Erbil and Baghdad were at odds with each other over revenue sharing and control of natural resources for much of the last year. When former Iraqi PM Nouri Al-Maliki cut the Kurdistan Region’s budget earlier in the year, the intention was to force the KRG to give up its ambitions to export crude. It is over eleven months later now, and the KRG has managed to weather the worst of the liquidity crisis and financial squeeze to reach what appears to be a definitive settlement on oil exports and budgetary matters with Baghdad.
Cutting the Kurdistan Region’s budget was Baghdad’s trump card and considered the “nuclear option.” Since then, however, Kurdistan’s grip over the local oil industry and oil exports has only grown stronger. Now, Kurdistan boasts oil exports of nearly 300,000 bpd, which promise to increase further in the coming year. When Baghdad cut the budget, there was little more the central government could do to force Erbil into an unfavorable deal on oil rights. Freezing the KRG’s budget was considered a red line. Baghdad crossed this line hoping to coerce Kurdistan into a settlement. Nearly a year on, however, it has become clear that Maliki’s strategy backfired and only emboldened the Kurdistan Region to become more self-reliant. Although many Kurds had been skeptical about the KRG’s approach, Baghdad’s efforts to deprive civil servants of their salaries and its lack of support in the war against ISIL caused the majority of Kurdish public opinion to shift in support of the KRG’s stance on budgetary issues and control over oil exports.
Baghdad’s threats of legal action did not make Kurdistan’s journey as an oil exporter easy. The sale of Kurdish oil on international markets became challenging as buyers shied away in the face of Baghdad’s promises of legal retaliation. One of the first tankers to export Kurdish oil, for example, was denied access to a Moroccan port and remained offshore for months. The United Kalavryta, another tanker carrying Kurdish crude oil, anchored off the US coast near Galveston, Texas for months awaiting a legal ruling by a US court that could stave off future legal actions from Baghdad.
Managing government finances became a challenge when the budget was cut, and– on top of that– the influx of refugees, fighting a war on ISIL, and sending troops to Syria to defend Kobane stretched the budget even further. Although the Kurdistan Region still lacks true economic independence, its ability to sell crude oil to international customers made the liquidity crisis resulting from Baghdad’s punitive budgetary measures less severe, despite the negative impact that low world oil prices have had on oil revenues. The KRG was able to pay the salaries of civil servants, although not on time. Public sector jobs dried up and many government-backed projects were put on hold. The KRG was eventually forced to consider borrowing $5 billion-$25 billion to fund infrastructure projects.
The tide turned, however, and the KRG began shipping more oil than ever before. Now, with a long-term oil export deal between the KRG and Baghdad in place, sales of crude to the Far East are accelerating, and the KRG is hoping to get a foothold in the US market. The level of growth that the Kurdistan Region enjoyed over the past decade may not return for some time, but the oil and gas sectors have remained largely unaffected. Over the past two years, some oil companies in Kurdistan were reluctant to invest in the development of their oilfields because there was little prospect of export as disputes with Baghdad rumbled on. The rate of oil exports through Turkey is now steadily increasing, though, and the KRG has made an initial payment of $75 million to fulfill its contractual obligations to companies in the oil and gas sector. International oil companies are now making new plans to develop their fields, and, according to the Ministry of Natural Resources, Kurdistan could be exporting 1 million bpd by early 2016.