested an opening for the KRG to one day sell its oil directly.

With wire services. Michael Pizzi contributed reporting.