BAGHDAD--The Iraqi government agreed Tuesday to an oil export
deal with the northern region of Kurdistan, signaling an end to a
yearslong political impasse that has nearly bankrupted both
governments and hobbled efforts to fight the Islamic State
insurgency.
The broad deal would allow Baghdad and Erbil, the capital of the
Kurdish Regional Government or KRG, to mend broken relations that
have put the defense of the country against Islamic State on shaky
ground. The accord is also likely to further muffle voices in Iraqi
Kurdistan that only six months ago had called for a referendum on
the region's independence from Baghdad.
"This agreement represents a victory for all Iraqis," said
Masoud Haidar, a Kurdish member of the parliament in Baghdad.
"There are no losers in this agreement. All are winners."
Obama administration officials hailed the oil agreement Tuesday
as a crucial advance in Baghdad's efforts to improve relations with
Iraq's Kurdish minority.
U.S. officials have pressed Iraqi Prime Minister Haider
al-Abadi, a Shiite politician who took office in September, to
build bridges to his country's Kurdish and Sunni population and
buttress the war against Islamic State militants. The Kurdish
security forces, the Peshmerga, are close ally of the Pentagon in
the fight against Islamic State, which is also known as ISIS or
ISIL.
U.S. officials have also been working to ensure the KRG doesn't
move forward with its threats to hold a referendum on
independence.
"This resolution, in line with its constitution, allows all
Iraqis to benefit equitably from Iraq's hydrocarbon sector," said
Marie Harf, a State Department spokeswoman. "This agreement will
further strengthen both Iraq's federal government and the Kurdistan
Regional Government as they work together to defeat ISIL."
Under the new agreement, which comes into effect on Jan. 1,
Kurdistan will export 250,000 barrels of oil a day and the disputed
province of Kirkuk--now under Kurdish control--will export 300,000
barrels a day, said Abdel Qadr Mohammed, a Kurdish member of the
Iraqi parliament's finance committee, who participated in the
negotiations.
Those exports will flow through Iraq's national oil company, the
State Organization for Marketing of Oil, or SOMO, marking a win for
Iraq's central government, which has long sought to exercise more
control over Kurdish oil exports and revenue.
In return, Tuesday's compromise would see the KRG keep 17% of
Iraq's budget expenditure, nearly a year after Baghdad halted
payments to the region in retaliation for its moves to sell Kurdish
oil on the global market independently of Baghdad.
That percentage, based on estimates of Kurds" share of Iraq's
total population, reflects the fiscal arrangement laid out in the
2005 constitution. By hewing closely to those parameters,
established under U.S. occupation, the agreement showed that Iraq's
worst security crisis in recent memory has helped shift the country
toward a renewed unity.
"With the threat of ISIS bearing down on all of us, it was
necessary for both sides to come to an agreement in any way," said
Razaq al Haidari, a Shiite politician from the ruling State of Law
bloc.
Though the deal is largely about oil, observers agreed that
concern over the insurgency made it possible.
"This is an oil deal that is motivated by security conditions
and the need for some sort of political unity against ISIS," said
Ahmed Ali, a researcher for the Washington-based Institute for the
Study of War. "At the end of the day, the realization on both side
is that the ISIS threat is so great that a unified front is the
major recipe to defeating it."
The deal satisfies many of the Kurds" outstanding demands,
giving them profits from what they consider their own oil, a
greater say in how Iraq's oil industry is administered, and
additional funding and recognition for their semiautonomous defense
forces.
The settlement also marks Baghdad's most formal step toward
recognizing the disputed province of Kirkuk as a formal part of
Kurdistan since Kurdish forces effectively seized the area during
Islamic State's initial blitz in June. By positioning Kirkuk's oil
as a part of Tuesday's agreement, Baghdad tacitly forfeited its
control over Kirkuk's oil to Erbil.
In addition to Baghdad according a portion of Iraq's budget to
Kurdistan, the deal calls for the Iraqi defense ministry to give a
direct monthly payment to Kurdish fighters, known as the Peshmerga,
to train and arm them in their fight against Islamic State, said
Kawa Mahmoud Mawloud, a Kurdish member of the oil and gas committee
in parliament.
Before Tuesday's deal, the Kurdish fighters had been financed
and were mostly managed independently of Baghdad.
The deal isn't a wholesale solution to Iraq's fractured national
polity. Governance in Baghdad has long been paralyzed by divisions
among Sunni Arabs, Shiite Arabs, Kurds and a many smaller religious
and ethnic groups. But the agreement demonstrates the unifying
potential of Mr. Abadi. With support from Washington, he assumed
the premiership in September followed the eight-year rule of Nouri
al-Maliki, whose leadership was marked by sectarian and ethnic
discord, corruption and worsening security.
Tuesday's deal had seemed almost impossible until last
month.
The long-simmering dispute came to a head early this year after
Baghdad cut off budget payments to the KRG, which began exporting
large volumes of oil for the first time via a pipeline to
Turkey.
Efforts by U.S. diplomats to broker a compromise fell apart amid
mutual distrust, with both sides unable to agree on who should
control the oil's marketing and revenue.
Kurdistan-focused oil stocks have languished this year as the
political tensions with Baghdad left the KRG struggling to meet its
payment obligations and the Islamic insurgency buffeting the
country threatened operational security.
Oil markets saw the first glimmer of a deal three weeks ago,
when Mr. Abadi and Kurdish delegates--supported by American and
regional diplomats--agreed to an interim deal that saw Baghdad pay
$500 million to the Kurds in exchange for 150,000 barrels a day of
oil.
The good-faith payments opened a floodgate of concessions, said
Mr. Haidari, the Shiite lawmaker. Kurds dropped their demands for
huge payments from Baghdad, while Baghdad stopped its requests to
micromanage Kurdish contracts with foreign oil firms, he said.
Shares in Kurdish-focused exploration and production companies
such as Genel Energy PLC and Gulf Keystone Petroleum Ltd. surged
Tuesday on news of the deal and after the KRG made initial payments
to some companies for oil exports.
Though good news for Iraqi unity, the deal is likely to add to
the downward tailspin in the oil market, with the additional
barrels from Kirkuk set to augment the already ample supply on the
market.
Oil prices have tanked since June amid sluggish demand growth
and a boom in oil production in North America, but major oil
producers in the Organization of the Petroleum Exporting Countries
have shown little sign that they intend to pull back their own
output to support prices.
When OPEC met in Vienna last week the group decided to keep its
oil production unchanged, sparking a rout in the oil market. Iraq,
the group's second-largest producer after Saudi Arabia, imade it
clear it wouldn't consider reducing its oil output, which remains
below levels reached in the 1970s before Saddam Hussein came to
power.
Iraq's oil minister Adel Abdul-Mehdi told reporters in Vienna
last week that Iraq is targeting production of around 3.8 million
barrels a day next year, an increase of around 500,000 barrels a
day compared with its production in October, according to the
International Energy Agency. Oil exports from the Turkish port of
Ceyhan via Iraqi Kurdistan have already reached over 350,000
barrels a day, according to Genel Energy, but the deal with Baghdad
should boost that figure by 200,000 barrels a day come January.
Jay Solomon contributed to this article.
Write to Matt Bradley at matt.bradley@wsj.com
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