Making Oil the Foundations of a Political Settlement in Kirkuk

When Iraqi federal forces rolled into Kirkuk and surrounding territory last week, regaining control of the territory in a relatively bloodless operation, it marked another chapter in the city’s contested history. Kurds have for decades claimed the territory as an indisputable part of Kurdistan, bestowing on the city an almost sacred symbolism before gaining full control of it in the summer of 2014, after Iraqi army forces withdrew in the face of ISIS’s offensive in western Iraq. But the Haider al-Abadi government never gave up its own sovereign claim, and like successive central governments before it, dismissed Kurdish assertions. Emotions in Baghdad have run particularly high since the Kurd’s held a controversial independence referendum on September 25 against the federal government’s wishes, and Kirkuk quickly became a focal point for anger and indignation in the Iraqi capital. Seizing an opportunity presented by intra-Kurdish political wrangling, Iraqi prime minister Abadi ordered his troops in.

Absent some imaginative thinking about how to jointly administer the territory, the latest crisis is unlikely to be the last, primarily because the dispute is more than just an emotional or nationalistic attachment to land. Underlying the rival claims to control between Baghdad and the Kurdistan Regional Government (KRG) in Erbil—and between the main Kurdish parties themselves—is a desire to exploit the massive oil resources that lie beneath its surface. The KRG knows that its dreams of independence rest on the fiscal reality of securing revenue from production in the Kirkuk area; without it, Erbil does not have the money to run a government independently. For Baghdad, the 300 thousand barrels per day (mb/d) plus of oil output is an important fillip for its own budget, and while Abadi has repeatedly offered Erbil a revenue-sharing deal, he has insisted on controlling its sales, thereby giving the federal government important fiscal leverage over the KRG.

This zero-sum logic explains why various initiatives over the last five decades to resolve the Kirkuk question have failed. Governments in Iraq have refused to hand over control of the territory and its resources to the Kurds as part of any deal, and the Kurdish leaders have rejected any pact that does not recognize their territorial claim. Meanwhile, each side has sought to enhance its control over the territory when it enjoyed relative strength over the other and has refused any accommodation when it has been the weaker party.

The current crisis will result in similarly destructive dynamics if an alternative approach is not adopted. Central to any workable initiative will be transforming the area’s oil resources from a driver for conflict into an enabler for a wider negotiated political settlement between the federal and regional governments.

This in turn will require a durable revenue-sharing mechanism that serves the interests of Baghdad and Erbil; acts as a confidence-building measure; and, provides the foundations for building broader governance and administrative structures.

Several elements would be required for a successful initiative:

1. The first step would be an immediate agreement between the federal and regional governments to establish special status for Kirkuk province’s oil and gas resources. Baghdad and Erbil would designate the acreage of the Kirkuk field, its satellites, and Bai Hassan as a “neutral zone” within which the two sides would jointly manage the assets without prejudicing any eventual legal decision on the long-term status of the disputed territory.
2. The federal and regional governments would then each select one or a group of international oil companies to form a consortium to develop and maximize the output of the oil and gas acreage, in cooperation with local state and private-sector firms. Both the federal Ministry of Oil and the regional Ministry of Natural Resources have already independently reached preliminary agreements with foreign companies to develop this acreage, and these deals could provide the cornerstone for a new joint-development organization.
3. Sales of crude oil produced could be managed by an international third-party company, overseen by a committee that includes representatives of the federal and regional governments, with equal executive representation and voting rights. One option would be also to include a representative from each of Turkey, Russia, and the United States.
4. Revenue from these crude exports would be shared 50:50, with the proceeds deposited into a special account held in the United States, similar to the Development Fund for Iraq account that was established in New York in 2003. Erbil would be guaranteed direct access to its 50 percent of receipts.
5. Crude flows would initially go through the current KRG pipeline to Turkey, although the Iraq-Turkey Pipeline could also be used later as and when it is rehabilitated. In both cases, metering would be established at the Iraqi-Turkish border.
6. A joint Iraqi Security Forces (ISF)-Peshmerga-international force would be established to provide security for the pipelines and the producing assets.

An initiative of this type would offer a number of potential advantages:

• It would alter the dynamics and narrative over Kirkuk, with an emphasis on cooperation.
• It delays the need for any immediate resolution of the territorial dispute over the status of Kirkuk, providing time for a workable mechanism to be put in place.
• It would establish the precedent of joint crude marketing and transparent revenue sharing.
• It could be a first step to broader dialogue over joint revenue and governance structures between Baghdad and Erbil.

Similar oil-export and revenue-sharing initiatives have been tried between Baghdad and Erbil before, only to fail. However, the current circumstances may offer the most propitious opportunity for a long-term deal over Kirkuk (and, arguably, over wider KRG-Baghdad relations) since 2003:

• The KRG’s determined push for independence, and its fundamental assumptions about the feasibility of secession, have been dealt a major blow by the domestic, regional, and international reactions to the September 25 referendum. For the first time since 2003, Kurdish leaders—including hardline secessionists in the ruling Kurdish Democratic Party—are being forced to consider alternative lasting political arrangements with Baghdad that do not inevitably lead to independence.
• The extension of federal-government control over the oil fields of Kirkuk and Bai Hassan has robbed the KRG of control over the source of almost 55 percent of its oil-export revenue. This comes at a time when the KRG is already facing a crippling fiscal crisis and has built up sizeable short-term debts to foreign creditors.
• The federal government, led by Abadi, has achieved its immediate goal of regaining control over territory it lost to the KRG after June 2014, and it has repeatedly expressed its willingness to reach a political settlement with the KRG that preserves Iraq’s territorial integrity.
• The generally peaceful withdrawal of Kurdish forces from Kirkuk suggests that there is scope for political deals between Baghdad and at least some Kurdish groups.
• Baghdad appears reluctant to take measures that will further antagonize Erbil or the international community, and since the September 25 plebiscite, Abadi has suggested his willingness to consider a revenue-sharing deal on Kirkuk as part of an eventual settlement.

An initiative of this type need not be introduced in isolation of other efforts to promote dialogue and an eventual deal on long-term governance between Baghdad and Erbil. Indeed, agreeing on the basis for a new political compact in Iraq that satisfies the basic demands of the country’s main factions remains fundamental to long-term stability. Past experience has shown that, unless both sides agree that they want to coexist rather than part ways, no initiative, no matter how mutually beneficial, stands any hope of moving forward.

Moreover, external mediation—led by the United States—will be critical to any hopes of success, as Iraqi leaders have proven incapable of (and often unwilling to) reach a lasting accord on their own. Nevertheless, a new arrangement over Kirkuk that offered benefits to both sides and takes the issue off the table early on might help to bring the two sides together and nudge them on the road to the type of all-encompassing compact that they need if the cycle of violence is to be broken.

Raad Alkadiri is a senior associate with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

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