As Turkey approaches pivotal elections, the International Chamber of Commerce’s Court of Arbitration in Paris has ruled against it in a long-running dispute with Iraq regarding crude oil exports from Iraq’s semiautonomous Kurdistan region. After losing the case, Turkey was ordered to pay Iraq around $1.5 billion for limited aspects of breach of contract from 2014-18.

The ruling, which was made public March 25, three days after Iraqi Prime Minister Mohammed al-Sudani visited Ankara, will likely lead to some shifting in the Ankara-Erbil-Baghdad relationship as the parties seek to turn the page on energy issues.

A Race for a Piece of the Oil Pie

With the Kurdistan Regional Government’s entrance into the oil industry in 2003, Turkish companies sought a share of the pie. In 2014, following the signing of an agreement between Turkey and the KRG, Kurdish oil started to be transported around the world through the Turkish port of Ceyhan. However, Iraq quickly filed a complaint in the Paris arbitration court, alleging that Turkey violated a 1973 pipeline transit agreement by facilitating oil exports from the Kurdistan region without its consent. A clause in the annex to the 1973 agreement stating that Turkey would only buy oil from Iraq’s state-owned oil marketer was a core component of Iraq’s arbitration case.

Turkish officials were worried that the case would result in severe penalties for Turkey. In the run-up to the court decision, some officials expressed concerns that a fine of up to $20 billion could be levied, given that the Iraqi government was reportedly seeking some $90 billion in damages. In addition to the economic and reputational costs, the case became a tool that was implicated in all aspects of Iraqi-Turkish relations, with Baghdad using it to pressure Ankara to end its special oil arrangement with the KRG. In the end, the much lower fine levied in March allowed Turkey to escape nearly unscathed.

Because the court also awarded Turkey nearly $600 million in counter claims, related to unpaid transportation fees and low pipeline capacity, Ankara is notionally on the hook to pay only about half of the roughly $1.5 billion fine, and one source suggested Baghdad’s judgment may be worth only a few hundred million dollars, given Turkey’s counter claims are much older and worth more, after a court-allowed interest rate surplus is calculated. And of the few hundred million Turkey will end up owing Iraq, it will be able to seek full compensation from the KRG because the 2013 oil agreement between the KRG and Turkey includes an indemnity clause. Although the Iraqi Ministry of Petroleum officially welcomed the decision, the consensus view is that Baghdad fell dramatically short with its legal case.

Following the ruling, Turkey stopped pumping crude oil through the Ceyhan pipeline from the Kurdish region as well as the rest of Iraq. The pipeline had been carrying around 400,000 barrels per day of KRG crude and 75,000 b/d of federal government crude. On April 4, Baghdad reached an initial agreement with Erbil that would allow for the resumption of northern oil exports, jointly exported by Iraq’s State Organization for Marketing of Oil and the KRG’s Ministry of Natural Resources, and Baghdad reportedly planned to send a letter asking Turkey to resume pipeline flows. However, the pipeline has yet to resume operations, and sources are in conflict regarding why – some say Turkey never received the request, and others suggest Ankara wants to negotiate on the payment and resolve a second arbitration case before restarting flows.

A Win for Sudani

During Sudani’s March 21 visit to Ankara, Turkey committed to increasing the amount of water released from dams on the Tigris River for one month, likely in an effort to ease tensions with Iraq and moderate its position in post-arbitration negotiations. Iraq and Turkey also discussed further cooperation on economic and security issues.

It is no coincidence that the arbitration ruling was announced immediately after Sudani’s trip to Turkey. Sudani has managed to successfully lower tensions surrounding the arbitration case with Turkey in a way his two predecessors could not. Former Prime Minister Adel Abdul Mahdi suggested freezing the case but was blocked by pro-Iranian groups, and Prime Minister Mustafa al-Kadhimi, who had close relations with Ankara, also failed to make any progress on the issue.

Although the arbitration decision did not satisfy some Iraqi groups, Iraq may be able to use it as leverage in its economic relations with Turkey. Iraq and Turkey’s bilateral trade volume exceeded $24 billion in 2022, and, if completed, the ambitious proposed “Dry Canal” corridor linking Iraq to Turkey could be an economic boon for both countries. Considering this economic potential, Sudani will likely continue prioritizing economic ties with Turkey.

Revisiting Ankara-Erbil Relations

The arbitration case is also part of Baghdad’s broader effort to weaken the KRG. The KRG’s independent oil sales, which spurred the federal government’s arbitration case, provided the Kurdistan region a great degree of economic independence. The court ruling makes oil trade with the KRG less legitimate in the eyes of the rest of the world and arguably poses challenges for companies that buy and produce Kurdish oil. If, as seems likely, the arbitration case contributes to undermining the legitimacy of Kurdish oil exports, it will be seen as of the same legal cloth as the unrelated February 15, 2022 Iraqi federal court decision that deemed a 2007 oil and gas law regulating the KRG’s oil industry unconstitutional and demanded that the regional government relinquish its crude oil supplies. Following the recent arbitration ruling, Erbil will likely struggle to sell its oil independently, stifling already faltering progress toward economic and political independence from Baghdad. However, because Ankara’s special relationship with Erbil allows Turkey to target Kurdistan Workers’ Party militants in northern Iraq, it does not want the KRG to be significantly weakened. Nevertheless, now that Turkey may find itself unable to import Kurdish oil without Baghdad’s approval, it may be forced to adopt a new policy toward the KRG.

Given the legal and political complexities related to the court’s decision, Baghdad is unlikely to see any compensation from Ankara in the near term, given Turkey’s immediate focus on its elections and its preference to wait for Erbil and Baghdad to settle their disputes. At the same time, however, Turkey would prefer not to cause further tensions with Baghdad by refusing to pay the award, and Turkish officials have expressed hope that the United States will step in to encourage reconciliation between the KRG and the federal government. With this in mind, efforts could be made to minimize the ruling’s impact on Kurdish oil exports as well as its wider geopolitical implications.