Baghdad’s control over Kurdistan region’s oil sector bolstered by new Iraqi budget law

The semiautonomous Kurdistan region in Iraq is facing further constraints on its oil sector as a result of the passage of the federal budget. The budget, passed on 12 June, calls for $152 billion in spending and requires Kurdistan to hand over 400,000 b/d of its crude production to federal oil marketer SOMO in order to receive its agreed 12.6% of federal funding. However, Kurdistan currently has no way of pumping anywhere close to 400,000 b/d due to the closure of its only pipeline outlet to the Turkish port of Ceyhan over a political and financial dispute between Baghdad and Ankara. This has resulted in a drastic reduction in Kurdish production, causing a loss of revenue and a growing deficit for the Kurdistan Regional Government. The prolonged standoff also imperils oil and gas investment in the region.

Furthermore, conditioning Kurdistan’s share of the budget on supplying SOMO with 400,000 b/d of crude makes the region vulnerable to disruptions and attacks on its oil and gas operations. In addition, future OPEC cuts could make it difficult for Kurdistan to meet its production target. If there are further cuts by OPEC and Kurdistan fails to meet the 400,000 b/d target, it could face trouble receiving its budget. Efforts to draft a comprehensive oil and gas law for Kurdistan’s crude sales have also been stalled, weakening the region’s position and putting its financing in the hands of SOMO.

The passage of the federal budget also includes a clause allowing Baghdad to intervene in intra-Kurdish disputes over funding allocations. This has raised concerns that Baghdad could make further budget cuts to the Kurdistan region in the future. Since 2014, Baghdad has regularly cut budget allocations to the KRG to pressure the region over its independent oil exports. The budget’s passage has been criticized by Kurdish officials for its potential to give Baghdad more control over the region’s oil exports and budget, which could complicate plans to revive shuttered crude production. There are also worries that the budget will impact the KRG’s ability to make financial decisions and allocate funding to different provinces within Kurdistan.

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