Iraqoilreport.com | Lizzie Porter and Ben Van Heuvelen

High-level diplomacy has failed to make progress, and a recent U.S. legal filing from Turkey suggests a new phase of adversarial action. 

ANKARA - Recent negotiations have failed to bring Baghdad and Ankara toward an agreement to restart Iraq’s northern oil exports, raising the likelihood that much of Iraqi Kurdistan’s oil production will remain offline for the foreseeable future.

The latest sign of acrimony was a Sept. 7 court filing in the U.S. in which Turkey claims Iraq owes $957 million stemming from an arbitration ruling issued by the Paris-based International Chamber of Commerce (ICC) in late March.

Turkey’s legal action comes on the heels of a flurry of high-level diplomacy that had raised hopes of a political breakthrough to end the pipeline outage.

In late August, Turkish Foreign Minister Hakan Fidan visited nearly two dozen Iraqi ministers and political chiefs in Baghdad and Erbil. In Ankara, a delegation led by Iraqi Oil Minister Hayyan Abdulghani met with officials from Turkey’s Energy Ministry and state pipeline company BOTAS, including Energy Minister Alparslan Bayraktar, on Aug. 22.

But rather than leading to progress, those negotiations highlighted the severity of the disagreements, according to an Iraqi Foreign Ministry document summarizing the Ankara meetings, which was seen by Iraq Oil Report.

“It can be said that the technical negotiations were difficult and strenuous, because of the lack of agreement between the two sides about some issues, especially with regards to the insistence by the Turkish side on including an article in the [meeting] minutes on the two sides agreeing on withdrawing the arbitration claims and subsequently re-starting the oil flows,” the document says.

The arbitration case dates back to 2014, when Baghdad accused Turkey of breaking a treaty governing the Iraq-Turkey Pipeline (ITP) by facilitating independent crude exports by the Kurdistan Regional Government (KRG) without Baghdad's permission. After many delays, the ICC tribunal finally ruled in Iraq’s favor in March 2023, which prompted Turkey to shut off the pipeline pending an arrangement that would enable exports to resume under Baghdad’s authority and in compliance with the treaty.

Since then, however, the two sides have failed to reach common ground. The Iraqi federal government struck a deal with Erbil that would enable KRG crude to be sold under Baghdad’s authority, and the Oil Ministry subsequently instructed Turkey to restart the pipeline — but Turkey has not done so, publicly citing technical problems as the reason.

The Iraqi Foreign Ministry’s written record of negotiations in Ankara suggests that the claims of technical problems are a pretense, and behind closed doors Turkish decision-makers are using the ongoing pipeline closure as leverage to extract other concessions. In particular, Turkey is reportedly focused on pressing Iraq to drop a second, unresolved portion of the arbitration case. (The March ruling covered violations through 2018, while the pending ruling could add new damages arising from violations in subsequent years.)

“Since the outset, the Turkish side has tried hard… to prove that the stoppage of the oil flows is for technical reasons and is far from politics, but the Iraqi delegation sees otherwise,” the Foreign Ministry document says. “This is clearly manifest in the Turkish technical delegation’s indirect confirmation that the issue of resuming oil flows through the pipeline depends on the withdrawal of the arbitration claims.”

The document describes a two-hour meeting between Bayraktar and Abdulghani, in which the two sides negotiated a “consensus text” of meeting minutes in which Iraq agreed to “hold off on” the second phase of arbitration “as a gesture of goodwill,” without saying it would drop the case entirely.

Iraqi officials also made a direct request to their Turkish counterparts to reopen the pipeline without political conditions to create space for further negotiations over a mutually agreeable settlement. But Turkish officials reportedly maintained they cannot do that because of damage sustained during earthquakes in February — without explaining why that damage is keeping the pipeline off now when it was operational for six weeks after the earthquakes and before the ICC ruling.

Turkey’s recent legal action is a further indication that negotiations do not seem to be moving in a positive direction.

The court filing is a response to Iraq’s request in April for U.S. courts to recognize the ICC ruling, setting the legal foundation for Iraq to take potential future actions to seize Turkish government assets in the event the ICC award is not paid. Turkish leaders have reportedly expressed frustration that Iraq took such an ostensibly hostile action before engaging diplomatically — an attitude subsequently reflected in Turkey’s U.S. legal filing on Thursday.

“Iraq filed its Petition… with no attempt to communicate with Türkiye concerning the implementation of the award,” says the motion filed by Turkey’s lawyers. “Iraq’s failure to confer with Türkiye before filing its Petition… exposes its apparent objective: to use this Court as a forum for a public relations campaign against Türkiye.”

In his meeting with Abdulghani, Bayraktar also reportedly “pointed out that lawyers from the Iraqi side took steps to implement the decision in Washington, and he sought clarification on the Iraqi government’s position on this,” according to the Foreign Ministry’s written account of the visit.

Less than a week later, Turkey informed Iraq that it had performed calculations showing that the initial ICC award, of $1.471 billion in favor of Iraq, should actually be flipped in Turkey’s favor. After accounting for the interest accrued on Turkish counter-claims, Turkey said, Iraq now owes a net award of $957 million.

“On Aug. 28, 2023, Türkiye sent a letter to Iraq recalling the tribunal’s decisions on interest, setting out the above-mentioned calculations, and demanding prompt payment of USD 956,946,766,” Turkey’s U.S. court filing says. “Iraq has not responded to this letter to date.”

Turkey’s letter may have been responsible for derailing some follow-up talks. After the mid-August meetings, technical teams from Iraq’s federal Oil Ministry and the KRG Ministry of Natural Resources had been scheduled to meet with Turkish counterparts in the border city of Silopi on Aug. 30 to assess pipeline infrastructure, according to multiple Iraqi oil officials — but that meeting did not happen.

“It has been postponed until further notice due to the absence of the Iraqi side,” said one Iraqi oil official, who said the Iraqi delegation never showed up for the meeting.

The dispute over the award stems from the methodology used by the arbitration tribunal in assessing Iraqi claims and Turkish counter-claims of various violations of the ITP treaty. The tribunal awarded $1.998 billion to Iraq and $527 million to Turkey, for a net award of $1.471 billion — but it also stipulated that each side of the award was subject to interest. The tribunal prescribed a method for calculating the interest without making the calculations itself.

Two factors could potentially cause those interest calculations to work in Turkey’s favor.

First, Turkey’s counter-claims date back to the 1990s and 2000s, whereas Iraq’s claims are more recent, from damages incurred between 2014 and 2018. Because the tribunal said the interest should compound annually, Turkey’s side of the ledger should accumulate proportionally higher interest. Second, the tribunal says the relevant interest rate is the yield on U.S. dollar-denominated Turkish bonds, which suggests a relatively high interest rate should be applied.

“Notably, Türkiye incurred its damages far earlier than did Iraq, with the earliest of Türkiye’s damages dating to 1990,” Turkey’s U.S. legal filing says. “Iraq’s damages date from 2014 to 2018 — a period of relatively low bond yields. As a result, far more interest has accrued on Türkiye’s damages than has accrued on Iraq’s damages.”

That said, Turkey’s calculations are hardly the last word. An official familiar with Baghdad’s legal strategy expressed conviction that Turkey’s numbers are not consistent with the methodology laid out in the ICC ruling. In particular, the official drew skeptical attention to Turkey’s claim that one aspect of its side of the award — $129 million in damages incurred in 1990 — has accrued $2.4 billion in interest.

The official maintained that an accurate application of the ICC ruling would still yield a large net award for Iraq. The ruling itself does not appear to lay out a mechanism for establishing a final award amount incorporating interest charges if the two sides disagree.

While the ICC arbitration panel found that Turkey breached the ITP usage treaty by facilitating the KRG’s independent exports, Turkish officials have also argued in subsequent negotiations that Iraq has not met its obligations under the agreement because it has failed to carry out repair work on the pipeline in Iraqi territory. The upshot is that crude flows through the pipeline — and therefore the amounts on which Turkey can charge transit fees — are well below full potential.

According to the Iraqi Foreign Ministry memo, BOTAS director-general Burhan Özcan said that “the benefit from the Iraq-Turkey Pipeline has not been at the level aspired to in the past, and it could be put to better use.” He then listed a series of measures that Turkey has taken over and above its obligations under the ITP treaty to make up for Iraq’s shortcomings, including installing a reserve pump on its side of the border, and a series of “emergency centres” to sustain throughputs.

BOTAS did not immediately respond to a request for comment.

Even if Turkey were to agree to reopen the pipeline, it is not clear that the Iraqi side is prepared to ramp back up to the roughly 450,000 bpd that was being exported before the shutdown.

International oil companies (IOCs) operating in Kurdistan have several months' of unpaid invoices, and they have expressed skepticism that new political arrangements with Baghdad will enable them to get paid going forward. In particular, the 2023 budget law approved in June ensures that oil revenues are controlled by the federal government rather than independently by the KRG. At the same time, the budget law allocates only $6 per barrel to oil producers operating in Kurdistan, which would amount to payments far below their contractual entitlements.

The upshot is that international oil companies (IOCs) operating in Kurdistan are unlikely to ramp up production unless there are sufficient revenue flows and authorizations to be paid in full, according to the Association of the Petroleum Industry of Kurdistan (APIKUR), an organization that includes several producing companies.

“Even if the ITP reopens, member companies of APIKUR will not produce oil for pipeline exports until it is clear how IOCs will be paid for their contractual entitlement to past and future exported oil,” AKIPUR said in a statement at the end of August.

_Lizzie Porter reported from Ankara. Ben Van Heuvelen reported from the United States._

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