Turkish Foreign Minister Hakan Fidan visited Baghdad and Erbil August 22-24, holding discussions with Iraqi and Kurdish officials centered on key issues such as the resumption of oil exports from Iraq’s Kurdistan region through Turkey and a related arbitration dispute, the Kurdistan Workers’ Party, or PKK, and the ongoing water dispute between Ankara and Baghdad. To address these long-standing issues effectively, the involvement of the Kurdistan Regional Government is indispensable. As a key stakeholder, the KRG can play a positive role in the management and resolution of these matters.

A Critical Oil Dispute

Both Iraq and Turkey share significant economic interests. Iraq’s abundant hydrocarbon resources have significant strategic importance for Turkey because of their close geographical proximity. Nonetheless, the absence in Iraq of a clear and comprehensive national legal framework regarding its hydrocarbon resources has severely restricted Ankara’s capacity to harness the potential of oil production in Iraq to fulfill its increasing electricity demands and stimulate its economy. The enactment of such legislation in Iraq would delineate the powers of federal and regional governments, providing a more secure environment for both Turkish and foreign oil companies to invest in Iraq and the Kurdistan region. Recognizing the relative stability of Iraq’s Kurdistan region, Ankara invested in its hydrocarbon resources, including by signing a 50-year energy agreement with the KRG in 2012, providing political support to Erbil, encouraging Turkish and foreign companies to invest in the region, and facilitating the exportation of Kurdish oil to international markets through Turkey.

While Ankara did benefit from energy cooperation with Erbil, it simultaneously put in jeopardy its relations with Baghdad and attracted international scrutiny for its role in facilitating the exportation and sale of oil from the nonstate Kurdish north. There has been controversy in the past over whether Erbil and Ankara’s actions violated the Iraqi Constitution, with both the KRG and Turkey using the ambiguity in the Iraqi Constitution to justify their energy trade.

In February 2022, however, the Iraqi Supreme Court declared the KRG’s 2007 oil and gas law unconstitutional. And, in March 2023, Iraq won an arbitration case filed against Turkey at the International Chamber of Commerce’s Court of Arbitration over oil exports from the Kurdistan region. Turkey was ordered to pay Iraq around $1.5 billion for limited aspects of breach of contract from 2014-18, and Iraq is seeking further compensation in a similar case covering 2018-22.

Consequently, on March 23, Ankara ceased oil shipments from the Kurdistan region, a move with significant financial and political consequences for Erbil. Since then, Ankara and Baghdad have held 19 meetings to establish a mechanism for resuming oil exports. Turkey has staked out an aggressive opening position, demanding the nullification of the $1.5 billion fine, the abandonment of the second leg of the case, an increase in transit fees, and Baghdad’s approval of the long-term energy agreement it signed with Erbil. Despite Ankara’s tough opening position, Baghdad has the leverage, with two legal opinions supporting its view.

The Turkish demands are nonstarters for Iraqi Prime Minister Mohammed al-Sudani. His authority and space for maneuver are constrained by the factions that helped put him in power. These factions generally oppose Turkish interests in Iraq.

Security Concerns

Beyond pressing Turkey’s position on the oil dispute, the primary goal of Fidan’s extensive outreach is likely to influence the Popular Mobilization Forces, an umbrella of militias that includes pro-Iranian forces, to cease its periodic collaboration with the PKK in Ninewa province. To do that, he met with officials in the Sudani government, with whom the PMF is generally aligned, and with PMF groups directly. Fidan reportedly pressed Iraq to designate the PKK a terrorist organization. It remains unclear how Baghdad responded. Making such a designation would be tough for the Sudani government, given the aggressive sovereignty-violating actions Turkey has regularly taken against the PKK in Iraq, poisoning public opinion and angering Iraqi lawmakers. Iran and its agents of influence in the country might also object to a measure that would undercut some PMF groups’ freedom to form the tactical alliances they choose. Iraq could possibly take such an action as part of a grand bargain with Turkey. Iraq has acquiesced to certain Turkish requests in the past, including improving security around the Makhmur refugee camp, which has provided shelter to Kurds from Turkey since the 1990s but which Ankara believes to be a recruitment hub for the PKK.

The KRG, pursuing its own interests, has increased security measures and formed a partnership with Turkey to combat the PKK. However, Turkish drone strikes deep inside the Kurdistan region have triggered tensions between Ankara and Baghdad, with Baghdad contending that they violate its sovereignty.

Fidan’s unorthodox meetings with leaders of the PMF, Iraqi political parties, and Islamist parties in the Kurdistan region, which wield influence in areas historically under Iran’s sway, suggest Turkey will pursue a more activist foreign policy under Fidan. He is leveraging connections made during his tenure as intelligence chief. The unusual outreach at the foreign minister level also reflects an approach similar to that of Iran in Iraq, encompassing both formal and informal interactions with the aim of bolstering Turkish influence.

Impact of the Oil Halt

While Iraq and Turkey may be able to manage the economic fallout from the halt in Kurdish oil exports, the brunt of the halt is being borne by the Kurdistan region, which relies on oil exports for 80% of its budget. Compounded by Iraqi federal officials’ refusal to allocate the KRG’s share of the federal budget, the region’s economic challenges may worsen, potentially leading to increased instability.

This situation has implications not only for Iraq and its neighbors but also the international community. Increased unemployment and economic woes could trigger another wave of Kurdish migration to Europe. On the other hand, as major oil producers Saudi Arabia and Russia recently extended voluntary oil production cuts, the resumption of Kurdish oil exports could reduce prices and help alleviate Europe’s energy crisis to some extent.

The Need for a Trilateral Agreement

A sustainable solution for the resumption of oil exports from Kurdish oil fields to the global market via Turkey must have buy in from Erbil, Baghdad, and Ankara. Kurdish officials have warned that unless the federal government honors its commitments detailed in the new budget law – paying the KRG its budget-specified allocation – they might opt for an unspecified alternative strategy to counter Baghdad.

The delivery of the Kurdish share of the budget by the federal government is contingent on the KRG supplying 400,000 barrels of oil per day to the federal government. Given the cessation of Kurdish oil exports due to the favorable arbitration ruling for Iraq against Turkey, fulfilling this requirement is currently impossible as oil operators in the Kurdistan region have significantly reduced oil production due to the lack of an export route. However, if Baghdad and Ankara agree to reopening the Kirkuk-Ceyhan pipeline, oil companies in the Kurdish region could increase production. This will enable Erbil to transfer 400,000 barrels of oil to Iraq’s national oil company.

The recent KRG delegation visit to Baghdad has produced a favorable short-term solution concerning the salaries of KRG employees. Baghdad has agreed to offer loans to Erbil for the next three months while actively working toward resolving the issue of Kurdish oil exports. This temporary relief reflects an acknowledgment of the current situation on the ground and the challenging conditions faced by the KRG. But, unless Baghdad engages in discussions with both Erbil and Ankara to find a lasting solution, any potential comprehensive deal is likely to collapse.

However, there are looming political hurdles that may impede efforts to reach a pragmatic solution. The current Iraqi Cabinet, which believes projecting a strong, nationalistic image will benefit it in the November provincial elections, is pursuing increased federal control over the Kurdistan region. This approach, although it might pay some electoral dividends, risks jeopardizing any agreement on oil exports and even destabilizing Iraq, which is already facing escalating tensions between Kurds and Arabs.

For Turkey, the Kurdish issue has become particularly sensitive, although the impact on Turkey’s relations with the KRG is not clear. Some key political parties are increasingly embracing anti-Kurdish narratives focused primarily on Kurds in Turkey. And the Turkish local elections scheduled for March 2024 are already shaping political calculations in Ankara.

Despite the hurdles, there are vital political, security, and economic interests at stake for all parties involved. Although the resumption of Kurdish oil exports hinges on achieving consensus between Baghdad and Ankara, a lasting solution can only be cemented through a mutually beneficial trilateral agreement that includes Erbil.