THE SLIPPERY BUSINESS OF OIL

Every day, a convoy of tanker trucks loaded with crude oil head north from Iraqi Kurdistan through the border crossing at Harbur into Turkey. The oil comes from new fields the semi-autonomous Kurdistan Regional Government (KRG) are opening up with the help of some of the biggest oil companies in the world.

Hussain Balu, undersecretary at the KRG’s Ministry of Oil and Natural Gas, estimated in January that some 15,000 barrels per day (b/d) of oil and natural gas condensate goes to Turkey for refining or export.

But Ankara wants to build pipelines from Kurdistan to Turkey’s Mediterranean oil terminal at Ceyhan that could initially carry 1mb/d, possibly as early as 2014, and bypass the Baghdad controlled export network.

Land-locked Kurdistan has no access to the sea, so if it wants to export independently of Baghdad it must use pipelines, which as the Americans found during their eight-year occupation, are highly vulnerable to sabotage. The central government in Baghdad bitterly opposes the Kurdish enterprise, viewing it as an act of treason against the post-war Iraqi state. Be that as it may, Kurdistan is sitting on at least 45bn barrels of crude, as well as substantial natural gas reserves.

That’s roughly one third of Iraq’s declared oil reserves total 143.1bn barrels, so the loss of such resources threatens Baghdad’s entire reconstruction programme which hinges on the quadrupling of oil production, a mammoth task that many in the global energy industry believe is unattainable. So Baghdad can be expected to fight tooth and nail to ensure that Kurdish oil and gas will be under its control.

Prime Minister Nouri Al Maliki, a Shiite with one foot in Tehran, insists that his coalition government, increasingly shaky though it may be as Iraq continues to be plagued by insurgency and sectarian violence, has the sole right to conclude drilling contracts with foreign companies and that the oil the Kurds are shipping north rightfully belongs to the Iraqi state.

“Exporting oil from the Kurdistan region to Turkey is illegal and illegitimate,” government spokesman Ali Al Dabbagh declared.
“The oil and gas are the property of all Iraqis and those exports and revenues must be managed by the federal government which represents all Iraqis.”

He accused Ankara of “participating in the smuggling of Iraqi oil … and this issue will affect the relations between the two countries, especially the economic ones.”

The Kurds have cut off all exports to Iraq, claiming Baghdad owes the KRG and the oil companies working with it some $2bn in fees.

The hostility between Maliki and the KRG under its president, Massoud Barzani, son of the late Mullah Mustafa Barzani, revered champion of Kurdish nationalism, has been escalating for years. But it accelerated when US forces, with whom the Kurds had a particularly friendly relationship, completed their withdrawal from Iraq in December 2011, leaving the power-hungry Maliki in control.

This has heightened speculation that the Kurds could be moving towards a declaration of independence, a dream they have cherished for generations and for which they have spilled much blood, particularly under the legendary Mullah Barzani.

“The hypothesis of an armed conflict between the central Iraqi government and the autonomous Kurdish region cannot be excluded,” French analyst and author Christophe Ayad wrote in Le Monde Diplomatique recently.

The KRG has been defying Baghdad on the oil issue for years and has signed exploration contracts with some 40 foreign companies, mostly trail-blazing independents known in the industry as “wildcatters”, or small companies such as DNO of Norway and Gulf Keystone Petroleum of the UK.

That was a mild irritant to Baghdad. But the game- changer came in October 2011 when the KRG signed up ExxonMobil of the United States, the world’s biggest oil company, to explore six blocks, two of them in ethnically mixed disputed territory.

Baghdad was incensed by Exxon’s defection because it had a 2009 production-sharing contract with the company to develop the vast West Qurna 2 oilfield in southern Iraq, where two-thirds of the country’s reserves lie.

This is where the Oil Ministry is concentrating its drive to push production up to around 8.6m b/d in the next few years, to challenge Saudi Arabia as the world’s leading producer. The loss of Kurdish oil out put, which is likely to increase sharply once new fields begin production, will significantly impair Baghdad’s effort to reach its state target levels.

ExxonMobil’s defection stemmed from the growing dissatisfaction among the score of international companies who have signed 20-year service contracts with Baghdad since 2009 that generally restrict earnings to $1-$2 a barrel produced.

The Kurds, eager to lure the majors to their territory, offer up to $5 a barrel and an alternative to the rampant corruption, bumbling bureaucracy and endless infrastructural delays the companies face in the south.

Since ExxonMobil defected, other international majors like Total of France, Chevron Corporation of California, the second largest US oil company after ExxonMobil, and Gazprom Neft of Russia have signed deals with Erbil.

Together these supermajors, and a gaggle of smaller operators, such as the Anglo-Turkish Genel Energy headed by former BP chief executive Tony Hayward, look set to transform Kurdistan into a serious energy player.

“If Exxon Mobil starts drilling operations, Baghdad will have no option but to try and stop them,” an oil industry analyst observed. “But they’ll have the KRG and the Peshmerga behind them.”

Kurdish leaders like Barzani and the ailing Iraq president, Jalal Talabani, a towering Kurdish figure, mediator and veteran of the long guerrilla war against Saddam, insist independence is not on their agenda.

But the oil dispute is only one aspect of the deteriorating relations between Baghdad and the KRG in Erbil, the booming capital of Kurdistan. And oil is now the key, for both sides.

Apart from drilling in Kurdistan, the KRG claims the disputed northern city of Kirkuk, 150 miles north of Baghdad, and its oilfields are historically part of Kurdistan, which was a separate province during 400 years of Ottoman rule that ended after Turkey’s defeat in World War I. Kirkuk contains about one-third of Iraq’s known reserves.

Baghdad refuses to relinquish the region, which Saddam sought to Arabise by driving out the Kurds and implanting Sunni Arabs.

But in particular, Maliki cannot afford to relinquish the Kirkuk oilfields, since that would not only diminish Iraq’s bountiful oil wealth but strengthen the economic base for a separate Kurdish state.

Maliki has added to the tensions by seeking to hire BP to boost production at the Kirkuk fields from the current 260,000 b/d to 580,000 b/d.

BP, which signed a major production-sharing con- tract from Baghdad in 2009 to develop the Rumaila superfield in the south, is reported to be close to an agreement with Maliki’s administration. That infuriated Erbil. The last thing the Kurds want is for BP – or anyone else – to arrest the fields’ decline to strengthen Iraq’s claim to them. So any effort by BP could trigger further hostilities.

Kirkuk is part of a wider territorial dispute between Baghdad and Erbil that has been steadily heating up for months along the southern edge of Kurdish territory. Both sides have sizeable military forces and heavy weapons, including artillery, deployed in a confrontation across the northern region, putting Iraq once more on the brink of civil war.

Fighting raged for several days in August 2012 until a ceasefire took hold. But there’s been no progress in defusing the confrontation and the next flare-up could be more difficult to contain given the thousands of US-trained Iraqi troops and Kurdish Peshmerga facing each other in the north.

The Peshmerga, “those who face death”, are the Kurds’ battle-seasoned fighters who for decades fought a separatist war against Baghdad until Saddam was toppled, with their help, in 2003.

This political fault line could be widened if Exxon goes ahead with exploratory drilling, expected this summer, in three of its blocks that lie in disputed territory. Iraq has some 280,000 men under arms, but its forces are still considered to have limited operational capabilities. The KRG, meantime, is still in the process of turning its 200,000 well-trained guerrilla veterans into a conventional army. Iraqi officials murmur about the KRG buying anti-aircraft and anti-tank weapons “with the help of a foreign country,” which these days means Turkey, whose relations with Maliki’s autocratic, pro-Iranian coalition have been steadily deteriorating as Ankara seeks to reassert its supremacy in the region.

Barzani, meantime, has been trying in vain to convince the Barack Obama administration in Washington not to sell Maliki an initial batch of 36 F-16 strike jets, which he argues could be used against Kurdistan or other troublesome minorities, as Saddam did when he was in power.

“This tension has been exacerbated by the war in Syria,” observed Ayad.

Barzani supports the rebels battling to topple the brutal regime of President Bashar Assad, a key ally of Iran. Maliki, no doubt doing Tehran’s bidding, supports Assad’s Alawite minority regime against his overwhelmingly Sunni opponents.

Baghdad appears to be very much on the defensive these days. It fears, with some justification, that the Kurds’ defiance could encourage other regions, most notably the Shiite-dominated south, which holds two- thirds of Iraq’s oil reserves, to seek self-rule.

That would fragment the post-war republic and dangerously reshape the geopolitical landscape of a volatile region already convulsed by historic changes, not least the Syrian war and its potential for region- wide strife. Turkey, along with Iran, which both have restive Kurdish minorities, would be deeply affected if the Syrian war produced a link-up between Kurdistan and Syria’s Kurdish provinces, which hold most of that country’s oil reserves.

In early March, Kurdish militias in Syria took over the oilfields and installations in the northeast.

All this poses a particular dilemma for Ankara, which has been battling its own separatist Kurds since 1984 in a war that has claimed some 40,000 lives but now seems to have made a significant, and pragmatic, change in policy. Ankara has no energy resources of its own, and Turkey’s ambitious Prime Minister Recep Tayyip Erdogan is hungry for the Kurds’ oil and gas as he seeks to transform Turkey into a regional energy hub.

Ankara’s using its commercial power to persuade Barzani to restrain Turkey’s own Kurdish separatists, the Kurdistan Workers Party, or PKK, to sign a peace deal, whereon secret negotiations are already underway. Joost Hiltermann of the Brussels-based International Crisis Group notes that “Erdogan is said to have promised Barzani that Turkish forces will protect the Kurdish region in the event of a military assault from Baghdad.”

Erbil, in turn, realises that it needs Ankara if it’s to wriggle out of Baghdad’s embrace.

“Turkey has made a strategic shift in its relations with us,” a senior official in Erbil acknowledged. “Whatever the scenario, our market is in Turkey.”

The confrontation between Baghdad and Erbil is fast becoming a major threat to Iraq’s stability and unity, and has hamstrung Maliki’s drive to entrench his authority following the US withdrawal.Maliki’s Shi’ite-dominated coalition is under growing pressure from Iraq’s minority Sunnis opposed to his increasingly dictatorial style, as well as the Kurds and daily attacks by a resurgent Al Qaeda in which hundreds of Shi’ites have been slaughtered in recent months. He cannot afford to let the KRG defy him. So it was that on 7 March, the Iraqi Parliament passed the 2013 budget that allocated Kurdistan $650m in oil revenues to pay oil companies for crude pumped into the state grid in 2010-12. Erbil had demanded $3.5bn.

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