Oil traders with an interest in the region should be aware of developments in a dispute between Iraq’s Ministry of Oil (represented by the State Oil Marketing Organisation, SOMO) and Turkey and BOTAS (Turkey’s state owned pipeline operator). On 23 May 2014, SOMO filed an arbitration claim with the International Chamber of Commerce (ICC) claiming, “by transporting and storing crude oil from Kurdistan, and by loading that crude oil onto a tanker in Ceyhan, all without the authorisation of the Iraqi Ministry of Oil, Turkey and BOTAS have breached their obligations under the Iraq-Turkey Pipeline Agreement.”

The Kurdish Regional Government (KRG) maintains that it is entitled to export oil through the Iraq-Turkey Pipeline (ITP) and that the federal government does not have exclusive exporting authority under the Iraq Constitution. SOMO argues that under Article 111 of the Iraq Constitution: “Oil and gas are the ownership of all the people of Iraq in all the regions and governorates”.

The KRG alleges that it has authority under Articles 112 and 115 of the Iraq Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005, the year the Constitution was adopted by referendum.

The KRG argues that because Article 112 provides that the central government may “undertake the management of oil and gas extracted from present fields”, with the logical meaning of the term ‘present fields’ being those fields under production at the date of the entry into force of the Iraq Constitution, oil and gas extracted from fields coming into production after that date can be managed by the KRG. In addition, Article 115 states “All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organised in a region.” The KRG says that as relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive revenue from its oil and gas exports. Further, the Constitution provides that, should a dispute arise, priority shall be given to the law of the regions and governorates.

The case will shed interesting light on the interpretation of the 40-year old ITP Agreement, originally signed in 1973 and last amended in 2010, and demonstrates the growing importance of ICC arbitration in resolving inter-state disputes. The Tribunal will need to rule on Iraqi constitutional law questions significant to the future of the independent export of Kurdistani crude.

This dispute has implications for oil traders operating in the region. SOMO has threatened to sue any buyer who lifts Kurdish crude, insisting that it holds rightful title to all Iraqi oil and gas under the Iraq Constitution. To date, no cargoes have been arrested. To succeed in an arrest, SOMO would need to show it has title to the crude and is entitled to either the proceeds of the sale or the crude itself.

Any defence to such an arrest would depend on the governing law of the contract, as this would affect whether or not title passes following a sale where title is disputed. It would also involve consideration of the Iraqi constitutional position outlined above.