ERBIL, Kurdistan Region - The United States on Tuesday urged both Baghdad and Erbil to resolve their long-standing financial disputes through “constructive dialogue,” while reiterating the importance of resuming Kurdish oil exports via the Iraq-Turkey pipeline.

Responding to a question from Rudaw’s Diyar Kurda during a press briefing, US State Department spokesperson Tammy Bruce stated, “We continue to urge Baghdad and Erbil to resolve their issues through constructive dialogue.”

Bruce emphasized the urgency of addressing the salary crisis affecting over 1.2 million public sector employees in the Kurdistan Region, noting that, “resolving this issue sends a signal that Iraq is creating an environment in which US companies would want to invest.” A successful resolution could also lead to "reopening the Iraq-Turkey pipeline and additional energy exploration, including with US companies," she concluded.

The backdrop

Tensions between Erbil and Baghdad flared in late May when Iraq’s federal finance ministry halted all budget transfers to the Kurdistan Regional Government (KRG), including payments for public employee salaries. The ministry claimed the KRG had exceeded its 12.67 percent share of the 2025 federal budget and failed to deliver its designated share of oil to SOMO.

The situation has been exacerbated by the ongoing suspension of oil exports through the Iraq-Turkey pipeline, which has remained offline since March 2023 following an international arbitration ruling.

In February, the Iraqi parliament amended the federal budget law to include a provision for a $16-per-barrel fee to cover production and transportation costs for international oil companies (IOCs) operating in the Kurdistan Region. The amendment also called for the joint appointment of an international consultancy within 60 days to audit those costs. The amendment was seen as a prelude to resume Kurdish oil exports.

On Monday, a senior KRG delegation arrived in Baghdad to resume talks with federal officials over the prolonged financial dispute, which has led to repeated salary delays in the Kurdistan Region.

A day earlier, Iraq’s parliament announced that “solutions were reached” on several key points of contention, with further discussions scheduled “in the coming days.” This followed a series of high-level meetings in Erbil between Iraqi Speaker Mahmoud al-Mashhadani and top Kurdish leaders, including Kurdistan Region President Nechirvan Barzani and Kurdistan Democratic Party (KDP) leader Masoud Barzani.

Sources informed Rudaw last week that one major sticking point remains: the volume of oil Erbil is required to supply to SOMO. Baghdad has demanded 400,000 barrels per day (bpd), while Erbil has proposed an initial commitment of 280,000 bpd.

Despite this, Iraq’s state-run al-Sabah newspaper reported on Tuesday that negotiations between the two sides had made “significant progress,” with both parties “getting closer” to reaching an agreement. The report added that efforts to finalize a deal based on constitutional principles had been accelerated.

On Tuesday, Rudaw obtained copies of two separate proposals - one from Baghdad and one from Erbil - outlining the terms of a potential agreement to resolve the financial and oil-related disputes.

Baghdad’s proposal

Baghdad’s draft proposal, dated July 7th, covers oil delivery, non-oil revenue sharing, and the crucial resumption of salary payments for Kurdistan Region civil servants.

Under the draft, the Kurdistan Region would “immediately deliver oil produced in the Region to the SOMO for export, contingent on reaching an agreement regarding the scope of work for the technical advisory body, as outlined in the federal budget amendment law.” This excludes oil quantities designated for local consumption.

Currently, the Region produces 282,000 barrels per day (bpd), of which 65,000 bpd is allocated for local use.

An alternative proposal suggests the Region “immediately deliver the available quantity, estimated at an average of 100,000 barrels per day of oil produced in the Region, to SOMO for export until an agreement is reached on the scope of work for the technical advisory body.”

Under this scenario, the Kurdistan Region would retain administrative and distribution responsibilities for local oil consumption, and would also bear the production and transportation costs for the 65,000 bpd used locally.

Regarding non-oil revenues, the Kurdistan Region would “continue to transfer the federal treasury’s share of non-oil revenues as stipulated by the Federal Financial Management Law.”

This includes 50 percent of customs duties and income tax.

The proposal also allows for offsetting these payments against the Region’s federal entitlements, such as operational and investment allocations and financial obligations like natural gas purchases for power stations.

Crucially, the federal finance ministry would be required to resume payment of KRG civil servant salaries for May and June 2025, and continue for subsequent months. This aligns with Federal Supreme Court rulings stating that disputes over budget implementation cannot be used as justification to withhold KRG salaries, and affirms the principle of equal treatment with federal employees.

KRG’s proposal

The KRG has submitted its own proposal, structured in two phases, to facilitate the resumption of oil exports and resolve financial disputes with Baghdad. It focuses on integrating KRG oil production into the federal system while addressing revenue-sharing mechanisms.

A draft of the proposal, seen by Rudaw, notes that in the first phase, the KRG commits to immediately handing over all oil produced in the Kurdistan Region to SOMO for export. Revenues from these exports would be transferred to the federal treasury.

Specifically, the KRG proposes “the immediate delivery of 236,000 bpd” - calculated from the total production of 282,000 bpd minus 46,000 bpd allocated for local consumption - as per a joint audit by Erbil and Baghdad authorities.

The KRG further pledges to deliver the full 236,000 bpd and to ensure compliance from International Oil Companies (IOCs) operating in the Region. Local oil consumption will remain under the KRG’s management, with a payment of $16 per barrel to cover IOCs production and transportation costs. While revenues from local oil sales will be transferred to the federal government after deducting these operational costs.

The second phase, which would run concurrently for 30 days, involves a joint assessment by the federal oil ministry and the KRG’s natural resources ministry to evaluate the Region’s actual needs for petroleum products. The goal is to determine how these needs will be met - either by the federal ministry or by the KRG - in accordance with existing law.

The latter phase responds to an earlier federal proposal to have all Kurdish oil exported centrally while providing the KRG with petroleum derivatives like other Iraqi provinces. While the KRG initially rejected this, it has now acknowledged that although current production stands at 282,000 bpd - and is expected to increase upon export resumption - it is "still unable to produce the 400,000 barrels per day stipulated in the [federal] budget law."

Beyond oil, the KRG’s proposal includes a commitment to transfer at least 200 billion Iraqi dinars per month (around $152 million) in non-oil revenues to the federal treasury.

The proposal also mandates the formation of a joint committee to finalize the localization of KRG salaries within 90 days. Funding for these salaries will be limited to employees successfully localized by the end of this period.

Additionally, a joint legal and technical committee would be established to review the KRG’s budget share based on actual expenditures. The committee is expected to submit its findings to the Iraqi Council of Ministers within two weeks.

The federal finance ministry would also resume salary funding for the KRG only after the conditions related to oil delivery, non-oil revenue transfers, and committee formations are fulfilled - and subject to final approval by the federal Council of Ministers.

What’s next?

On Tuesday, the Iraqi Council of Ministers decided to form a committee to address the unresolved issues between Erbil and Baghdad.

Karwan Yarweis, a Kurdish lawmaker in the Iraqi parliament representing the Patriotic Union of Kurdistan (PUK), stated in a Facebook post that the cabinet “did not make a decision regarding the [stalled] salaries” of public sector employees in the Kurdistan Region.

However, Yarweis noted that the Iraqi cabinet formed a committee made up of representatives from the ministries of justice, health, finance, planning, and higher education. The committee is tasked with “reviewing and reconciling” the two draft proposals submitted by the federal government and the KRG to address the salary crisis, oil revenues, domestic income, and taxation.

However, Yarweis noted that the cabinet established a committee comprising representatives from the ministries of justice, health, finance, planning, and higher education. The committee is tasked with “reviewing and reconciling” the two draft proposals submitted by Baghdad and Erbil.

He added that the reconciled proposals will be jointly submitted to the Council of Ministers for further discussion and potential approval.

Later in the day, a well-placed source told Rudaw that the committee is set to hold its first meeting on Wednesday to prepare recommendations for an upcoming extraordinary cabinet session on the issue.