ICC arbitration tribunal finally issues ruling in the Iraq-Turkey pipeline dispute – what it means for Iraq and the Kurdistan Region

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The dispute between Iraq and Turkey regarding the use of the Iraq Turkey Pipeline (ITP) has finally been resolved by an International Chamber of Commerce (ICC) arbitration award issued on 13 February 2023.

Iraq has been awarded over 1.9 Billion USD Dollars for Turkey’s breach of the 1973 ITP Agreement in the period from 2014 and 2018.  Now Turkey refuses to restart ITP operations on the Turkish side until another arbitration is decided in connection with similar claims for the period from 2018 onwards. 

Iraq initiated arbitration proceedings against Turkey in 2014 following the loading of the first tanker in the Turkish port of Ceyhan with Kurdish oil transported through the ITP.  Turkey and the Kurdistan Regional Government had entered into an Energy Framework Agreement for the cooperation between the KRG and Turkey in the export of crude oil extracted from the Kurdistan Region of Iraq despite repeated instruction by the Federal Government of Iraq to Turkey to cease any and all such activities using the ITP.

Iraq claimed that Turkey violated the ITP Agreement by transporting, storing, and loading crude oil originating in the KRI and under KRI direction and for the account of the KRI.  Iraq further claimed that Turkey violated the ITP Agreement by breaching the exclusive use clause of the ITP Agreement and refusing federal Iraqi personnel access to certain facilities on the Turkish side.   Of the five Iraqi claims, the tribunal only found in favor of Iraq in connection with the unauthorized loading of crude oil in Ceyhan port in Turkey and Turkey’s denial of access to facilities as per the terms of the IPT Agreement.  The tribunal awarded Iraq over 1.9 Billion USD (before set-off for amounts awarded to Turkey for its counterclaims).

Turkey refuted Iraq’s claims and counterclaimed that Iraq has violated the ITP Agreement by failing to pay minimum guaranteed throughput fees, failure to pay transportation charges and failure to reimburse for equipment and personnel.  The tribunal found that Iraq had similarly breached various obligations under the ITP including failure to pay fees when due and awarded Turkey approximately USD 500 million.

Amounts payable by either side are to be set-off after calculating interest.

In addition to damages, the award also orders that Turkey shall forthwith “load all oil in the storage tanks at Ceyhan as at the date of this Award in accordance with the instructions of the Iraqi Ministry of Oil, as required by the ITP Agreements.”

Double Win for Iraq

While Iraq’s win in the arbitration and the award of 1.5 billion USD (after set-off) is a big win on its own, the award preventing Turkey from resuming exports of Kurdish crude oil directly through the KRG and restricting all activities on the ITP to the FGI’s instructions has also had another (maybe more important) positive impact on Iraq and the KRI.  In the days following the award, the FGI and KRG came to a temporary agreement for the export of Kurdish Oil through the Iraqi State Oil Marketing Company commonly referred to as SOMO (SOMO).  The FGI has always held that the KRG’s export of crude oil independently from SOMO is illegal and unconstitutional.  The agreement between the FGI and KRG following the award has had a positive unexpected result in laying the framework for a truce between the FGI and the KRG with regards to the decades old dispute regarding the KRG’s independent export of oil.  The marketing and export of Kurdish crude under the umbrella of SOMO has positive outcomes for both the FGI and the KRG; for the KRG, this means that Kurdish crude oil will now be sold on more favorable terms rather than at discounted prices as it was in the past, and for the FGI, it finally has (some) control and visibility over Kurdish crude oil exports which it has fought for years to gain.

The agreement between the FGI and the KRG is not publicly available in full, however both sides have made statements regarding some of the salient points including, the export of Kurdish crude oil through SOMO, the appointment of a Kurdish nominated deputy general manager for SOMO; the formation of a four member temporary committee (two members from each of the KRG and FGI) to oversee for the sale of Kurdish Crude; and the deposit of all proceeds from the sale of Kurdish crude in a KRG controlled bank account with the Central Bank of Iraq or another authorized bank with the FGI having access to such bank account for auditing purposes.  Although the agreement has been signed, it remains to be seen how it will be implemented and to what extent the FGI and KRG will iron out any differences.

This arbitration award is likely to be the building block for a long-term cooperation between the FGI and the KRG and maybe even lay the groundwork for a long-awaited Federal Oil and Gas Law.

Turkey’s Suspension of Exports through the ITP

Following the award, Turkey has ceased all operations of the ITP on the Turkish side.  According to various press articles, Turkey will not resume the operations until Iraq and Turkey reach a settlement agreement with respect to the amount awarded to Iraq.  Various press reports have also mentioned that Turkey may refuse to resume operations until a second arbitration filed by Turkey has been resolved.  This could take years which would result in tremendous damage and losses to both the FGI and the KRG in particular as it has no other avenue for exports at the current time.  In the meantime, the press has reported that Iraq is considering exports by truck.

If operations on the ITP are not resumed soon, the closure of the Ceyhan ports to Kurdish crude will have detrimental effects on the KRG and international operators operating in the KRI which have or will be forced to halt production as storage facilities in the KRI near maximum capacity.

It seems unlikely that Turkey will resume operations of the ITP until the Turkish elections are final.

If you would like more information about this topic, or require a copy of the Notification, please contact us.

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