Iraq-Türkiye Oil Arbitration Case and the Future

The International Chamber of Commerce Arbitration Court in Paris announced its ruling on the arbitration case filed by Iraq against Türkiye On March 24, 2023. The case pertained to Iraq's complaint about Türkiye’s role in the Kurdistan Region's oil exports, which Baghdad claimed was in violation of the pipeline agreement between the two nations. As a result of the ruling, the pipeline was shut down until a new agreement could be reached between Baghdad and Erbil. Consequently, a delegation from Erbil traveled to Baghdad to commence negotiations with the aim of finding a solution for resuming oil exports. The Kurdistan Regional Government's (KRG) Prime Minister, Masrour Barzani, expressed his desire to resolve the issue, stating, "the recent disruptions to oil exports from the Kurdistan Region have hurt the country as a whole. This agreement brings much-needed revenue."

Preliminary deal between Erbil and Baghdad
Thanks to constructive efforts from both Baghdad and Erbil, a preliminary deal has been reached, and it is expected that oil will start flowing through the pipeline in the coming days. Although the agreement has been described as "temporary" by Iraqi Prime Minister Mohammed Shia' Sudani and Masrour Barzani, it is still a preferable outcome compared to having no agreement at all. Moreover, the consensus that has been achieved on this issue may pave the way for new opportunities in the Ankara-Baghdad-Erbil triangle. In fact, Sudani's visit to Ankara before the court's decision indicates that the matter may have been discussed during the visit. Given the positive atmosphere of the meeting between Turkish President Recep Tayyip Erdoğan and Sudani, it can be concluded that both parties are satisfied with the court's decision. In fact, it can be said that with the announcement of the court's decision, a point of tension in relations has disappeared. In this direction, it can be said that the expectations of a balanced and similar decision from the second arbitration court have increased and the uncertain shadow cast on bilateral relations has decreased.

It can be argued that both Erbil and Baghdad have achieved their respective goals with this agreement. For Baghdad, the State Organization for Marketing Oil (SOMO), Iraq's national company, will manage future oil exports. For Erbil, revenues generated through the exports will be deposited into an account at the Iraq National Bank, which will be under Erbil's control.

With the conclusion of the arbitration issue, attention will now turn to the oil and gas law and the federal budget, which were unable to be issued in Iraq in 2022. The constructive approaches taken by Baghdad and Erbil on both issues are crucial for the future of the region. Another positive development is the statement by Iraqi Foreign Minister Fuad Hussein that both Kurds and Sunnis support the Erbil-Baghdad agreement, in addition to the Coordination Framework. The fact that actors beyond the Kurdistan Region in Iraq's central politics are satisfied with reaching a consensus on the issue gives an indication of the negotiations' positive atmosphere on other matters as well.

It is anticipated that the conditions agreed upon in the preliminary agreement will be formalized once the Iraqi Parliament approves the federal central budget. In fact, after the oil and gas bill is enacted, the principles outlined in the temporary agreement are expected to be institutionalized. With the conclusion of this agreement, a major disagreement on two crucial issues - the budget and the oil and gas law - has been resolved.

Future expectations
Maintaining the positive atmosphere that has been created is crucial for resolving problems not only in the Kurdistan Region but also in other provinces of Iraq. Indeed, the court’s decision's binding nature paved the way for a swift agreement between Erbil and Baghdad. Failure to use the pipeline, through which 450 thousand barrels of oil are transferred daily, could have placed a significant financial burden on both Erbil and Baghdad.

To achieve a permanent solution to the hydrocarbon dispute between Baghdad and Erbil, it is essential to examine the shortcomings that may arise in the temporary agreement over time. Addressing these deficiencies in the permanent agreement will not only ensure its long-term effectiveness but also alleviate any potential discontent from both Baghdad and Erbil.

If the positive agreement environment persists, it is expected that oil production and exports from the Kurdistan Region will increase, leading to economic growth. By eliminating legal risks, many international oil companies are likely to invest in developing the oil sector. This, in turn, will create more jobs and have positive effects on other non-oil sectors as well. In addition, actors in the Kurdistan Region who may want to disrupt the positive atmosphere that emerged in line with the agreement with Baghdad pose a threat to the future.

Finally, solving the problem is crucial for Turkey's energy security. In 2020, according to the Turkish Petroleum Corporation, 30 percent of Turkiye's crude oil needs were met by imports from Iraq. Therefore, the flow of oil from Iraq is a significant issue for Turkiye’s need to diversify its imports. Furthermore, resolving the dispute could improve stability in Iraq and reduce the risk of conflict and violence, which could have positive spillover effects for the region as a whole.

This article was published on Rudaw on  April 6, 2023, with the title "Iraq-Turkey oil arbitration case and the future.”