In a case that could be critical for the future of Kurdish exports, the Government of Iraq has commenced an ICC arbitration against Turkey and Turkish Petroleum Pipeline Corporation (BOTAS) under a 40 year old pipeline agreement claiming that accepting imports from Kurdistan is a breach of existing international agreements.
The trigger for the dispute seems to have been the export of oil from Turkey in a crude oil tanker, rumoured to be United Leadership, carrying a cargo of Iraqi crude oil. The dispute may have important implications for oil companies with interests in the Kurdistan region of Iraq.
The primary agreement relied on by Iraq is the Iraq – Turkey Crude Oil Pipeline Agreement signed on 27 August 1973 (“Pipeline Agreement”). The pipeline is, of course, the Kirkuk – Ceyhan pipeline connecting the two countries currently engaged in a protracted political stand-off relating to crude oil produced in the Kurdistan region of Iraq.
The Iraqi Ministry of Oil (“MOO”) claims that the Turkish Petroleum Pipeline Corporation (BOTAS), acting with the authorisation of the Turkish government, breached the Pipeline Agreement by selling crude oil without the approval of the MOO. According to the MOO, on 21 May 2014, BOTAS began loading a cargo of crude oil onto a tanker at Ceyhan marine terminal. This, according to the MOO, was in clear breach of the Pipeline Agreement and the Treaty of Friendship and Neighbourly Relations signed by the Republic of Iraq and Turkey on 29 March 1946 (“Mutual Friendship Treaty”). While the MOO quotes both international agreements as a basis for its claim, it is apparent that the Pipeline Agreement is the instrument containing the ICC Arbitration provision which the MOO has triggered by commencing arbitration. In contrast, the Mutual Friendship Treaty provides for the resolution of disputes under Article 37 of the Charter of the United Nations.
Currently the MOO values its claim in excess of USD 250 million but this may escalate if further shipments of crude take place. However, the dispute is likely to have knock-on effects on the Kurdistan Region’s attempts to maintain control of the hydrocarbons industry in the Kurdistan region of Iraq and obtain finance outside of the budgets provided by Baghdad.
It is likely that the main impact on the MOO and the Republic of Iraq will be in the form of political instability and further disputes over the status of oil produced under the Production Sharing Agreements entered into by the Kurdistan Regional Government.
In addition, any threat to the export of oil from Kurdistan is likely to have a negative impact on investment decisions concerning the Kurdistan energy sector. The Iraqi Government’s stance is doubtless an attempt to exert further influence over oil operations in the region by pressuring the Turkish Government to cease exports unless authorised by the Bagdad Government.