Sunday, March 31, 2013

Will Oil in the End Divide Iraq?

March 31, 2013

BEIRUT, Lebanon  Crude oil is the cornerstone of the dispute between Iraq's central government and the semi-autonomous region of Iraqi Kurdistan. During recent months the tension between Erbil and Baghdad has consistently increased, especially after rumors about a possible energy partnership (ranging from exploration to export of crude oil) linking Turkey with the Kurdistan Regional Government (K.R.G.). It's esteemed that the K.R.G. has 45 billion barrels of oil reserves and more than three trillion cubic meters of natural gas.
For Ankara this proposed partnership has with no doubt an economic logic: It could provide Turkey with oil and gas in a time of hasty economic growth, when Ankara is paying Russia around $2 billion for fuel every month. Conversely, the United States one of Turkey's most important allies is deeply concerned about the consequences of this plan. In fact, Washington fears about the disintegration of Iraq, an event that could prompt Iran to additionally extend its influence over proper Iraq. "If oil from Kurdistan goes through Turkey directly, that will be like dividing Iraq. This is our big concern," Deputy National Security Adviser Safa al-Sheikh Hussein of Iraq said recently on the fringes of an Iraqi conference.
Last Friday, these rumors were well confirmed when Recep Tayyip Erdogan, the Turkish prime minister, in an interview with CNN-Turk, expressly said that Turkey is currently in the process of signing a trade deal with the K.R.G. And when he went on referring to the Baghdad-controlled oil pipeline to Turkey, he underlined that the pipeline was operating well below its capacity (70.9 million tons a year) and that something had to be done in order to utilize it in a more business-oriented manner, like, for instance, extending it with multiple oil and gas pipelines. When talking about the quarrel between Baghdad and Erbil, Prime Minister Erdogan affirmed that according to the Iraqi constitution the K.R.G. had the right to use part of its energy endowment with every foreign country it selected. "There is no article in the constitution [the Iraqi constitution] that can prevent [the K.R.G.] from making this trade contract with us" added Mr. Erdogan.

Prime Minister Erdogan's declarations are not easily accepted in Baghdad. Since long time Turkey has courted Iraqi Kurdistan while the K.R.G. relations with the Shiite-controlled government in Baghdad have been consistently deteriorating. Today, Turkey is a major trading partner for the semi-autonomous region. And in addition to energy issues, Baghdad has recently quarreled with Ankara with reference to Turkey's refusal to extradite Iraq's fugitive vice-president Tareq al-Hashemi, who took repair in Ankara in order to avoid Iraq's Central Criminal Court's sentence that condemned him in absentia to death.

On the energy side, Baghdad's position is very clear: thwarting all possible energy deals between Ankara and Erbil. For example, last November, Iraq strongly opposed Turkey's national energy company T.P.A.O. from bidding for an oil exploration contract in the K.R.G. Later, in December, the Iraqi government stopped an aircraft carrying the Turkish energy minister Taner Yildiz from landing in Kurdistan. The basic assumption was that the energy minister was en route to Erbil for signing one of these Turkey-K.R.G. energy deals that are so despicable for Baghdad.   

The K.R.G. used to ship the lion's share of its oil production through the Baghdad-controlled pipeline that connects Iraq's Kirkuk to Turkey's port of Ceyhan, but as a result of these energy wars, after last December's dispute with Baghdad over the payments to the companies operating in Kurdistan, this channel was quickly interrupted. In practice, some of the companies working in Kurdistan and then shipping oil abroad through the Kirkuk-Ceyhan Pipeline have at present not been remunerated for a good portion of what they have shipped abroad. The K.R.G. affirms that it has not gotten enough money to pay for the companies working in Iraqi Kurdistan. It seems that the problem arose after some changes in the way the central government calculates the procedures for paying the operators.

As a consequence of the non utilization of the pipeline, the K.R.G. is continuing to increase its crude oil deliveries by truck to Turkey. According to Kurdish sources, Kurdistan's export volumes were 12,000 barrels per day in October 2012, but deliveries are now continuing to increase. January's data spoke about 30,000 barrels per day of crude oil and condensate (the latter is a light form of oil). This trucking activity irritated Baghdad that menaced reprisals against the K.R.G. and the foreign companies involved in the oil exports. In December, the trading house Trafigura was banned from operations in Iraq. Baghdad when referring to the oil trucked to Turkey defines it as "smuggled oil" to well underline the illegality of this activity.

Things again escalated earlier this March when Iraq's 2013 Budget Law was passed into law with the absence of the Kurdish M.P.s (168 M.P.s were present and the quorum was 163 members). The result was a very anti-Kurd Iraqi budget law. The government expenditure for 2013 totals $118.3 billion with an increase of 18 percent over 2012 and exceeding 70 percent of G.D.P. The proportion allocated to Kurdistan is $12.5 billion according to the 17 percent quota (since 2007) set for the region minus a certain number of sovereign expenses that are deducted. If the K.R.G. now decided to pay by itself the foreign companies, it would immediately lose half the allotted budget.
Erbil requested $3.5 billion to cover the costs accumulated by the companies operating in Kurdistan in the last three years among them ExxonMobil, Chevron and Russia's Gazprom Neft. But the central government considered some of these contracts illegal and consequently reduced the amount to be given to Kurdistan to $650 million. The shortfall is quite evident. The companies operating in Kurdistan need to be paid. The K.R.G. internal oil market and the export of some oil to Turkey is not a reliable solution. Budget Law 2013 is based on a $90 barrel price and on averaged exports of 2.9 million barrels per day including Kurdistan's production. An additional tough condition included in the law is that the K.R.G. has to resume crude exports at a level of 250,000 barrels per day before funds are released by Baghdad. As per the new budget law, the K.R.G. could only be able to cover two months of payments to the foreign companies. Some sources explain the low amount paid for by Baghdad with its intention to force these foreign companies out of Kurdistan.
Given the K.R.G. non utilization of the Kirkuk-Ceyhan Pipeline, it's quite improbable that trucking crude oil to Turkey could be any soon stopped although in no way may trucks transport the entire crude oil production of the K.R.G. In fact, Erbil should send by truck around 250,000 barrels of oil a day, which is not doable. To provide an example, K.R.G.'s Taq Taq crude oil is currently routed to Turkey's Mersin port and given the small amount trucked every day to fill up an oil tanker it may require up to two months. After the interruption of December, Iraq exported 2.4 million barrels per day in January mainly from the south.

One point should be clear: The future developments in the K.R.G. will have a huge impact in all the Middle East, a region where oil is politics and politics is oil. And surely, both Turkey and the K.R.G. have relevant interests with reference to the development of improved business relations. On the K.R.G. side, if Erbil were able to raise its production to 400,000 barrels per day of oil and to export it with a new Kurdish pipeline to Turkey, it could make $14.6 billion (considering a $100 per barrel of oil). This value is consistently superior to the budget allocation that Erbil should receive now from Baghdad. In other words, economic self-sufficiency could be a potent tool to declare independence from Iraq in the future.

For these considerations, the K.R.G. and Turkey are definitely set to build an oil pipeline to Turkey, notwithstanding the contrary advice of the United States. A new pipeline with a capacity of 200,000 barrels per day should be ready by the end of 2014 or the beginning of 2015. And according to the K.R.G. energy minister Ashti Hawrami, a gas pipeline could be easily converted to ship up to 200,000 barrels per day of crude oil by June. The British-Turkish company Genel Energy is as well planning another pipeline to ramp up oil exports to Turkey by 2014. This pipeline will link Iraqi Kurdistan's oilfields directly to Turkey, but it could also connect to the Baghdad-controlled Kirkuk-Ceyhan pipeline. And there is also a plan to build a parallel pipeline that would supply several hundred million cubic feet of natural gas per day to Turkey annually by 2014. Turkey’s national oil company (T.P.A.O.) would be involved in this deal, under which it would acquire the rights to five exploration blocks in Iraqi Kurdistan. In addition to all these planned pipelines, another scheme of cooperation involves energy swaps between Turkey and the K.R.G. with the latter pumping gas to the former's power plants, which in turn would send back electricity to Kurdistan.

On the Turkey's side, improved relations with the K.R.G. would have important economic and political consequences. And economically speaking, Turkey needs the K.R.G. energy resources. In this way, Turkey would really become a major energy hub connecting the Middle East with Europe. Already of two foreign businesses in Kurdistan one is Turkish, and this testifies the reciprocal economic interests between Ankara and Erbil. But politically speaking, the developments could also be very relevant. The initial point for understanding these evolutions is that at the moment Ankara is trying to resolve its domestic problems with its internal Kurdish minority. There is the necessity to end a conflict that has killed more than 35,000 people over thirty years. Turkey's foreign policy steered clear from the idea of having good relations with all the country's neighbors. The Syrian conflict put Sunni Turkey in direct competition versus the Shiite-dominated Iran, Iraq and Syria. For Turkey, obtaining peace at home with the Kurdish minority, would trim down the possibility that greater autonomy in the K.R.G. could represent a reignited spur to obtaining independence from Ankara for the Kurdish minority located in Turkey. And as a consequence, geopolitically speaking, the K.R.G. would gravitate around Turkey.

If the pipelines are built they will partially alter the geopolitical chessboard in the region. In fact, they are a real game-changer because they will give Erbil those economic resources that will permit it to sever the chain of Baghdad's political control. For Iraq, embittering the relation with the K.R.G. — for instance, drafting a very anti-Kurdish budget law not only could not bring back the K.R.G. in line with the central government, but also it could rather force Erbil to try to get the opposite result: independence. There is no easy solution to this impasse because in any case both parties want to have under their control the ethnically mixed city of Kirkuk, which lies in the territory disputed between Erbil and Baghdad and which sits on one of Iraq's largest oil fields.

Kirkuk's Citadel - Source: Wikipedia

The U.S. would like to avoid a conflict that could subtract energy resources from energy markets while inflaming one more time the Middle East. Plus, the U.S. energy companies have interests in both the K.R.G. and Iraq. By contrast, Europe is desperate for energy resources and getting them from a Kurdistan gravitating around Turkey could be safer than negotiating with Iraq. At this regard, around ten days ago the K.R.G. prime minister Nechirvan Barzani participated to an international conference concerning energy security that was organized by Germany's Christian Democratic Party and presided by Chancellor Angela Merkel. On this occasion, Prime Minister Barzani stated plainly that the K.R.G. could well satisfy on a long-term basis Europe's energy needs, while at the same time help Europe to diversify its energy suppliers. He said that if the right infrastructure were built by 2019 more than three million barrels of oil per day could be flowing from the K.R.G. to the international markets. Last but not least, as a perfect corollary to his meeting in Germany, on his way back to Kurdistan he then stopped in Turkey.