Discrepancies Over Budget Proposal Highlight Oil Smuggling Issues in Iraq
The ongoing tensions between Baghdad and Erbil surrounding the new budget law proposal have reignited discussions concerning oil smuggling from the Kurdistan region of Iraq. Today, parliamentary criticism has intensified regarding the continued illicit oil trade from the region, which stands in stark contrast to the lack of revenue remittances to Baghdad. This situation has notable implications for Iraq’s international standing.
Bassem Al-Gharibawi, a member of the Oil, Gas and Natural Resources Parliamentary Committee, remarked that the government has dispatched a new amendment to the prior law concerning the costs associated with oil extraction and transportation in the Kurdistan region. The amendment proposes that all oil revenues be registered with the Iraqi state, enabling the government to take over subsequently and ensure the allocation of necessary dues.
He emphasized that the Kurdistan region has not adhered to prior agreements, resulting in accrued debts. Al-Gharibawi further indicated that the oil contracts negotiated by the region are ambiguous, raising concerns regarding the profitability of oil companies operating there and the returns generated from established facilities.
Additionally, he mentioned that there are ambiguities surrounding the contract durations, which have not been adequately defined. This lack of clarity, coupled with the role of consulting firms in delineating contract terms, has led to governance issues. Al-Gharibawi asserted that the region’s oil should be managed by the national oil company, SOMO, to prevent illegal smuggling and exploitation.
Moreover, he acknowledged the presence of specific political and international pressures, particularly from American interests, where U.S. companies engaged with the region are eager to recover their dues, despite Iraq having previously secured a legal victory against these firms. Furthermore, Iraq is owed sums by Turkey due to contractual violations linked to oil transactions.
Al-Gharibawi contended that the region appears to be leveraging the budget and oil smuggling to repay its debts to these companies. He reiterated the need for compliance with legal and constitutional standards regarding the budget law, ensuring transparency in the management of national resources and safeguarding the rights of all parties involved.
In related developments, Adnan Al-Jabri, another member of the Oil and Gas Committee, affirmed that the ongoing oil smuggling operations from the Kurdistan region adversely affect Iraq’s international reputation. He stated that the Ministry of Oil identified smuggling activities amounting to 220,000 barrels per day, representing a significant threat to the national economy, and clarified that these operations are fully documented.
According to Al-Jabri, the illegal movement of approximately 200,000 barrels daily undermines Iraq’s credibility on the global stage and erodes confidence in its oil infrastructure. He called for stringent measures to curb this malpractice, emphasizing the importance of protecting the rights of the Iraqi people regarding their national wealth.
Official reports indicate that smuggling activities are substantial, with oil being sold at prices less than half of their global market value and in volumes exceeding 350,000 barrels daily, none of which contribute to the Iraqi treasury.
In a separate statement, MP Abdul Hadi Al-Saadawi criticized the proposed production cost of $16 per barrel for the region’s oil as unrealistic, particularly when contrasted with the $6 per barrel cost associated with central and southern provinces. He suggested that the government’s amendment regarding extraction costs requires reassessment by technical committees within the Ministry of Oil.
Al-Saadawi cautioned that the proposal might face resistance from council members due to its stark deviation from extraction costs in other regions. He also noted that the contracts the Kurdistan region has entered into are fundamentally different from licensing agreements in the central and southern Iraq oil sectors, which could lead to significant losses for the Iraqi oil sector. Therefore, he advocated for a thorough review of these contracts by the Federal Ministry of Oil.
The friction between Baghdad and Erbil intensified with a newly submitted proposal that diverged from the prior agreement verified by the Parliamentary Finance Committee. Notably, Article 12 addressing the resumption of oil exports from the Kurdistan region has been a point of contention.
Bishua Hawrami, spokesperson for the Kurdistan Regional Government, asserted that the recent amendments to the budget proposal were enacted without consultation with the regional government. He expressed complete disapproval of these changes and urged for the draft law to be presented and approved by the Federal Council of Ministers.
In response, the spokesperson for the federal government, Al-Awadi, refuted Hawrami’s claims about impediments to amending export procedures in the budget law. He called upon the Kurdistan Regional Government to comply with the provisions of the federal budget law, including the remittance of financial revenues—both oil and non-oil—to the federal government, as mandated by law and the Federal Court’s decision.
The interplay between the federal government and the Kurdistan region regarding oil revenues remains one of the most intricate challenges, characterized by intertwining legal and political factors. As the government and parliament strive for resolutions through legal reforms and oversight, the region’s adherence to regulations is crucial for securing workforce rights and promoting stability in their relationship.
Recent tensions have been further exacerbated by a “war of data” between the Kurdistan region and the Federal Ministry of Finance over salary disputes, particularly regarding the delayed disbursement of December 2024 salaries to regional employees. The Federal Ministry of Finance asserts that full payments were sent to the Kurdistan region, while the Kurdistan government contends that the funds received fell short by approximately 800 billion dinars, hindering salary distribution.
On January 15, the United States urged the Iraqi parliament to expedite the passage of the federal budget. Matt Miller, a spokesperson for the U.S. State Department, noted that efforts have been made to facilitate a sustainable budget agreement that allows for efficient oil production in the Kurdistan region. He has emphasized the necessity of adopting the budget amendment swiftly.
The Kurdistan region had previously been exporting around 450,000 barrels of oil daily through the Turkish port of Jihan, albeit without federal government consent. However, exports were halted in March 2023 following an international arbitration ruling that mandated that regional oil exports could only proceed through the Federal Government Oil Company, SOMO.
According to estimates from September 2024, the suspension of the region’s oil exports has resulted in losses approximating $20 billion, as reported by the Oil Industry Association in the Kurdistan region.
In late 2019, a prior agreement between the federal government—led by former Prime Minister Adel Abdul-Mahdi—and the Kurdistan Regional Government stipulated that the region would deliver 250,000 barrels of oil per day to SOMO in exchange for receiving a 12 percent allocation of the federal budget. However, by April 2020, Baghdad reduced the region’s share, including state employee salaries, due to non-compliance with the agreement.
In July 2021, Ali Nizar, deputy director of SOMO, indicated that the Kurdistan region’s failure to adhere to the OPEC Plus agreement contributed to financial obligations accruing to Iraq. Parliament had previously allowed non-compliance from the region, resulting in a requirement to cut production quotas by 6 million barrels per month due to its noncompliance.
It is important to note that Iraq is obligated under the OPEC Plus agreement, established in May 2020, to implement production reductions, which initially mandated a cut of 9.7 million barrels per day across the 13 member countries, later decreasing to 5.8 million barrels per day by July 2021.