Is a grand oil bargain with the Kurds Trump’s next big move to stabilize Iraq?

As a senator, Joe Biden once famously proposed segregating Iraq into three autonomous regions led by Kurds, Shia, and Sunni, an idea rejected by Republicans and Democrats alike as an unnecessary concession after the sacrifice of so much American blood and treasure. 

As president, Barack Obama never embraced the Biden plan, seeking instead to try to prop up Iraq as a whole. But his team failed to quickly counter the rise of ISIS, which plunged Baghdad into years of chaos and deadly violence that only emboldened neighboring Iran to meddle more.

President Trump has spent his first term mostly stabilizing Iraq’s security, pushing Iran into a corner with stiff sanctions and a drone strike on its most feared military leader, and reducing ISIS’ capabilities substantially.

But with the economic double whammy of COVID-19 and lower oil prices, Iraq and its new prime minister, Mustafa al-Kadhimi, need more than just security help. They crave a jumpstart to their long-sagging economy.

Behind the scenes in recent weeks, U.S. and Iraqi officials have been exploring a nascent plan to give Baghdad the jolt it is seeking: an oil alliance with the crude-rich Kurdistan Regional Government within its borders. It’s one of many ideas that could be raised at strategic meetings in Baghdad that start Thursday.

The plan actually dusts off an idea the Obama State Department set in motion back in December 2014 in which the Kurds, who control some of Iraq’s most valuable crude, struck an agreement with Iraq’s central government, which possessed the marketing and distribution capabilities, to facilitate oil sales and revenue sharing.

The 2014 deal, which permitted Iraq to blend and market Kurdish oil and transport and market Kirkuk oil, was hailed by then-Deputy Assistant Secretary of State Brett McGurk as a major breakthrough and was also embraced and assisted by U.S. and international oil companies.

But ISIS’ violent rampage through Iraq, particularly in the Iraq/KRG border region, impeded the incipient partnership.

With ISIS sidelined right now by a successful U.S. counterinsurgency operation under Trump, elements inside both the Iraqi government and the Trump administration are exploring a new partnership between the Kurds and Iraq.

The idea has the potential for wins on all sides. The Kurds have great oil but lack the capacity to get it to market in volumes that would benefit their regional economy. And they have been accepting below-market values for years because of the concerns about the legal claims by Iraq.

The Iraq central government through its State Organization for Marketing of Oil (SOMO) has the distribution, transportation and marketing capabilities, and its badly drained treasury would benefit from the cash infusion of a revenue share. The potential impact to Iraq’s treasury is estimated at $15 billion annually.

Stronger ties between Iraq’s central government and its Kurdish regional citizens would also create an attractive counterbalance to Iran should its Shia allies inside Iraq seek to escalate sectarian violence.

The Kurds and Iraq's central government have found themselves at loggerheads often over oil revenue sharing since 2003. The 2014 deal showed they have the capacity to work together on the country's most valuable asset, but the relationship chilled in 2017 when the KRG pushed a referendum seeking more autonomy from the mother country, a moved that got quashed. This plan, if all sides can work it out, has the potential to put the Kurds and the central government back into warmer relations, something al-Khadimi himself has enjoyed with the Kurds personally.

For the United States, a more vibrant Iraq economy would mean less long-term U.S. investment in the country and a potential opportunity for Trump to make good on his promise to bring U.S. troops home from a war begun in 2003. And U.S. and international energy companies that invested in the 2014 plan would finally be able to realize a return on investments and contracts that were often interrupted by the ISIS insurgency.

While details are still being ironed out, at least one U.S.-backed energy company is excited enough about the prospects that it has tried to incentivize the deal by offering to provide free gas to Iraq’s central government to make elements of the plan work, according to sources familiar with outlines.

Some of the key details of the emerging plan include:

• KRG would increase its oil production from about 450,000 barrels per day to 1 million, and SOMO would market and sell about four-fifths of that output. KRG would keep about 200,000 barrels to meet its existing oil sales commitments.
• SOMO would blend the Kurd’s higher-grade crude with Iraq’s more ordinary oil, creating an expected increase of $5 per barrel in the price Iraq commands for its exports. The two would benefit from a revenue share from the ensuing sales.
• KRG would approve as many new oil drilling areas in its vast untapped fields as possible, to ramp up production.
• U.S. and international oil firms will assist in increasing drilling and production as quickly as possible.
• U.S. and Iraqi security forces would join Kurdish forces in ensuring the safety of drilling sites, supply lines, and pipelines to keep oil flowing.
• The KRG would maintain the contractual relationships with international oil partners, while SOMO would market the new blend.
• SOMO will pay international partners their monthly dues owed under existing contracts and keep the rest of the sale proceeds, sharing 17% of the Iraq budget with the Kurds.
• Iraq will in turn stay its legal claims over KRG oil issues.

Trump has already signaled his desire to help al-Kadhimi, the new Western-friendly prime minister, get off to a good start. The president in May renewed the Iraq war authorization, signaling Baghdad U.S troops will stick around for another year at least. 

And Secretary of State Mike Pompeo provided Iraq a waiver so it could purchase badly needed electricity for some of its regions from neighboring Iran without violating sanctions.

An economic revival plan is the logical next step to build on the success of joint security operations. The Kurdish oil alliance, by some estimates, could infuse a quarter trillion dollars of growth into Iraq’s economy by 2040.