A cash for oil deal between Baghdad and Kurdish Regional Government appears to be in tatters.
The Kurdish government has grappled with a deep financial crisis since the beginning of 2014.
The deal is not beyond redemption yet.
Erbil - A deal on oil exports and revenue sharing between Iraq's government and the Kurdish Regional Government (KRG) appears to be in tatters as both sides signal their reluctance to uphold it prompting the Kurdistan government to seek alternative ways of monetising its oil.
At the currently lower oil prices, any severing of the deal can, at least in the short run, affect both sides' war efforts against the Islamic State of Iraq and the Levant (ISIL) and further fragment Iraq, analysts say.
The deal, signed last December, essentially amounted to a cash for oil exchange: The Kurds committed to handing over 550,000 barrels of oil per day from areas under their control to Iraq's national oil marketing entity known as SOMO.
In return, the federal government in Baghdad agreed to pay Kurds 17 percent of Iraq's national budget. That meant, after deducting certain expenses for common national purposes, the KRG would get around $1bn per month from Iraq's budget, estimated at about $105bn.
In late January, the deal was incorporated into Iraq's national budget law for 2015.
On Monday, KRG's Prime Minister Nechirvan Barzani threatened to withheld oil exports without getting KRG's share. "If they don't send the budget, we won't send oil," Barzani said.
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But according to several sources speaking to Al Jazeera, the KRG has not been able to fulfil the target level of 550,000 barrels per day. Although Kurdish officials say this was due to technical difficulties, critics argue otherwise.
"There is enough production capacity within Kurdistan whether from the originally KRG-controlled fields as well as the Kirkuk fields," said Luay al-Khateeb, the executive director of the London-based Iraq Energy Institute who has also advised the Iraqi parliament on energy policy.
"But Kurdish authorities are very interested to keep enough margin of production for export to pay the IOCs [international oil companies] investing in the north [in Kurdistan] as well as allocating enough production to meet local consumption and this has reduced the share agreed with Baghdad."
The Kurdish government has grappled with a deep financial crisis since the beginning of 2014 when the then Iraqi Prime Minister Nouri al-Maliki cut its share of the national budget.
To provide the salaries of employees in its vast civil service, the KRG increased independent oil sales that it had already started through Turkey. It also borrowed around $3bn from international firms operating in Kurdistan particularly those in the energy sector, said Dilshad Shaban, a member of the energy committee at Iraqi Kurdistan's parliament.
Of the nearly 500,000 barrels its produces per day, the KRG has withheld at least an average of 150,000 barrels per day from SOMO in a bid to pay those international firms, multiple Kurdish sources said. Around 150,000 additional barrels are used for domestic consumption.
Kurdish officials also said that since the beginning of February, the KRG has only pumped around 150,000 barrels per day from Kirkuk fields which has been under Kurdish control since ISIL's emergence last June.
The budget law mandates that the KRG provide 250,000 barrels of oil on a daily basis from the three provinces under its jurisdiction, and 300,000 barrels from oil fields in Kirkuk province that is now under the Kurds' de-facto control.
But it does not clearly address the issue of a time frame for calculation purposes.
Barzani recently said due to fluctuations in output caused by technical difficulties, the Iraqi government should not measure his government's commitment to the deal by calculating the amount of oil the KRG provides on a daily basis.
The Iraqi government, Barzani suggested, should rather take an average of KRG's oil deliveries within a three-month period and expressed optimism the Kurds can meet the target that way.
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On Thursday, Barzani met with Turkish president and prime minister in Ankara to discuss energy matters. The Kurdish prime minister's visit to Ankara and his previous statements that the central government in Baghdad is "bankrupt" are seen as signs that KRG might resume its independent oil sales through a pipeline it has built with the help of Turkey in recent years.
The prime minister's visit to Turkey is aimed at talks about independent oil sales so that the Kurdistan Region can overcome the financial crisis. If Baghdad does not commit to the agreement, then the KRG will opt for independent oil sales.
"The prime minister's visit to Turkey is aimed at talks about independent oil sales so that the Kurdistan Region can overcome the financial crisis," said MP Shaban, who is also a member of Barzani's Kurdistan Democratic Party. "If Baghdad does not commit to the agreement, then KRG will opt for independent oil sales."
It is not clear yet if the KRG would go as far as including Kirkuk's oil in its exports in the event that the deal with Baghdad collapses and the Kurds embark on extensive independent oil sales.
Many expect the Kurdish government will have a hard time in the coming months to make ends meet as its coffers are almost empty.
The government has often come under criticism for not carrying out reforms to diversify and better regulate its economy and the current situation might further compound the situation.
The KRG is already behind schedule in paying its civil servants and while March is approaching, it has not yet fully paid its employees for December.
"It's a triple whammy crisis [for KRG]," said Shwan Zulal, managing director of Kurdistan focused consultancy Carduchi firm. "You have Baghdad not paying you, oil prices crashing and you have a war with ISIL. It's difficult even if it had a plan, or if it had contingency funds, or had economic robustness, [then] the KRG would have probably withstood it much better."
Some analysts and officials who spoke to Al Jazeera suggested that one reason why Baghdad has not been willing to fulfil its side of the agreement might be that Kurdish contribution to the Iraqi budget is significantly below what it is entitled to receive.
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While Kurdish officials admit that "KRG is committed to the agreement with Baghdad and wants it to work", some, however, accuse Baghdad of double standards in distributing the national budget.
The Baghdad government, say Kurdish officials, has withheld KRG's funds for most of the past year, but it has paid civil servants in the rest of the country.
"Why does Baghdad pay other provinces even those under ISIL's control but it refuses to pay KRG's budget?" asked Shaban, the Kurdish MP.
But even as the distrust between Baghdad and the KRG has deepened, some believe the deal is not beyond redemption yet.
Both sides say they need to cooperate in the fight against ISIL and oil should not hamper that.
Aziz Alwan, a member of the Iraqi parliament, believes the federal government should accept the idea to calculate the KRG oil output in three-month blocks and not on a daily basis.
"There is a weakness in commitment to the deal but not a total collapse yet," said Alwan, also a member of the Iraqi National Alliance of which Iraqi Prime Minister Haidar al-Abbadi is a member as well. "There is still some good will left and attempts will be made to resolve the matter."
Source: Al Jazeera