Iraqi officials announced on November 25, 2019 that they reached an agreement “in principle” with the Kurdish semi-autonomous region of Iraq on an oil-sharing deal. According to the statement, the Kurds are to provide 250,000 barrels of oil per day (bl/d) to the central government in Baghdad starting in early 2020 in return for a bigger share of funds from the federal budget to pay salaries of Kurdish public sector workers. 

The deal gives hope for an improved relationship between the Kurdish Region of Iraq (KRI) and the central government, which has had its fair share of turmoil. Yet the current Iranian-American tensions affecting Iraq since the assassination of Iranian military commander Qassem Soleimani could complicate things. 

The oil agreement was in the works for months, promising to serve as a basis for a larger agreement to address enduring problems between Erbil (capital city of the Kurdistan Region) and Baghdad.

Reportedly, the oil agreement was in the works for months, promising to serve as a basis for a larger agreement to address enduring problems between Erbil (capital city of the Kurdistan Region) and Baghdad such as oil revenue sharing, military cooperation, and territorial disagreements. 

This is a positive turn from the peril of conflict between the KRI and the central government over the Kurds’ decision to independently sell its oil. Both the central government and KRI heavily depend on oil export revenues. Sitting on top of roughly a third of Iraq’s total oil reserves, the Kurdish region exports between 400,000 and 580,000 bl/d and runs Iraq’s only northern pipeline. Oil exports from Kurdistan are important to both the regional and federal economies. 

Kurdish authorities and the federal government have been at loggerheads for more than a decade over oil and revenue sharing from oil fields located in northern Iraqi Kurdish region. The Kurdish regional government made production sharing contracts with more than 20 international energy companies. Claiming that KRI government has no constitutional authority to sign any oil contracts without getting an approval from the central government, Baghdad insisted that all oil exports must go through the Iraqi oil marketing company. 

To make matters worse, the Kurdish region held a referendum to gain independence from Iraq in September 2017 to the objection of the federal government.

To make matters worse, the Kurdish region held a referendum to gain independence from Iraq in September 2017 to the objection of the federal government. The backlash against the referendum, which almost led to a full-blown civil conflict, nearly ended the autonomy of the region after the central government launched a military offensive and seized a portion of the Kurdish territory and oil fields near hydrocarbon-rich Kirkuk. 

A subsequent drop in half of Kurdistan’s oil production, including in Kirkuk, nearly paralyzed the economy of KRI and left its public sector salaries unpaid for years. Because government jobs constitute nearly half of all jobs in Kurdistan, the blow to the region’s economy was significant. Halting of oil sales from Kurdistan also hurt the rest of the Iraqi economy, which is heavily dependent on oil income.

The brink of civil war and economic downturn forced KRI to mend its relations with the federal government in 2018. Oil exports from Kirkuk resumed that year as relations improved shortly after Adil Abdul-Mahdi was sworn in as prime minister. For the first time, the 2019 federal budget allocated money to Kurdistan to pay its civil servants without demanding a transfer of oil. 

Considered an ally of the Kurds, Abdu-Mahdi’s recent resignation following the outbreak of protests since October 2019 has caused alarm in KRI over the future of the oil-sharing law. Abdul-Mahdi currently holds a caretaker role until the Iraqi parliament approves a new prime minister. 

A new KRI government under Masrour Barzani, who became regional prime minister in July 2019, made it a priority to further improve relations with Baghdad.

A new KRI government under Masrour Barzani, who became regional prime minister in July 2019, made it a priority to further improve relations with Baghdad. While Barzani’s father led the bid to gain independence in 2017, his son Masrour made it clear that Kurdistan’s wishes of self-rule needed to be shelved for now. At this juncture, defeating the Islamic State (ISIS) and establishing a joint security system with Baghdad appear to be more important to Barzani. 

The protests that broke out across Iraq against poor governance, corruption, and the lack of basic services since October 2019 have so far spared Kurdistan. But the region has had its own demonstrations against corruption and political dysfunction in the past. 

After years of leading Kurdish politics, the Barzanis have been accused of corruption by the Kurdish electorate as international investigations of an alleged bribery scheme involved a Barzani family member. Such allegations were particularly notable when Kurdish civil servants were not paid after Baghdad stopped allocating money from the federal budget following the failed independence referendum. 

Therefore, it has been important for Masrour Barzani’s government to strengthen relations with the central government, restore the annual federal budget allocations for the region, and win back the trust of the Kurdish voters. 

However, Iraqi Kurds are increasingly upset with shrinking economic opportunities as the region’s oil sector has become more profitable to foreign stakeholders and international oil majors than to KRI. The standoff between Erbil and Baghdad over oil transfers from Kirkuk and budgetary allocations to KRI has hurt the people in this semi-autonomous region and worsened the corruption in the oil sector due to unreported revenues that were pocketed by a handful of executives and energy companies. 

Some of the key challenges to Barzani’s government will be making the oil sector transparent and improving the management of oil revenues.

Some of the key challenges to Barzani’s government will be making the oil sector transparent and improving the management of oil revenues against the wishes of the entrenched special interest groups that prefer the status quo. Economic diversification is another big hurdle for the new government. 

Adding to this, the recent assassination of the Iranian military commander Qassem Soleimani by the U.S. and subsequent escalation of U.S-Iranian tensions, Kurdish leadership is concerned about destabilization of Iraq and KRI just as their political relations began improving. 

Breaking with the Iraqi parliament’s majority Shiite decision to expel the U.S.-led Global Coalition forces from Iraq on January 5, 2020, almost all Kurdish and Sunni members of parliament did not attend the session in implicit support of keeping the Coalition troops in the country. The Iraqi Kurds fear losing the protection of foreign forces and being further exposed to Islamist extremists’ threats. At the same time, they do not want Iraq to become a battleground between foreign powers. 

Under pressure from the U.S. and Iran to pick sides, Kurdistan has so far chosen to remain neutral. Depending on how far the animosity between Washington and Tehran goes and the extent to which these adversaries use Iraq to conduct their proxy conflict —  and whether ISIS will regroup in Iraq to pose a real threat again — KRI’s eventual choice of an ally will define the course of its future relations with the Iraqi central government.