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Shadow Governance Intel

Shadow Governance Intel

Shadow Governance Intel (www.shadowgovintel.com), the analytical arm of West Sands Advisory Limited, conducts in-depth research on power players and power plays that challenge the transparency…

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Kurdish Oil: The Two Biggest Threats

Middle East oil plant

As the Kurdistan Regional Government (KRG) seeks to restore pre-2014 levels of attractiveness to its energy sector from an investment standpoint, it grapples with several key challenges. Chief among these are its efforts to safeguard the strategic assets and operations of International Oil Companies (IOCs).

Of course, it is not uncommon for businesses with operations in emerging and frontier markets to be cognisant of weak security conditions that could disrupt project viability. But that being said, the KRG has faced an uptick in violence and is prone to the advances of Sunni militant groups in particular.

This analysis explores the threat presented by ISIS and the PKK, by looking at what impact they have had on the oil sector, as well as the role they may yet play. Moreover, it builds on a report released by Shadow Governance earlier this month, detailing the dynamics and drivers of the Kurdish oil sector.

Islamic State

During initial land grabs in early 2014, ISIS became well known in Western Iraq. However, it was not until June 2014, after acquiring the city of Mosul as well as portions of the Kirkuk Governorate, that the organisation began to pose a serious security threat to the North.

As such, ISIS went from not only challenging the FGI over its authority within Iraqi jurisdiction, but undermining the KRG’s control over areas of Iraqi Kurdistan. This added a new dynamic into what had hitherto been a bipartisan legal disagreement between the KRG and FGI.

This has, at times, threatened the refining capacity inside the domestic oil market of both Iraq and the KRG. Iraq has three primary oil refineries; Baiji, Dawra, and Basra. Dawra is located to the South East of Baghdad, and Basra is one of Iraq’s most Southern points. As such, these two refineries are far removed from the front lines of fighting against ISIS and are also uncontested by the political elite in Erbil. The recent swathe of fighting has therefore not affected these two regions in any noteworthy way.

However, the Baiji refinery is noteworthy because all three of the aforementioned parties to the recent violence have vested interests. ISIS began attacking the town of Baiji in Salahuddin province in June 2014, which is home to the largest of Iraq’s three oil refineries. Baiji is strategically located along Highway 1, which runs from Baghdad to Rabia, a border town in the North West of Iraq. Moreover, Baiji is only 111 kilometres from Kirkuk and therefore encroaches on the oil concessions which have been granted by the KRG to international oil companies in South-Eastern Kurdistan. Related: How “Zombie” Funds Are Disrupting Oil Prices

ISIS presence in this region, and control over the refinery, not only hampered Baghdad’s oil production but also threatened to spill over into de facto Kurdish civilian territory. In April 2015, the refinery succumbed to ISIS attacks and was captured by the militant group; jeopardising a refining capacity estimated at 310,000 bpd. ISIS most likely ran the facility after assuming control but open sources suggest that the group’s control of the refinery was relatively short lived, and it has since been driven from the town by ISF.

The New York Times cited reports from the Iraqi military that it had retaken the Baiji oil field from ISIS on the 16th of October 2015, bringing an end to approximately six months of ISIS control over the refinery. Although ISIS no longer occupies the land, the damage to the refinery after its re-capture was extensive.

Reports in early 2016 stated that it was ‘plundered beyond repair’, this corresponds with a wider ISIS tactic of decimating all existing infrastructure when forced out of an area. Interestingly, this is a similar tactic to that employed by Saddam Hussein in 2003 when driven underground by U.S. forces.

It is unclear how long it will take for the field to become as operational as it was in the pre-2014 period. No further reports have been identified, either confirming or denying that Baiji is operational once more, suggesting that it is still in disrepair. Despite its geographical proximity to Kurdish oil fields, the Baiji refinery is more of a strategic asset for Baghdad’s National Oil Company (NOC) as opposed to Erbil. Now that control of the area is back under the ISF, threats to Kurdish oil interests from Baiji are low. But this region could be volatile and be a danger to the KRG if violence reoccurs.

PKK as an Energy Actor in the KRG

In addition to ISIS, another key militant group threatens the Kurdish oil sector’s operational capacity, namely, the Partiya Karkerên Kurdistanê (PKK).

Since is foundation in the early 1980s, the PKK has been involved in Turkish politics, but it has also played a regional role in the bordering countries of the south-eastern provinces of Turkey. Its regional presence has been legitimised by its nationalist ideology in claiming the establishment of Kurdistan, uniting the Kurdish populations of Turkey, Syria, Iraq and Iran.

Within this regional framework, the PKK is often viewed as the leading actor in so-called “Kurdistan”, despite there being a historic political rivalry for Kurdish regional leadership between the PKK and other groups. Related: Top Asset Managers Still Bullish On Crude

This competition has triggered regional alliances, where the political logic of the “enemy of my enemy is my friend” has prevailed. This has been the case of the political alliance between the Turkish government, led by Recep Tayyip Erdo?an, and the self-declared autonomous region of the Kurdistan Regional Government (KRG), led by Masoud Barzani.

Given this political competition, every policy issue has been used for political interests between the PKK and the KRG government, and energy has been no exception. Although the PKK has targeted energy infrastructure between the KRG and Turkey, it could also be considered an active player in the energy sector, increasingly involved in its exploitation.

Since the 1980s, the PKK has been attacking the Ceyhan-Kirkuk pipeline. The attacks and its consequent cuts of oil transportation are overwhelming, and have incurred uncountable losses. The most recent PKK attack on Turkish soil was carried out in February 2016, and it is believed to have resulted in the cutting of oil transportation for almost a month, resulting in a total estimated financial loss for the KRG of U.S. $112 million.

The presence of the PKK in the KRG energy sector is two-fold. Primarily, and historically, the PKK has targeted the Kirkuk-Ceyhan pipeline, causing millions of dollars of losses in the Kurdish energy sector. Secondly, and more recently, the PKK is thought to be directly involved in the extraction and commercialisation of oil from within KRG territories itself. This is due to its heavy presence in the Qandil and Sinjar areas, which allows the armed group to benefit from the KRG’s energy resources, by commercialising the extracted oil through Iran.

Moreover, the presence of the PKK in the KRG’s energy markets does not help the KRG government appear as a solid and unified political actor – often a prerequisite for investor confidence. The PKK’s control of oil assets undermines the political authority of the KRG, and furthermore, the KRG loses its monopoly of violence by being incapable of securing its own borders. In this sense, the erosion of political legitimacy and security pose a direct threat to economic stability and foreign investment prospects in the region.

An empowered PKK directly affects political stability in the KRG, which is already fragile, and paves the way for a potential revival of the sort of Kurdish internal conflicts last seen during the 1990s.

The political ramification of the PKK in Syria, Iraq and Turkey, makes its complete disappearance from the geopolitical landscape highly improbable. In this sense, curtailing PKK influence in the Kurdish region depends on other political actors who could mediate peace between Iraqi Kurdistan’s various actors. One of the most important actors is the Turkish state, which has historically fought the Kurdish insurgency, viewing the PKK as a terrorist group. Under Erdo?an’s leadership, dialogue with the PKK remains a distant reality, and Turkey’s alliance with the KRG only increases political competition among Kurdish actors, triggering more future political and economic uncertainty.

Security Prospects Going Forward

Although ISIS never directly threatened to achieve major concessions from the KRG, the fight against the militant group has indirectly drained its financial resources. The war against ISIS has been one of the factors that has driven the KRG government into budgetary crisis, with the costly and prolonged conflict shifting the emphasis from contracting IOCs to paying the salaries of Peshmerga personnel, the armed forces of the KRG.

Furthermore, the PKK presence does not help stabilise the economic volatility of the KRG. Its various attacks on energy infrastructure and the direct exploitation of some of these energy sources are triggering further economic losses for the KRG state. In particular, the empowerment of the PKK and its activities in the KRG energy sector could further discredit Barzani’s government. The presence and freedom with which the PKK acts within the KRG shows a lack of control of the KRG government in its territories, and diminishes its already weak de jure role as the only security actor in its own territories.

By Shadow Governance for Oilprice.com

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