Kurdish Oil Exports Add Tensions to Iraq
Kurdish president Massud Barzani, right, and Iraqi President Jalal Talabani open a ceremonial valve during an event to celebrate the start of oil exports from the autonomous region of Kurdistan, in the northern Kurdish city of Irbil, Monday, June 1, 2009. Iraq”s self-ruled Kurdish region began exporting oil for the first time on Monday, shipping crude through a pipeline to Turkey. Photo by Safin Hamed: AP
The Iraqi central government’s recent decision to authorize exports of up to 100,000 barrels a day from its semi-autonomous Kurdish region came as a surprise after years of animosity and political wrangling. Even more unexpected was the Kurdish authorities’ claim that an $8 billion plan to export natural gas to Europe from its territory did not need the Oil Ministry’s approval.
Officials in Baghdad have tried to brush off the proposed gas deal as illegal, as it has with the many upstream deals signed by the Kurds over the past few years. But the contradictions are obvious. Is the Oil Ministry backtracking by allowing exports and in effect legitimizing all the upstream deals signed with the Kurdish Regional Government? And more importantly, does this signal a thaw in relations that will finally lead to the approval of the long-delayed oil law and open the door to increased investment in Iraq’s beleaguered energy sector?
At stake is the development of up to 45 billion barrels of oil that the KRG estimates its territory holds, plus huge gas reserves that are still being assessed after years of neglect. Instead of a breakthrough though, Baghdad’s decision appears to be a calculated move to temporarily increase oil revenue, which the KRG partakes in, while winning itself time in the larger standoff, analysts say.
Indeed, the apparent concession rather than auguring better times could signal more trouble ahead. “There is potential for tensions to come back when Baghdad feels it is regaining power,” said Raja Kiwan, a Dubai-based PFC Energy analyst. “This sets the stage for oil conflicts to come back with a vengeance.”
To begin with, the terms under which Kurdish oil will be exported remain uncertain. Pipeline supplies to the Ceyhan port in Turkey from the Tawke field operated by Norway’s DNO International will begin June 1 at 60,000 bbl/d, according to the KRG. Another 40,000 bbl/d will be initially transported in trucks from the Taq Taq field operated by the Swiss-Canadian firm Addax Petroleum. to the pipeline until it is connected directly.
The marketing will be left to Iraq’s national State Oil Marketing Organization. It isn’t clear whether the Kurdish-signed contracts with DNO and Addax will be honored or how they would be paid. Under those terms, companies get between 18 percent and 20 percent of revenues, more than the 17 percent the KRG gets from Iraq’s central government.
The Kurdish region, like the rest of Iraq, is reeling from the crisis, so it equally benefits from increased oil revenue, unless the contractual shortfall comes out of its own coffers. The motivation for Baghdad is clear: money. Iraq’s crude exports have recently fallen by about 250,000 bbl/d, which coupled with low oil prices, is further restricting the government’s ability to finance its oil-dependent budget.
“It was precipitated by the need for immediate revenues,” said Kiwan. “That was the catalyst.” Baghdad has already adjusted its average oil price for 2009 twice. “But the KRG is not getting all it wanted.
Baghdad will still do the marketing. Baghdad still retains a lot of control.” The natural gas deal that the KRG has flaunted in Baghdad’s face is unlikely to go ahead, at least how it was conceived. Under the cross-shareholding deal, Austria’s OMV will pay UAE’s Crescent and its affiliate Dana Gas each $350 million for a 10 percent stake in Pearl Petroleum, a gas project in the Kurdish region. Hungary’s MOL will also get a 10 percent stake of the project in exchange for 3 percent of its shares to each of the UAE companies.
Under the plan, some $8 billion will be invested. At least half of the 3 billion cubic feet a day pumped out of Pearl Petroleum would go to jumpstart the almost defunct Nabucco pipeline. European partners and officials cheered the deal, insisting completion would come by 2014, but a lot of the obstacles appear insurmountable. “I would caution that these deals signed won’t necessarily come to fruition in the time they say,” Kiwan said.
Iraq’s Oil Ministry, which has been involved in Nabucco talks for some time, has said it is willing to supply a good share of Nabucco, but from its Akkas field bordering Syria by connecting to the Arab Gas Pipeline. The duct runs from Egypt to Syria and is expected to connect to Turkey.
Another powerful deterrent is Baghdad’s standing threat to bar any company that signs with the KRG from bidding for contracts in the rest of the country, scaring the biggest names in the industry away.
Still, Baghdad’s decision is no doubt a significant break from the past that legitimizes, at least partially and temporarily, the KRG-signed contracts, analysts said. That might not last long though. The deals are a corollary issue of the sectarian tensions pitting Kurds and Arabs, which have put aside their Sunni-Shia division to face the common threat of what they believe Kurdish independence aspirations. Baghdad has the support of its neighbors and the United States, all equally concerned of the risk of a civil war that would likely draw in foreign armies.
There are no signs of a political thaw either. Indeed tensions are mounting as parliamentary elections scheduled this year approach and as US forces continue to hand military control to the central government and the Iraqi military. Any oil and gas exports out of the Kurdish region would also require support from neighboring countries, namely Turkey, because the region is landlocked. But Turkey will almost certainly always side with Baghdad to avoid emboldening its own Kurdish PKK separatists.
So aside from Iraq getting around $6 million per day in extra cash, expect little else. Both sides are seen as gearing for the worst. That could mean a civil war pitting Iraq’s rejuvenated, well-trained and armed military against the Peshmerga, the KRG’s formidable militia. Any real reconciliation will have to be preceded by a final agreement on territorial disputes over the northwestern province of Nineveh and Kirkuk, which is not only the historical and sentimental Kurdish capital, but could also hold as much as 4 percent of the world’s oil.
Kurds say that’s a prize worth fighting for. And Baghdad knows that a conflict is unavoidable unless Kurds give up on their centuries-old independence aspirations. Don’t count on that.