As the Iraqi government seeks to reinvigorate its oil-dependent economy, it faces increasing challenges from regions and groups demanding a greater share of the country’s petroleum wealth. The Basra provincial council, for example, is at odds with the Ministry of Oil over control of investment projects in its region. The Kurdistan Regional Government (KRG) insists on the validity of contracts it signed with international oil companies. A national hydrocarbons law could help resolve these tensions, but the complexity of the draft oil law, new leadership of key parliamentary committees, and opposing views on how to reallocate oil revenues are likely to stifle the legislation. Underlying these constraints is the 2005 Iraqi constitution, which—in the attempt to prevent a tyranny of the majority—left revenue and resource-sharing between Baghdad and its provinces unclear, which in turn undermined the viability of economic development projects.
Iraq’s petroleum impasse is rooted in the vagaries of the Iraqi constitution and the ethnic and sectarian interests it has encouraged. By devolving large powers to the regions and providing for the distribution of oil revenues to make up for the wrongs of the past, the constitution disempowered Baghdad regarding key oil sector activities.
In addition, many new regional powers are unequal in terms of their institutional capacities, the legal constraints they face, and their natural resources. The Kurdistan Region, for instance, is permitted to exploit and develop natural resources but has no authority to export its crude outside Iraqi borders without Baghdad’s permission. Kirkuk has significant oil reserves but no delineated administrative boundaries to ascertain land and resource claims. Basra contains the vast majority of Iraq’s oil wealth, while lacking the infrastructure to exploit, produce, and export at projected levels.
Poorly crafted consociationalism also has left the fiscal responsibilities of the regions unclear. Baghdad is required to allocate a portion of the national budget to the provinces, yet there is no requirement for timely and transparent payments from the regions to the central government. While the KRG claimed its portion of the national budget, it has not regularly paid its customs taxes to Baghdad. In fact, the KRG continues to smuggle petroleum to Iran without sanction or financial penalty. When the Iraqi Supreme Auditing Office recently requested petroleum receipts and files from the KRG Ministry of Finance, the KRG refused outright.
Nor is there any clear national policy on how to spend Iraq’s oil wealth. While the Kurds want Baghdad to use part of their petroleum revenues to pay international oil companies’ profits in the north, the southern and central regions are clamoring for greater social services. The 2011 budget has addressed this issue, at least temporarily, by directing a portion of oil revenues to the public food ration system. Still, these revenue allocation issues are likely to become particularly sensitive as Iraq increases its oil production over the next year. At the current $76.5 per barrel and estimated 2.25 million bpd exports, Baghdad could reap over $80 billion in 2011, engendering more squabbling over who gets what.
Disagreements about the legitimacy of the 2005 constitution have aggravated regional resource competition. For the vast majority of Arab Iraqis, the constitution represents the interests of its chief engineers—the Americans, Kurds, and small Shi’i groups—not those of the larger Iraqi population. The Kurdish autonomy it guarantees and the asymmetrical power and resource distribution it permits have led to a backlash from underdeveloped Sunni Arab regions seeking to protect their marginalized status and get what they consider to be their fair share of oil revenues. In addition to the revenue issue, the uneven availability of energy and petroleum resources for Iraqi consumption remains problematic, as shown by ongoing protests in Iraqi cities from Nasiriyyah to Kirkuk as well as the recent destruction of key Iraqi oil refineries.
Iraqi Prime Minister Nuri al-Maliki, who still needs to consolidate his power, has responded to regional tensions with ad-hoc appeasement measures. In addition to promising early retirement, personal salary cuts, and a 100-day government evaluation period, he has promised to allocate one dollar for every barrel in oil-producing provinces and an additional 80 megawatts of electricity daily to Kirkuk. Maliki recently permitted the KRG to recommence its oil exports and recognized the disputed KRG production-sharing contracts, even though key Iraqi oil ministers and parliamentarians continue to deny their legitimacy.
These piece-meal and sometimes secretive arrangements might buy time for Iraqi and Kurdish officials and quell conflict temporarily. Still, they do not address the fundamental source of tensions between the central government and its regions, namely, the character of the Iraqi state.
At minimum, a more coherent federal system is needed to reflect the political realities and economic demands of Iraq’s current circumstances. If the goal is to maximize petroleum wealth and limit resource conflict, then clearer lines of authority will have to be drawn among the central and regional governments as well as the provincial councils. Bilateral agreements and a national hydrocarbons law can clarify some issues, such as payment mechanisms and fiscal responsibilities. Ultimately, however, Baghdad’s authority might have to expand beyond the limited, enumerated powers accorded to it in the current constitution to a more direct role in managing the country’s petroleum resources and revenues.
Denise Natali is the Minerva Fellow at the Institute for National Strategic Studies (INSS), National Defense University and author of The Kurdish Quasi State (Syracuse University Press, 2010).