Oil has often been described as part of the glue that holds Iraq together. And yet, few issues have proven more divisive to the fabric of the state since 2003 than those related to the management of the natural resource base and the distribution of the revenue accrued from its export. Rather than acting as a catalyst to strengthen the fiscal and political relationship between Baghdad and Erbil, and encouraging accommodation between them over key constitutional issues related to sovereign authority, both sides have used control of their oil sector (and related revenue-distribution mechanisms) as a mechanism to bolster their thus-far irreconcilable power-sharing agendas. Independent licensing of acreage, and management of the production and sale of crude oil, has been the cornerstone of KRG efforts to bolster its autonomy from the central government, and to lay the foundations for possible secession. As the federal government has belatedly recognized this fact, it has adopted more draconian revenue-sharing sanctions, essentially cutting Erbil off from most of its share of the national budget. The result has been heightened acrimony and a greater separation between the two sides, just at a time when fiscal and security pressures place a premium on cooperation and maximizing revenue generation.
This situation is primarily the result of putting long-term political objectives above concerns about investment and the optimal development of (and monetization of) the hydrocarbon sector. Protecting political prerogative has been a paramount goal for both Baghdad and Erbil, and in the absence of a compromise power-sharing formula, each side has operated according to its own interpretation of the constitution. As a result, the passage of new legislation designed to guide the development of the sector has been blocked, as have related laws on revenue distribution and the structure of the local industry. These elements have combined to increase uncertainty and perceived risk for investors in Iraq, undermining the full development in the sector, especially in Kurdistan. More importantly, these contests have cost both the regional and federal governments precious revenue.
There are signs, however, that the political status quo that this impasse imposes is becoming more fragile. What Iraq needs is a new durable power-sharing formula that respects the basic sovereign prerogatives of the government in Baghdad while at the same time meeting at least the the minimum KRG demands for autonomy. Moreover, Iraqi factions – Arab and Kurd – need to decide whether this can be achieved within the structure of a unified state, or whether more radical secession arrangements need to be negotiated.
These decisions will determine how the structure of the Iraqi oil sector – north and south – evolves in the future. One thing is clear from the past 13 years: oil-sector and related revenue-sharing mechanisms cannot be a vehicle for resolving the power-sharing dispute. Quite the contrary. A bottom-up approach that uses practical solutions in the sector as the basis for confidence building and deeper cooperation between Baghdad and Erbil has not just proven impossible; it has been actively eschewed. Both the federal government and the KRG have been much more intent on cutting off their noses to spite their faces for the sake of political principle, and in the case of some Kurdish leaders, the long-held dream of independence (no matter how impractical this goal may be). Thus, the potential of Iraq’s – and Kurdistan’s – hydrocarbon sector, and the revenue benefits that can be derived from it, will depend on what the ability of Iraqi leaders to negotiate a new power-sharing arrangement that works, and where oil is not regarded as the means of reaching an accommodation, but rather one of the elements that helps sustain it in the long term.