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Iraq's Supreme Court Rejects KRG Oil Autonomy

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Iraq's Supreme Court issued a landmark ruling on Tuesday stating that the Kurdistan Regional Government (KRG) has no legal right to manage the oil resources within the territory it administers.

The ruling obliges the KRG to hand over crude produced in northern Iraq's Kurdistan region to Baghdad and throws into doubt the legality of the contracts that it has signed with international oil companies (IOCs).

Baghdad has long disputed the KRG's constitutional right to export oil — as it has done since 2014 — and has claimed the contracts it signed with IOCs are invalid.

The largely autonomous Kurdish enclave produces around 400,000 barrels of oil per day, of which the vast majority is exported by pipeline via Turkey.

The collapse in oil prices in 2020 hit the beleaguered Kurdish oil sector hard. The Supreme Court ruling has now darkened the outlook and is likely to intensify the region's difficulties in attracting foreign investment.

Top foreign producers in Iraqi Kurdistan include Norway's DNO, London-listed firms Genel Energy and Gulf Keystone, Sharjah-based Dana Gas, Abu Dhabi's Taqa and Russia's state-controlled Gazprom Neft.

Unconstitutional

According to a 15-page court document published by the oil ministry and dated Feb. 15, Iraq's highest court ruled that the KRG's oil and gas law was unconstitutional and should be annulled.

The law was passed in 2007 and gave the KRG's Ministry of Natural Resources full authority over development of oil resources in the region.

The ruling also obliges Erbil "to hand over all the oil production from the oil fields in the Kurdistan region, and other regions which the KRG's Ministry of Natural Resources produces oil from, to the federal government."

The Supreme Court did not explicitly invalidate the production sharing contracts that the KRG has signed with IOCs, but it makes them vulnerable to legal action by the federal government in Baghdad.

Specifically, it allows the federal government "to seek to invalidate contracts between the regional government and other countries or companies for the exploration, production and sale of oil."

It remains to be seen how Baghdad might try to implement the court's ruling, which comes 10 years after it first filed a case challenging the legality of the KRG's oil exports.

Political Turmoil

The ruling also comes at a time of political turmoil in Iraq, which is partly related to a feud between the main Kurdish parties.

Legal experts have been saying for years that the Supreme Court's final decision on the KRG's right to independently export oil would have far-reaching implications for the oil and gas landscape in Iraq.

The ruling also authorizes a federal audit of the regional government's oil and gas sales to determine its share of the federal budget.

Under an agreement reached two years ago, the KRG pledged to hand over 250,000 b/d of its oil in return for its full share of the budget.

But the agreement was never implemented, and the KRG's dependence on ad hoc monthly transfers from Baghdad to pay public sector salaries was highlighted during a 2020 financial crisis, when the federal government halted the transfers.

The cutoff of those funds caused extreme financial difficulties for the region.

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