Turkey's halt of Iraq's oil exports shakes the global market, may start a war

Turkey's halt of Iraq's oil exports shakes the global market, may start a war

Shafaq News/ It’s been nearly five months since Turkey halted the flow of oil through the Iraq-Turkey pipeline, a move that came after the International Chamber of Commerce (ICC) ruled on a nine-year legal dispute between the two countries. Even though Turkish President Recep Tayyip Erdogan was rumored to make a historic diplomatic visit to Baghdad this month to discuss restarting the oil pipeline, the economic, political, and legal ramifications of the oil dispute are mounting as millions of barrels of oil remain stuck in ports—despite Turkish Foreign Minister Hakan Fidan’s recent visit to Baghdad, where he did not publicly acknowledge the oil blockade.

The dispute boils down to whether Turkey broke a 50-year-old pipeline transit agreement by allowing oil from fields in areas controlled by the Kurdistan Regional Government (KRG) to be exported without Iraq’s consent. But since the Paris court of arbitration awarded Iraq $1.5 billion in compensation, Turkey’s response—to block approximately 500,000 barrels per day from the KRG in northern Iraq, headed to global markets via its port in Ceyhan—has sent shock waves through the oil sector and catalyzed a regional, and even global, fallout.

Erdogan has blamed internal wrangling between the central Iraqi government in Baghdad and the autonomous KRG in northern Iraq. But Iraqi and KRG officials deny this, blaming Turkey instead. Although Turkey initially claimed to simply be complying with the ICC ruling, it quickly transpired that it was trying to negotiate the $1.5 billion compensation payment and to resolve a second arbitration with Iraq on unauthorized oil flows since 2018. Meanwhile, there have been no signs that Turkey will resume the flow of oil anytime soon.

Turkey’s prolonged block on Iraqi oil exports and attempts to pressure Iraq to comply with its demands is destabilizing a pipeline of central importance to regional and global economic stability. The pipeline was carrying some 10 percent of overall Iraqi exports, amounting to 0.5 percent of global production—Iraq is the second-largest OPEC producer. Turkey’s cessation of the exports immediately bumped up global oil prices above $70 a barrel. Moreover, oil export revenues account for some 80 percent of the KRG’s annual budget, putting the entire administration in jeopardy.

As the blockage has continued, choking global crude supply, it has helped contribute to increasing oil prices, especially affecting the European Union, which had dramatically increased its imports of Iraqi oil to replace Russian gas. Italy, for example, satisfies 13 percent of its crude oil demand from Iraq, with more than half of it coming from KRG-controlled northern Iraqi fields. With the KRG oil flow cut off, Europe is in a precarious situation with no quick and easy solution.

But it’s not just Europe that is taking a hit.

A prolonged embargo, which has already cost the KRG more than $2 billion, could decimate northern Iraq’s economy and potentially lead to the collapse of the semi-autonomous KRG. For years, the KRG economy has been struggling with budget cuts from the Iraqi federal government. If the situation remains unresolved, it could instigate a disruptive wave of migration; tens of thousands of Iraqi Kurds have already migrated to Europe, and more could go in the near future.

The financial fallout—large budget deficits in both the KRG and Baghdad—could lead to catastrophic instability in the region, something that militant groups such as the Islamic State could take advantage of, potentially triggering further destabilization. With the KRG institutions virtually crippled in the wake of the oil export crisis, Iraq is at risk of losing its primary shield against the Islamic State—especially if the KRG security forces are forced to divert resources devoted to guarding the KRG’s network of detention centers.

Although Erbil—the KRG’s regional capital—and Baghdad reached an agreement in early April, prompting hopes that Turkey would have no further excuse to avoid resuming the exports after its May elections, there have been no signs of meaningful progress from Ankara’s side.

The stakes are high: A continued dispute risks the collapse of U.S. investments in Iraq, the economic destabilization of the Iraqi federal government, and Russia and Iran rushing in to fill the geopolitical vacuum. The stalemate has already seen international oil companies in Iraq slash investment by $400 million, lay off hundreds of workers, and threaten legal action against the governments deemed responsible. As the crisis drags on, Iraq’s reputation among investors would be increasingly damaged.

But the biggest risks come from what could happen if Erbil continues to lose billions of dollars from the loss of oil revenues due to the pipeline dispute. Some of its oil is likely to find its way out via Iran, while Turkey may end up turning to Iranian and Russian oil to fulfill its own demands. Ultimately, the KRG—which is dependent on the oil revenues to survive—could collapse, triggering a bureaucratic conflict between the two main rival factions, the Patriotic Union of Kurdistan (PUK) and the Kurdistan Democratic Party (KDP), and potentially turning into a full-blown civil war.

Instability in Iraqi Kurdistan could also seep into wider Iraq, which is already teetering on the edge of sectarian conflict. Last year, Iran conducted attacks on alleged Iranian opposition groups in Iraqi Kurdistan, and its increased interference in the region is aggravating intra-Shiite political tensions. The fall of the KRG could create a vacuum that allows Iran to ramp up its involvement, which could further escalate these simmering tensions and threaten a country-wide civil war.

Turkey previously viewed the KRG with suspicion, but began to strengthen bilateral relations in 2012 as a way to influence a potential post-Assad Syria through ties with Syrian Kurds. As Turkey became concerned about a growing Iranian presence in Iraq, its increased ties with the KRG were seen as a tool of regional influence. Cultivating the KRG’s dependence on the Turkish oil pipeline route through Ceyhan made perfect sense.

But Baghdad’s successful arbitration victory against Turkey over the KRG oil exports threw a spanner in the works by suddenly consolidating central Iraqi domination over the exports, undermining Turkish influence in Iraqi Kurdistan. The move is a major step in Baghdad’s attempt to abort the KRG’s aspirations for Iraqi Kurdistan independence. This may have prompted Turkey’s overall position on the KRG to shift.

Recent evidence of heightened contacts between Iraqi Kurdistan politicians and the PKK, the separatist Kurdistan Workers’ Party fighting for independence in southeastern Turkey, have led Turkey’s relationship with the KRG to deteriorate. In Turkey, the PKK is seen as a terrorist organization that aims at ethnic separatism in the southeast. (The Turkish foreign minister, on his recent Baghdad visit, even urged Iraq to designate the PKK as a terrorist organization.)

In this context, it could even be argued that Turkey may see the pipeline dispute as an opportunity to greatly weaken the only internationally recognized independent Kurdish entity in the region, quashing hopes for autonomy among its own Kurdish population—and potentially even seeking to reclaim former Ottoman territories in Iraq and Syria.

The international community should be concerned. Not only could Erdogan be signaling a return to Turkish militarism, having dramatically stepped up its own anti-PKK operations inside Iraqi Kurdistan, but the ongoing dispute also raises stark questions about the effectiveness of international arbitration as a stand-alone tool in resolving high-stakes geopolitical disputes.

For example, a major arbitration case, originally started in Madrid, has pitted Malaysia against the heirs of the Sultanate of Sulu, a remote island area in the southwest Philippines, in a high-stakes geographical dispute over territory and resources. The case, in which the heirs claim rights over Malaysian oil and gas revenues, was determined based on a 19th-century land treaty between the British colonists and the defunct sultanate. Spanish arbitrator Gonzalo Stampa issued a record-breaking $15 billion award against the government of Malaysia.

However, Stampa is now facing criminal prosecution from the Spanish courts for refusing to comply with an order canceling the arbitration, which followed a court petition from the Malaysian government noting it did not recognize the arbitration’s legitimacy. The colonial undertones in how the case was determined have only driven Malaysia closer to China and undermined the Association of Southeast Asian Nation’s unified front against China’s territorial claims in the region.

As tensions continue to rise between Iraq and Turkey, it becomes increasingly clear that international arbitration is not a substitution for careful diplomacy. It is critical for the international community to realize that without the accompaniment of diplomatic efforts, arbitration risks stoking the fires of international tension at a time where the globe faces a multitude of complex crises in need of delicate, collaborative solutions.

The U.S. government can play a constructive role here. While Baghdad and the KRG have already signed a deal to resume oil exports, it is Ankara’s relations with both Baghdad and the KRG that are dangerous. Washington needs to both push Baghdad and Erbil to reach a more comprehensive oil agreement, and help mediate talks between Ankara and Baghdad—including on matters related to water, trade, and infrastructure. As the dispute goes on, the loss in revenues will eventually wipe out the compensation due to Baghdad. It is therefore in both countries’ interests to find a negotiated compromise. An external broker with ties to all three players is needed to help them see that any scenario that heightens the risk of a regional conflict is a lose-lose-lose situation.

Over the past half a decade, Erdogan has envisioned a more prominent role for Turkey in the wider region—from assisting the U.N.-backed government in Libya during the civil war to acting as a key diplomatic force in securing grain shipments out of war-torn Ukraine—until Russia suspended the grain deal last month. However, bullish foreign policy can pose a significant risk to already fragile stability in Iraq, which is still dealing with the trauma of two decades of conflict.

Turkey’s accelerating drift toward anti-Kurdish nationalism, and its insistence on using the KRG oil exports as a means of control, appear to have led to the current impasse. Instead of negotiating, Turkey is using the situation to force Baghdad and Erbil to capitulate on the terms of oil arbitrations, even if that risks destroying the KRG’s economy. Both Iraq and the KRG, in contrast, are keen to resume exports.

It is not too late to resolve the situation. But central to moving forward is the need for Turkey to recognize that if the KRG falls, the resulting destabilization in Iraq will create far bigger problems, including opening the door for its historic rival, Iran.

To avoid the most damaging of outcomes, the international community must realize the conflict has always extended further than oil. Swift, careful, and diplomatic intervention is needed to prevent potentially calamitous regional instability.

(By Emir Gurbuz for the Foreign Policy)

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