Interim agreement between Federal Government of Iraq and Kurdistan Regional Government on oil exports, yet major differences and legal proceedings persist

These are challenging times for Iraq. The Islamic State or ISIS controls thousands of square miles of territory and major Iraqi cities such as Mosul, Tikrit and Falluja. While leading the offensive against ISIS and enjoying the support of international allies, the Kurdistan Region of Iraq is seeking to secure contracts with international energy companies and export oil in order to boost its strained economy, a situation exacerbated by the cost of supporting refugees from the fighting in Syria and northern Iraq, as well as unpaid revenues owed by the Federal Government of Iraq (FGI).

In mid-November, the FGI and the Kurdistan Regional Government (KRG) announced a deal to ease tensions over Kurdish oil exports and payments from Baghdad. Under the deal, which lasts for one month only, the KRG is to provide the FGI with 150,000 barrels of oil per day in exchange for US$500 million in immediate cash payments. This was paid in two instalments last week. The 150,000 barrels of oil per day represents about half of the KRG's export capacity, the remainder of which is still being shipped independently. The deal was reached after talks between Iraqi Oil Minister Adil Abdul Mahdi and Kurdish Prime Minister Nechirvan Barzani. At the Atlantic Council summit in Istanbul, the oil ministers of the KRG and FGI welcomed the deal as the first step in a broader effort to bridge differences over hydrocarbons. Notably, Oil Minister Abdul Mahdi appeared to acknowledge that federal legislation for petroleum might have to provide for a decentralised system, striking a tone very different from that of his predecessor.

Despite the November compromise, significant differences remain in relation to the sharing of oil revenues, the export of oil from the Kurdistan region and control of disputed territories including Kirkuk and the Kirkuk oil field. Much of the disagreement between the FGI and KRG stems from the lack of clarity in key provisions of the Iraqi constitution relating to the respective powers of the FGI and the KRG to legislate and contract for oil and gas operations in the Kurdistan Region. This has enabled the FGI and the KRG to adopt significantly different positions on the interpretation of the constitution. It has also led indirectly to inter-state arbitration proceedings between Iraq and Turkey regarding the export of oil through the Kirkuk-Ceyhan pipeline, as well as proceedings before the Texas courts involving a US$100 million cargo of oil on board the tanker United Kalavryta. These proceedings remain ongoing, with the most recent round of pleadings in the Texas case filed by FGI and KRG on 13 and 21 November, respectively.

Given the threat to Iraq posed by ISIS, both the FGI and the KRG have been under pressure to resolve their differences. Yet these differences are manifestations of a much broader issue between the KRG and FGI, that of Kurdistan's push for greater autonomy, and potentially independence, from Iraq. In such circumstances, legal proceedings which are nominally about crude oil in a tanker or in a pipeline take on a larger significance, symptoms of issues which have the capacity to fundamentally affect the future of the Iraqi state. In a recent Herbert Smith Freehills webinar, a panel of our expert speakers considered these issues and the implications of the on-going instability in Iraq on international energy contracts. You may download and play the webinar by following this link. The topics discussed include:

• hydrocarbon legislation in Iraq, including the positions of KRG and the FGI in relation to power to legislate and contract for petroleum operations and export;
• the implications of the ICC arbitration initiated by the FGI against Turkey under an Inter-Governmental Agreement;
• the legal proceedings launched by the FGI against the KRG and third party purchasers of oil exported by the KRG;
• the impact on international energy contracts of a potential declaration of independence by the Kurdistan Region of Iraq; and
• the implications of export of oil from Iraq by ISIS.

For further information, please contact Matthew Weiniger QC, Partner, Caroline Kehoe, Partner, Dominic Roughton, Partner, Christopher Thomson, Senior Associate, Harry Ormsby, Associate, or your usual Herbert Smith Freehills contact.