Friday, August 22, 2014

The Emergence of the K.R.G. as an Oil-Exporting Area


August 22, 2014

LARNACA, Cyprus — This article tries to understand whether Iraqi Kurdistan is emerging as an oil-exporting area disconnected from the federal government in Baghdad. While Iraq is in complete turmoil under the attack of ISIS, the Islamic State in Iraq and Syria, there are also some indications that, despite the current legal confusion regarding the ownership of Kurdish oil, the Kurdistan Regional Government (the K.R.G.) is fully committed to getting ahead with its plan of exporting its oil and gas independently of the central government's authorization.  And now the K.R.G. is finding additional buyers for its crude oil. With reference to the data regarding the tracking of the tankers transporting Kurdish oil, the article is fully indebted with Reuters, which, thanks to its Live AIS ship tracking system, has been an invaluable source of information.      
The retaking of the Mosul Dam Showcases how a Coordinated American-Iraqi-Kurdish Strategy Is the Right Approach Against ISIS

When on August 7, 2014, militants of the Islamic State in Iraq and Syria, or ISIS, took control of the Mosul Dam, which is the largest dam in Iraq, many analysts thought that this action was a sign of the future fall of Erbil, the capital of Iraqi Kurdistan. The dam is located on the Tigris River in Ninawa Governorate, upstream the city of Mosul, which fell in ISIS hands on June 10, 2014.

The strategic importance of the dam is quite evident because it provides electricity to the 1.7 million residents of Mosul (there is a 750 MW power station). After the capture of the dam there was immediately fear that the jihadists could use the dam as a tool of destruction. In fact, according to a September 2006 report by the United States Army Corps of Engineers (Usace), this dam is one of the most dangerous in the world because of its internal erosion potential of the foundation. In practice, according to the report, there is a worst-case scenario consisting in the collapse of the dam and in the resulting flood of Mosul with 65 feet (20 meters) of water and Baghdad with 15 feet (five meters). Estimates put the death toll to at least 500,000 casualties. In practice, without a big effort, ISIS could destroy an already quite unstable dam. Moreover, if the Islamic fighters decided not to destroy the dam, they could also cut power supply or water flows to the population served by the basin. Now, all these scary scenarios seem to be ruled out. In fact, the current American airstrikes against ISIS militants have permitted Iraqi and Kurdish forces to reclaim the site thanks to a concerted action that lasted from last Sunday to Tuesday morning.

What until last Sunday had been missing in Iraq in the fight against ISIS was a coordinated military action against the Islamic militants. On August 7, the Obama administration decision to authorize airstrikes against the jihadist fighters changed the balance of the current confrontation in Iraq. Now that several external actors are supporting both the Peshmerga forces and the Iraqi army, it will be difficult for ISIS to conquer Erbil and/or Baghdad. Yet, on the government side, winning completely the battle against ISIS will not be easy because the militants could fall back to Iraq's Anbar Province and to the other eastern parts of Syrian territory under their control.    

Blocking ISIS in Anbar Province means that Iraq's two most important oil-producing regions, southern Iraq and Iraqi Kurdistan, would be out of ISIS control. Of course, for the southern oil fields, there will be some problems in relation to land transportation of oil through Iraq. Currently, of the three Iraqi export pipelines (from Iraq to a foreign country), none is able to transport oil.


In addition to this, the Strategic Pipeline, which theoretically could be used to transport oil from Iraq's southern fields to Kirkuk (from where oil might enter the I.T.P.), is working on reduced scale and would need several years of rehabilitation. But, notwithstanding this infrastructural pipeline malfunction, at least the control of the oil fields in northern Iraq and in southern Iraq will continue to be in Kurdish hands and government hands respectively. This will reduce ISIS economic resources, which derive from smuggling oil from the areas under ISIS control both in Syria as well as in Iraq. ISIS is currently controlling some oil fields in Iraq. Some reports suggest that ISIS could sell approximately 10,000 barrels per day to fund its activities. (For more information see: BACCI, A., Iraqi Kurdistan's Occupation of Kirkuk Oil Field Will Deeply Affect the Iraqi Oil Sector, June 2014)     


Notwithstanding the Iraqi Turmoil, International Oil Companies (I.O.C.s) Are Still Working in the K.R.G. — Upstream

After ISIS advance during the month of July the shares of the energy companies working in Iraqi Kurdistan experienced some losses. The assumption was that ISIS advance could disrupt their operations. Financial markets had probably an excessive reaction to the news coming from the K.R.G., although at the beginning of August ISIS was 40 kilometers southwest of Erbil. And the K.R.G. territory in its western and southern parts, the two sides from where ISIS could attack, is not as mountainous as in the east, where there is the Zagros mountain range. After the events of the last days, there is now the idea that Iraqi Kurdistan for the time being will continue to be a safe area especially now that Western countries will start supplying the Kurds with heavier weapons.

Some of the I.O.C.s working in the area are carrying out a buyback of their shares, which have decreased approximately 25 percent since early July. All the involved companies have confirmed in the last days that they are operating their oil fields in a safe and secure manner. The only exception is currently U.S. Hess Corp., which has temporarily suspended its oil-drilling operations. I.O.C.s have only implemented in the last two weeks as a precautionary measure, the withdrawal of non-essential staff — among them Chevron and ExxonMobil. Both the I.O.C.s and the K.R.G. authorities have confirmed that they will be able to increase production in the second part of the year as it was previously planned.

Already by the end of August, a joint venture of Genel Energy, an Anglo-Turkish company, and Sinopec's Addax Petroleum, a Chinese company, should increase production in the Taq Taq oilfield, which is the largest in the K.R.G., to 140,000 barrels per day. Recently, in an interview with Rudaw, a Kurdish media network, the K.R.G. natural resources minister, Ashti Hawrami said that the K.R.G. had a production capacity of 300,000 barrels per day (bbl/d) and that it is expected to increase it to 500,000 bbl/d by the end of 2014.

The K.R.G. Has Doubled the Export Capacity of the K.R.G. Oil Pipeline — Midstream (Pipeline)

After completion of upgrade work, the Iraqi Kurdistan oil pipeline, resumed working on August 21, 2014, at the increased rate of 200,000 barrels per day of Kurdish oil. Before this upgrade, the pipeline was transporting approximately 100,000 to 120,000 barrels of oil per day. According to local sources the pipeline should be upgraded to 220,000 barrels per day in the coming ten days and then to 250,000 barrels per day in a couple of months.

Until now, around 7.8 million barrels of crude have transited through the pipeline and have arrived at Ceyhan, Turkey, where 6.5 million barrels (83 percent of the shipped quantity) have been loaded onto tankers for export. At the date of this writing a seventh tanker is being loaded at the terminal in Ceyhan. According to a Reuters analysis of satellite data, around $350 million in oil sales have been concluded or are currently in the process of being finalized. And, during his interview with Rudaw, Mr. Hawrami affirmed that except for two rounds of Kurdish oil sales all of the revenues have been deposited in a Kurdish bank.
The K.R.G. Is now Finding More Customers for Its Oil — Midstream (Oil Tankers)

So far it is has not been easy for Erbil to find customers for its oil. In fact, Baghdad's continued and strong efforts aimed at blocking Kurdish sales have deterred some possible buyers.  And, in general, until now it has been quite difficult to have disclosure of the buyers of K.R.G. oil. Something is now changing and the K.R.G. is finding more buyers for its cargoes.   
Last January upon completion of the Kurdish pipeline between the Taq Taq oil field and Fishkhabur, a small city at the border with Turkey, Baghdad started to protest vehemently against the K.R.G. ability to sell oil independently of the central government authorization. In addition to this, Baghdad:

  • Threatened to sue the companies that were lifting oil via the K.R.G. pipeline.
  • Initiated legal action against Turkey, taking the case to the International Chamber of Commerce (I.C.C.) in Paris.
  • Cut the K.R.G. budget allocations.

During the last months Baghdad has said plainly that Erbil has been plundering Iraq's national wealth. (For more information see: BACCI, A., Iraqi Kurdistan's Occupation of Kirkuk Oil Field Will Deeply Affect the Iraqi Oil Sector, June 2014)      

Only on May 22, the United Leadership, which was the first tanker loaded with Kurdish oil (1 million barrels oil) left Ceyhan.  This tanker with its $100 million cargo has been anchored off Morocco for more than two months without unloading.

Since May, six tankers have already left the harbor and a seventh is being loaded in these days. At the end of June, the tanker United Emblem did a ship-to-ship transfer of its 1 million barrels to the tanker SCF Altai, which then delivered the cargo to the Israeli port of Ashkelon. The buyer is unknown. This was the first successful delivery of Kurdish oil. Another cargo, again carried by the United Emblem, was transferred to a second vessel off the coast of Malaysia late July. The purchaser is unknown.   

Instead, since late July, the tanker United Kalavrvta has been sitting off the coast of Texas after Iraq requested a U.S. court to seize the tanker. At the moment the oil tanker, a Suezmax carrying 1,032,212, barrels of crude of worth over $100 million of oil, is in international waters in a sort of institutional limbo. In fact, the Iraqi Oil Ministry filed a suit in the Southern Texas District Court. Without delay Erbil countered the case writing a letter to the American court. In the letter it explained why the K.R.G. had the right to sell Kurdish oil. In specific, the K.R.G. clarified that: 

  • the American court did not have jurisdiction in order to determine whether the owner of the oil was the K.R.G. or proper Iraq. The American court seemed to agree on this point. Already in mid-July State Department spokesman Eddie Vasquez said that how to share Iraq's national oil resources was a matter that had to be solved by the Iraqis. 
  • Iraq's Supreme Court already rendered void the Oil Ministry's attempts to stop Kurdish oil sales through a temporary injunction until the Iraqi political environment were settled. At this regard, it has to be noted that it was not clear whether the Supreme Court rejected the Oil Ministry's attempts on the basis of the content and/or the form.    

On August 11, the tanker, Minerva Joy, which transported 300,000 barrels of Kurdish oil, was due to arrive at Paulsboro, New Jersey, where it should have unloaded its cargo to U.S. refiner, Axeon Specialty Products. For the moment, the buyer has not bought or accepted the cargo; and the justification has been the unclear legal ownership of the crude oil. The tanker has now been stopped approximately a few dozen miles from Ocean City, Maryland. Axeon had received in June a separate cargo of Kurdish Shaikan crude. Similarly, the chemical firm, LyondellBasel had bought in May two cargoes of Kurdish crude (respectively 266,000 and 267,000 barrels). And, already in April, a shipment of crude oil probably from Iraqi Kurdistan had arrived at Marathon Petroleum Corp's Galveston Bay refinery in Texas.         
Mr. Hawrami is confident that soon there will be a positive solution and that the K.R.G. will be able to sell its oil to the United States. Washington did not banned U.S. companies from purchasing Kurdish oil, but it clearly expressed that the companies might have to face legal disputes with Baghdad. Indeed, the Obama administration direct support for the sales of Kurdish oil would be of paramount importance for Erbil. Buyers would no longer be scared by Baghdad's possible legal lawsuits. 
Moving to Israel, it seems that, notwithstanding a lack of confirmation from Kurdish authorities, there is an ongoing trade between the K.R.G. and Israel. The Tanker Kamari plays an interesting role at this regard.

The Tanker Kamari, until three days ago was approximately 30 kilometers off the coast of Israel. But already at the beginning of August this tanker had been in the area, exactly a little less than 125 miles off the coasts of Israel and Egypt. According to Reuters:

Reuters AIS Live ship tracking showed the ship was fully loaded, based on its draft in the water. After turning its satellite tracking off on Aug. 1, the ship reappeared four days later sitting far higher in the water - indicating it had unloaded its cargo of disputed oil.

It was not possible to determine which port the oil aboard the Kamari had been delivered to or who the buyer was.

Then last week, this tanker, which had been loaded again at Ceyhan around August 8, carried out close to Malta a ship-to-ship transfer to a vessel called the United Carrier. The transfer involved 80,000 cubic meters of Kurdish crude, i.e., 600,000 barrels. Later, the United Carrier offloaded the oil at the port of Omisaly in Croatia. The buyer was the Hungarian energy company MOL. More recently, according to Reuters:

The tanker Kamari was partly laden north of Egypt's Sinai on Aug. 17, tracking showed, before it turned off its satellite transponder until early on Aug. 19. It was not possible to determine where the oil had been delivered to or who the buyer was.

A spokesman for the Kurdistan Regional Government (the K.R.G.) Ministry of Natural Resources did not immediately respond to phone calls and emails seeking comment on Wednesday. The K.R.G. has previously denied selling oil to Israel "directly or indirectly".




A Gloomy Event

During the chaotic Iraqi developments of the last three months one event that partially in its significance passed unnoticed was, on July 11, 2014, the takeover by the Peshmerga forces of the oil fields of Bai Hassan, which is the country's fourth-largest field, and the Makhmour area. According to the official statement released by the K.R.G., on July 11, the decision of the takeover was carried out "after learning of orders by officials in the federal Ministry of Oil in Baghdad to sabotage the recent mutually agreed pipeline infrastructure linking the Avana dome with the Khurmala field." The damage should have consisted of dismantling or rendering inoperable the valves of the new pipeline. In fact, in the last months as a consequence of the difficulties of exporting the oil of the area around Kirkuk through the Kirkuk-Ceyhan Pipeline (a.k.a. Iraq-Turkey Pipeline, I.T.P.), which has not been working since last March as a result of the attacks of the ISIS insurgents, it has been constructed a new pipeline linking Khurmala, in the K.R.G., with Kirkuk's Avana dome. In practice, the new infrastructure, the Avana-Khurmala Pipeline, serves to move crude oil from the Makhmour, Avana and Kirkuk area fields to the K.R.G. From Khurmala crude oil could be also exported to Turkey through the new Kurdish infrastructure (300,000 bbl/d) which bypasses the territory controlled by the insurgents and is linked to the I.P.T. at the border between the K.R.G. and Turkey. At the time of the takeover, the Avana and Makhmour fields were producing 110,000 bbl/d of oil while the associated gas was used for the L.P.G. bottling plant at Kirkuk. But the operator of the fields, the North Oil Company, which is linked to the Iraqi Ministry of Oil, instead of using the new infrastructure to ship oil was reinjecting it back in a small disused field. The main result of this operation was a permanent loss of most of the oil.

This episode tells us a lot of the difficult relations between Erbil and Baghdad also during times when they should have a common enemy, which is ISIS. Sabotaging oil fields reminds us of at least two famous episodes:

  • Rumania 1916 — During World War I when German and Austrian troops were advancing on Rumania in September 1916, the British Cabinet War Committee deemed necessary to avoid the takeover by Germany and Austria of the Romanian oil fields and refineries and recruited Colonel John Northon-Griffiths "Empire Jack" with the task of destroying the Rumanian oil industry.
  • British East Indies 1942 — In mid-January 1942 when the Japanese were approaching the Balikpapan refinery and the surrounding oil fields (in today's Borneo, Indonesia), a crew of workers of Dutch/Shell Group, which was the company operating the complex, destroyed the wells and the refinery complex in order to impede Japan from having access to important oil reserves, which were of paramount importance for the continuation of the war.    

From the two examples above, it emerges that the saboteurs were obliged to act in order to avoid that Germany and Austria, in the first case, and Japan, in the second case, had access to intact oil resources. It was only a matter of time, but it was sure that in both cases the oil resources would have been conquered by the enemy forces. The saboteurs and the future owners of the resources were enemies fighting a world war. Instead, in the area of Kirkuk the two involved parties, the K.R.G. and Iraq, should absolutely be on the same side. Trust is what is missing between Erbil and Baghdad. It is difficult to imagine a positive cooperation between Erbil and Baghdad if these two sides are not able to collaborate in order to fight ISIS, which is today's common enemy. And indeed, some of ISIS recent victories are linked to the current lack of organization between the K.R.G. and the federal government. During World War II at least until the Yalta Conference in February 1944 — when it was clear that the Allies would win the war and it was only a matter of time — the U.S., the U.K. and the Soviet Union had been able to wage the war in a unified manner. In Iraq a similar commonality of intents has not been reached yet.


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