The Kurds Can't Afford to Leave Iraq

For the two families that govern the Kurdistan Region of Iraq — the Barzanis and Talabanis — the Islamic State’s rampage across Iraq this past summer represented an unprecedented opportunity. Taking advantage of the Iraqi army’s complete collapse, the Kurds captured the oil-rich area around Kirkuk on June 11.

Soon after taking Kirkuk, President Masoud Barzani called for a referendum on independence. And he has — since 2008 — advocated circumventing Baghdad and selling Kurdish oil directly on the international market with Turkey’s help. All of this struck the rest of Iraq as opportunism.

In the eyes of the K.R.G., however, it’s an insurance policy if Iraq collapses. The Kurds were deprived of their 17 percent constitutional share of Iraq’s oil wealth in January when former Prime Minister Nuri Kamal al-Maliki slashed their budget, costing the K.R.G. almost one billion dollars per month. Seen in this light, increasing independent Kurdish oil exports was essential.

Mistrust has always been at the heart of the dispute: Baghdad has expected 83 percent of the K.R.G.’s oil revenues in return for 17 percent of Iraq’s collective oil money. To date, that hasn’t worked; no oil has been sent from Erbil to Baghdad, and Baghdad was only sending 12 percent to the Kurds prior to the budget cutoff.

The federal government in Baghdad believes the Kurds have been playing a double game by demanding their share of federal oil revenues while also signing a string of independent contracts with international oil companies and midsize wildcatters and then pocketing the oil export profits after bypassing Baghdad.

In the past, Iraq and the Kurds have always come back to the negotiating table. This time could be different.

Despite Mr. Barzani’s calls for an independence referendum, K.R.G. officials are still counting on Baghdad to send them money. However, this double strategy is precarious — and the threat doesn’t come from Baghdad, but from Basra in the south.

There is a real risk that Iraq’s southern Shiite provinces — which produce over 90 percent of Iraq’s oil — could copy the Kurds in their call for autonomy. Basra’s political elites do not see why a share of their oil profits should go to the K.R.G. government in Erbil if those funds are only helping to subsidize Kurdish independence ambitions.

The Kurds face a hard choice: either they become part of a viable federal oil revenue sharing system or go their own way. And for the K.R.G., losing revenues from the central government would be irreversible and disastrous. That’s because an independent Kurdistan would make less than $7 billion per year — almost a third less than they received when given just 12 percent of Iraq’s total oil revenues.

This is not economically sustainable, especially at a time when Mr. Barzani’s government faces the added financial strain of aiding beleaguered Syrian Kurds while the Kurdistan region becomes a dumping ground for the rest of Iraq’s problems. With nearly two million internally displaced persons now in Iraq — the majority in Kurdish territories — the K.R.G. is facing a fiscal burden of almost $300 million per month alone.

To make matters worse, the recent decline in oil prices means the Kurds will now need to produce up to twice as many barrels per day to break even and sell them at market prices. (Until now, the K.R.G. has sold oil at heavy discounts mainly because traders views buying K.R.G. oil as a risk in the face of legal objections from Baghdad.)

In Erbil, the lack of petrodollars coming from Baghdad — and too little coming from the sale of Kurdish oil — has left a phalanx of civil servants, including 180,000 Peshmerga fighters, without salaries for months.

Some Kurds are even selling smuggled oil produced by the Islamic State. People think with their stomachs first; politics come second.

If the K.R.G. really wants to unlock its potential, it must seek a revenue-sharing model that benefits all of Iraq.

Mr. Barzani should take advantage of Iraq’s new unity cabinet that includes Shiites, Sunnis and Kurds. Iraq now has a Kurdish Finance Minister — Hoshyar Zebari — who can play a more important role in negotiating future revenues for Erbil. The legacy of Iraq’s former oil Minister, Hussain Al-Shahrastani, who pursued an aggressive centralized oil policy that the Kurds perceived as negative, has been offset by the appointment of Adil Abdul Mehdi as the new oil minister. Mr. Abdul Mehdi enjoys close relations with Mr. Barzani’s party; there are even rumors in Baghdad’s oil circles that next year will see a lifting of the blacklist for companies that operate in the Kurdistan region. Finally, once audits of the K.R.G.’s finances are completed, 17 percent of Iraq’s oil and gas revenues are slated to be sent to Erbil.

The K.R.G. is currently only producing ten percent of the country’s oil. Despite export bottlenecks and regulatory challenges, international companies have hinted that by 2020 they can double production at Basra’s huge fields — which would mean a potentially bigger national oil pie for the K.R.G. to share in. If Iraq takes steps to reduce flaring — the wasteful practice of burning gas while produding oil — the captured fuel could satisfy energy demand in the south and center of the country as well as the K.R.G.’s pressing power needs.

To take advantage of this opportunity, the K.R.G. must guarantee that it will not exploit any future revenue-sharing system for its own ends. Iraq’s oil wealth cannot be an engine of K.R.G. aims only; it must serve all regions. In return, Baghdad should pay the K.R.G.’s outstanding October salaries and provide lump-sum payments for previous months. Iraq’s 2015 budget gives Mr. Abadi an opportunity to do this.

For Baghdad’s elite, the lessons of zero-sum oil politics under the former prime minister have shown their true cost. If Basra goes, all of Iraq goes. This is why working now — while there is still an opportunity — toward a truly federal oil and gas council with real participation from key provincial players can both keep Iraq together and improve the country’s security.

Luay Al Khatteeb is a foreign policy fellow at the Brookings Doha Center. Ahmed Mehdi is a Senior Associate at Protection Group International.

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