The Iraq-Turkey Pipeline Dispute: Opportunity in an Arbitration

Fatigue and frustration aside, U.S. focus and engagement in Iraq remains critical to the national- and energy-security interests of the United States and its allies. Iraq has increased its oil production by more than half since 2012, and is set to be the world’s third-largest oil producer by 2030. Its proven natural gas reserves are enough to meet, for example, Germany’s present demand for 40 years.

Extracting and exporting those resources with the help of U.S. energy companies would produce wins on several fronts: reducing Europe’s and other markets’ energy dependence on Russia, further consolidating America’s energy security, and generating jobs and revenue for the United States. For Iraq, the cost-effective and environmentally responsible extraction of its natural resources would help secure the stability essential for that country’s future prosperity.

None of these gains are achievable, though, without consistent and direct U.S. support of Iraq’s state institutions and the country’s energy development, and without shepherding normalized relations between the capital in Baghdad and the semi-autonomous Kurdistan Regional Government (KRG) in Erbil. A dispute in arbitration at the International Chamber of Commerce’s International Court of Arbitration (ICA) in Paris affords an exceptional opportunity for the United States to play an affirmative and decisive role in Iraq and, by extension, support U.S. allies in the region and in Europe.

The Dispute

The arbitration case, now in its fifth year, concerns the Iraq-Turkey Pipeline (ITP), also known as the Kirkuk-Ceyhan Pipeline. It is Iraq’s largest crude oil pipeline, allowing the country to export oil over 600 miles from two major oil fields near Kirkuk to the Mediterranean port of Ceyhan in southern Turkey. The pipeline is owned jointly by the two countries and governed by a 1973 agreement.

The current row goes back to the spring of 2014, after Iraq’s Kurdish peshmerga forces had successfully driven back the fighters of the self-styled Islamic State, or ISIS, who had overrun much of northern Iraq the previous year. The peshmerga victory allowed the KRG to consolidate control over the plentiful oilfields surrounding Kirkuk, territory that has long been in dispute between the KRG and the central Iraqi government in Baghdad. The two governments also have long fought a political war over oil exports and revenues from northern Iraq, the primary victim being the languishing U.S.-brokered draft oil-and-gas law of 2007.

Bolstered by new export production from the Tawke and Taq Taq fields in 2014, KRG commenced with its pipeline transit absent permission or instruction from Baghdad. (The Iraqi army and state-backed irregulars retook Kirkuk in October 2017 in response to Iraqi Kurdistan’s independence referendum, thereby denying Erbil oil fields that had accounted for as much as 40 percent of KRGs pre-referendum exports.)

The KRG sold its first ITP-supplied oil to Turkish state oil firm BOTAS in May 2014, which then loaded it on a tanker bound for Israel. Baghdad immediately responded by filing a request for arbitration at the ICA against the Turkish government and BOTAS. Baghdad claimed that Ankara broke the terms of the 1973 agreement by allegedly taking, storing, and loading oil from Iraqi territory without the Iraqi government’s consent.  Final hearings are set for this September, followed by a ruling within 90 days afterwards, per ICA procedure.

Arguments and Implications

While the ICA case is between Iraq and Turkey, the outcome will determine the breadth of Baghdad’s authority over oil and gas on KRG territory and whether the Kurdish region can continue to independently sell the oil produced in its territory. As of late 2018, the KRG reported exports of 400,000 barrels per day, with an increased capacity up to 1 million barrels. With additional infrastructure improvements, outflows could rise to 1.5 million.

Baghdad wants control of that revenue and that the proceeds be distributed based on an agreement with Erbil that has eluded the two governments since the toppling of Saddam Hussein in 2003. Baghdad fears that a ruling in Turkey’s favor could give the KRG the kind of energy autonomy that would lead to outright political independence too.

The applicability of the 1973 agreement rests in arbiters’ interpretations of the Iraqi constitution; namely, whether under the Iraqi constitution the KRG was a legitimately representative Iraqi entity that could legally enter into a contract with Turkey. Approved in a nationwide referendum in 2005 and entering into force in 2006, the constitution’s treatment of natural resources is open to interpretation. For example, while Article 112 empowers the federal government to manage the country’s oil and gas, the strategic policies necessary to develop these resources are to be formulated jointly with regional governments. The same article explicitly addresses oil and gas “extracted from present fields,” of which there were none producing in the KRG when the constitution came into force in 2006.

The implications of the arbiters’ final ruling are far-reaching, affecting energy markets near and far. A fifth (est. 200 billion barrels) of Iraq’s oil production occurs in northern Iraq, which includes both areas of the KRG and disputed areas such as Kirkuk. Iraqi Kurdistan’s natural gas reserves are abundant – its Khor Mor and Chemchemal fields alone hold an estimated 75 trillion cubic feet.

No matter the ICA’s ruling, the result likely would lead to extensive appeals and counterclaims, leaving a mutually unsatisfactory status quo. Furthermore, parties to the 1973 agreement chose French law to govern, which could make the decision subject to a review in a French court that could find the panel’s ruling non-binding for lack of jurisdiction.

Even if the ruling is affirmed, its enforcement would likely be problematic. The New York Convention on Foreign Arbitral Awards contains a “public order” exception that permits the non-enforcement of a decision if it is determined by “the competent authority” to be “contrary to the public policy of that country” where enforcement is sought. Given the politicized character of the judiciaries and other state institutions in Turkey and Iraq, the loser’s resort to the convention’s Article V is a distinct possibility.

An extended vacuum would leave Iraq primed for renewed efforts by Russia to gain a strategic energy foothold in the KRG. This effort includes Rosneft’s contract to finance KRG oil pre-production to the tune of $2 billion in 2017, backed by an informal commitment from Moscow to back Iraqi Kurdistan independence. More recently, Russia has been courting Iran’s and Iraq’s oil ministries with discussions to finance a future pipeline through Syria and onward to European markets. Compounding this is the unrelenting Iranian influence in Iraqi state affairs that could leave the KRG increasingly held hostage by Tehran-aligned powerbrokers in Baghdad, in turn harming U.S. interests in regional energy and security affairs. This vacuum also would open the door wider for China’s growing role in the region.

An Opportunity at Hand

Clearly, a lasting resolution is highly unlikely if left solely to the experts on the ICA panel.

The U.S. should proactively mediate a solution as a first step towards the ultimate goal of a just, mutually acceptable, and functioning oil-and-gas law for all of Iraq. By advancing solutions for what is equally a legal and political issue, Washington stands to gain in the role of impartial friend to Erbil and Baghdad. As the presence of the Chinese, Russians, and Iranians demonstrates, Iraq’s bountiful gas and oil resources are poised for the long-term benefit of our adversaries. Politically, a committed U.S. role as an even-handed mediator between these capitals would help mitigate our competitors’ influence.

In practical terms, one sustainable way forward would be to deepen the interdependency of the KRG and federal governments in energy production. For example, incentives could be created for the KRG, which lacks refining capacity, to send crude to operations elsewhere in Iraq for domestic consumption and surplus export. Demonstrative signs of functioning interdependence between Erbil and Baghdad could encourage Western energy firms to return to fields that are in significant need of their engineering, managerial, and technological expertise. And given the domestic consequences of a potential war between the U.S. and Iran, the KRG and Iraqi governments may now be more willing than in the 2007 oil-and-gas law failure, to compromise for a U.S.-brokered (possibly with U.K.) path out of the dispute.

In the end, Iraq’s federal authorities and the KRG government are fundamentally bound to the Republic’s constitution — no more, no less. Acknowledging that state sovereignty isn’t negotiable, the Baghdad-take-all approach apparent in the 2007 draft law is justifiably recognized in Erbil as a legislative gutting of any real autonomy. Getting a new and equitable draft law hammered out for feasible ratification would require consistent heavy lifting by American and British diplomats working in concert. Yet the invariably laborious arm-twisting would be unequivocally worth an oil-and-gas law that works for all of Iraq – and for energy security far beyond.

IMAGE: A picture taken on October 17, 2017 shows the Bai Hassan oil field, west of the multi-ethnic northern Iraqi city of Kirkuk, after Iraqi forces took control of the two largest oil fields in the disputed northern province of Kirkuk. (Photo by AHMAD AL-RUBAYE/AFP/Getty Images)

 

About the Author(s)

Richard Kraemer

Co-Chairman of the US-Europe Alliance and Eurasia Program fellow at the Foreign Policy Research Institute. Follow him on Twitter (@RichardKraemer7)