When the International Court of Arbitration ruled on Thursday that Turkey violated a contract by trading oil directly with Iraq’s Kurdistan Regional Government starting in 2013, and asked Ankara to pay $1.4bn, Baghdad was quick to win announce.
Iraq’s oil ministry issued a statement praising the court, and Iraqi officials quickly and openly expressed their talking points to local and international media. Turkey also halted the pumping of Iraqi crude oil through Ceyhan on Saturday morning, half of the world’s oil supply.
However, western and Turkish sources with knowledge of the court case paint a different picture. They say Baghdad is curtailing the full scope of the judgment on the Iraq-Turkey Pipeline (ITP) agreement, signed in 1973, which regulates the export of Iraqi oil to Turkey through the Turkish port of Ceyhan.
“They can celebrate all they want, but I would definitely fire their lawyers for a botched job,” one western source briefed on the court case told MEE. “They claimed breach of contract under five categories: storage, transportation, exclusive use, access claim and loading. All they could do was win their claim to loading.”
The court case is seen as a legal challenge that crosses a commercial dispute with national and international politics, as Iraq says that one of its components, KRG, does not have direct authorization to sell oil through the pipeline, as Ankara and Erbil agreed in 2013, and pocket the income.
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Baghdad sued Turkey in 2014 and sought $33bn in compensation for lost revenue and damages. Last month, they requested $58bn in compensation from Ankara for all oil sales made until 2022, according to the sources. But in the end the court only awarded them $1.4bn for the period 2014-18, pending interest rates.
‘Neither party succeeded’
The sources said the court found the KRG to be an organ of the Iraqi government, and therefore a legitimate entity under the ITP deal. “Therefore there was no fault on Turkey’s part in storing and transporting the oil under KRG instructions,” the western source said. “Their claim for loss of exclusive use damages was also denied, they sought full compensation for the revenue from the sale of oil and they lost.”
The sources said that the court found that Turkey violated the contract only by loading tankers with the oil transported to the port of Ceyhan under the instructions of the KRG, because the 2010 amendment to ITP makes it clear that the Iraqi Ministry of Oil and its corporation Somo the. only legitimate authorities could issue orders for loading.
‘Even the court agrees in its judgment that neither party could be considered successful’
– Western Source
Through this violation, the court assessed whether Ankara overcharged transport fees to Iraq and whether it received an unfair discount on the price of oil and issued an award to Baghdad. However, the court ruled that the Iraqi government must bear 50 percent of the revenue lost due to the discounted Iraqi price, since the KRG, as an organ of the Iraqi government, profited from the sales and he used them for state expenditure.
“Another issue that Baghdad does not want to talk about is Turkey’s counterclaims regarding a series of issues from low capacity at the pipeline and unpaid transportation fees going back many years,” said a second western source. “The court awarded almost $600m to Turkey because of them.”
The source added that Turkey’s counterclaims would carry more weight when calculating US nominal interest rates and add to the total since they go back to the 90s when rates were higher. . “Iraq’s claims, which only go to 2014-18, will not have the same excess interest rate, and will only receive a few hundred million dollars,” the source said. “It is a weak victory. Even the court agrees in its judgment that neither party could be considered successful.”
A Turkish source familiar with the 2013 KRG-Turkey oil deal said that no money would ultimately come out of Ankara’s pocket since the agreement includes an indemnity clause. “The KRG would pay any award, therefore the Iraqi party,” said the source.
Turkey ordered to pay $1.4bn to Iraq in Kurdish oil arbitration case
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The development has already raised tensions between Turkey and the KRG since the latter essentially runs its government services through oil revenue, which was over $5.7bn last year.
Iraq’s federal court last year also ruled that the law governing the oil industry in Iraqi Kurdistan was unconstitutional, and demanded that Kurdish authorities hand over their crude oil supplies.
But Turkish officials hope that an agreement will be reached between all the parties involved in due time and that oil exports will resume.
One Turkish official familiar with past negotiations said Turkey aimed to drag out the situation when it realized a deal with Baghdad was unlikely because it did not want KRG representatives in the room. .
“We even proposed to build a sophisticated water management system, irrigation, dams and others that were priced at $5bn,” the official said. “But they couldn’t allow themselves. Because there are other centers of power in Iraq besides the government.”