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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Kurdish Independence Could Deal A Major Blow To Oil Markets

Kurdish Flag

The future stability of OPEC’s second-largest oil and gas producer could be decided by the end of 2017. Unrest is growing in Iraq as the Kurdish referendum grows nearer. Soon, the Iraq that we have known since the end of WWII could be drawing new borders. At the same time, the conflict between the Shi’a (supported by Iran) and the Sunni (Saudi-UAE) could be heating up again.

Regional actors and political friction have added fuel to the fire, in the first signs that the strong Shi’a majority is experiencing internal instability. One of the main leaders of the region’s Shi’a has broken ranks in Iran’s Shi’a led government factions just as Sunni power players in the Arab Gulf are expecting a collapse of the Shi’a power triangle of Iran-Iraq-Syria.

The unexpected visit of Shi’ite cleric and power broker Muqtada Al Sadr to Saudi Arabia and the UAE has stirred unrest in the region. On the 30th of July, Al Sadr and Saudi crown prince Mohammed Bin Salman met in Jeddah, discussing possible cooperation between the Sunni Wahhabi Kingdom and Shi’a led Iraq.

Al Sadr’s meeting with MBS is significant, as it could lead to a change in Iraq’s pro-Iran political military position. This would signal a major success for the anti-Iran GCC front, but it would put severe pressure on Tehran in its quest to construct a Shi’a land bridge between Iran, Iraq, Syria, and Lebanon.

A political thaw between Baghdad and Riyadh has occurred in recent months with a number of high-ranking ministers and officials meeting regularly. Still, official diplomatic relations remain very cold.

Al Sadr’s political maneuver has created a tense relationship with Tehran. Iranian media have even accused Al Sadr of treason.

The Iraqi leader has shrugged off the criticism, however, even upping the pressure in a recent visit to Abu Dhabi, where he met with Crown Price Mohammed bin Zayan Al Nahyan. MBZ and MBS are close allies, both of whom hold the same anti-Iranian views and share a similar vision for the region.

The move by Al Sadr, a Shi’ite cleric and leader of a strong Shi’a militia, is significant. The once cohesive Shi’a military and political front in Iraq has splintered, adding to the already significant pressure on current Prime Minister Al Abadi, whose waning power could be threatened further if regional players up the ante.

For Tehran, the situation is troubling. Until July, Iran’s influence on the region was growing. The gap that the U.S. has created has given Tehran a free card to assume full power in the vast territory. If not addressed, Iran could build a Shi’a regional super power that could further destabilize the MENA region and even impact Turkey in the years to come. The main backbone of this power would stem from the intricate religious culture and a military link between Tehran’s hardliners and the Shi’a majority in Iraq.

This strategy could now be at risk if Al Sadr maintains his current commitment to de-escalating tensions with the Sunni GCC countries. As one analyst stated, “Tehran was pulling all the strings among the Shiites (of Iraq) but it seems that several strings are now beyond its grasp, like that of the Sadrists”.

Al Sadr has skillfully used the openings created in the previous months by Iraqi Prime Minister Haider Al Abadi as a follow up to Saudi foreign minister Adel Al Jubeir’s visit to Baghdad. However, the GCC leaders could be overplaying their cards as the Shi’a power struggle in Iraq has not yet presented a clear winner. Tehran could still attempt to pre-emptively remove Al Abadi from power, replacing him with the likes of Al Maliki.

Several Iraqi analysts are warning that Iran is preparing for a showdown, supported by money, weapons, and a strong media campaign. Iranian influence in Iraq should not be underestimated, as the current anti-Daesh military campaign is largely led by Iranians or Iranian trained personnel. The economic interlinkage is also immense, especially in the Shi’a majority areas of the country.

A potential military showdown could be expected if the thaw between Baghdad and Saudi Arabia removes even more obstacles the coming months. The opening of the bilateral borders, which were closed since 1990, is a sign of this. Increased Saudi investments in Iraq could lead to not only an economic revival but also stir up renewed tensions at the same time. The pro-GCC power players in Iraq, such as the Kurds, Sunni minority groups or even Al Sadr, will have to remain very cautious. A total removal of armed groups or militias is needed, but even Al Sadr, known as a firebrand, has not yet even addressed the end of the Hashed Al Sha’abi.

Iranian news site Tasnim, known for its links to Iranian Supreme Leader Ayatollah Ali Khamenei, has openly accused Al Sadr of betrayal. The news site also stated that the visit is a betrayal of the Yemeni people who have been fighting the Saudis for more than a year. Tasnim also accused Saudi Arabia of taking advantage of the Sadrist movement and seeking influence gateways in Iraq.

Iraq is also facing possible turmoil due to the pro-secession vote in Kurdistan. The call for independence by Iraqi Kurdish parties is not surprising, but it is only the first step further towards the hard-sought-after independence. The majority of Iraqis, however, are against the independence of the Kurds, as it could lead to further instability in the rest of the country. Related: Two Countries Could Push Oil Over $50

Still, the September 25 non-binding referendum could be a watershed in Kurdish and Iraqi politics. Until now, the Kurdish region has been one of the most tranquil regions in Iraq, when not taking into account the harsh military operations against Daesh around Mosul. The semi-autonomous Kurdish nation has also established trade and economic relations with Turkey and Iran.

In the Iraqi constitution, supported by the U.S. after 2003, Kurdistan has received a semi-autonomous status. As in the whole region, political powers are tribe or family related, resulting in power politics and corruption. The Barzani-Talabani rule is no different from other parts in the Middle East. Kurdish politics are ruled by the two former Peshmerga leaders, now dividing the Kurdish arena between themselves. Since October 2015, the Kurdish Parliament has not met while Kurdish president Masoud Barzani has overstayed his tenure by four years. The economic situation is slightly depressed, largely due to declining oil and gas revenues, a conflict with the Baghdad government about financial disbursements of revenues and a rising debt portfolio.

Still when looking back at Kurdistan just after Saddam Hussein’s removal, optimism is shown on the streets of Erbil, Kirkuk and other places.

The real danger lurks in the mountains surrounding the Kurdish region. Kurdistan has to deal with armed opposition coming from Iraqi groups and the Baghdad government which people fear. Kurdistan’s neighbors will be the real wolves to be watched. Turkey, Iran and Syria disagree with an independent Kurdistan. If the referendum is positive about autonomy and secession, its Turkish-Arab-Iranian neighbors will put all their power behind attempts to block it before birth.

The Turkish and Iranian government fear that a free Kurdistan will directly affect their own Kurdish minorities, which have been fighting for independence since years. Even though the Iraqi Kurds have been assisting (or at least not military blocking) Turkish military incursions and operations against the Turkish PKK on their own soil, a free Kurdistan cannot be tolerated according to Turkish nationalism or Erdogan’s Ottoman strategies. Ankara will do all, including military pressure or operations, to drown the Kurdish baby before it can start growing.

Iran holds the same position, as there is already some cooperation between Iraqi Kurdish groups and Iranian Kurdish militants. Iran, under the flag of Iraqi integrity or solidarity, will try to prevent it by all means.

Looking at the Arab world, especially Saudi Arabia, UAE or Egypt, a different picture needs to be painted. Before the Syrian war, followed by the Qatar crisis, there was a tendency of supporting the Kurds partly, but no outright military or political support was given. Since the Turkish military operations in Syria and Iraq, and Ankara’s support for Qatar and Iran, Saudi Arabia and its allies have decided to support fully and openly the Kurdish dream. Not only to divide the powers in Iraq and weaken the impact of Iran’s ongoing military operations, but also to hit Tehran and Ankara where it really hurts. By supporting the Kurdish national independency Saudi, Egypt and UAE, are pushing (and weakening) the growing influence of Turkey and Iran in Iraq.

The Arab countries have decided that the Kurdish issue is the weak spot of both adversaries. The growing military cooperation between Iran and Turkey, as demonstrated in the past few days, only puts oil on the fire according to the Arab leaders. Iran’s military chief of staff General Mohammad Hossein Bagheri has met with Turkish president Erdogan and Turkey’s top general Hulusi Akar to discuss the Kurdish question. Both sides have warned for military consequences if a referendum is even held.

In a statement Turkey’s Foreign Minister Mevlut Cavusoglu stated that holding the referendum when Iraq already has many problems could “lead the country to civil war.”

For Saudi Arabia and its allies, the current situation presents major opportunities. First of all, the Kurdish referendum will possibly reel in Iran’s current power buildup in Iraq. Secondly, the move of Muqtada Al Sadr to leave the Iranian influence sphere and join the Arab Sunni alliance puts Iran under pressure to act, with a possibility of a total breakdown.

Regional and national politics, instability and possible conflicts could have another positive result - Iraq’s oil and gas future will be bleak. Iraq’s re-emergence as a major oil and gas producer has put the ongoing endeavors of OPEC, led Saudi Arabia and backed by Russia, to stabilize the strained oil market under pressure. Any possible obstacle put in the way of an Iraqi oil production volume increase is worthwhile considering. An unstable Iraq will not gain the hard-needed investment influx to gain influence as OPEC’s second producer.

An independent Kurdistan could have a detrimental impact, not only because Iraq will lose part of its oil and gas reserves, but it will also have to rely mainly on oil exports via the Shatt Al Arab river, providing a bottleneck for future expansions.

Political or even armed instability in Iraq will bring the country back to the situation of 2013-2014, a country rife with conflicts, sectarian or religious infighting and a power vacuum. Related: Can Mexico Replicate The U.S. Shale Boom?

At present, the current oil market could not absorb the implosion of Iraq, as it will affect also its neighbors. Iran and Turkey will feel the results in their volatile regions, where several main oil and gas arteries are located. The real winners in the short term could be the Arab coalition members, as their oil and gas operations would not be threatened directly.

A power struggle within Iraq’s Shi’a regions could also remove part of the ‘perceived’ Iranian interference in Saudi’s Eastern Province. The current Shi’ite opposition in and around Qatif would be not able to block or capture any Saudi energy assets without Iranian support.

All pieces are currently on the chess board, and a possible end-game plan is to be expected. The risks and rewards on all sides are sure to be extremely high.

Iraq’s future is being decided, this time three new and battle-hardened players have entered the arena. The pawns are in the hands of Iran, Turkey or the Saudi Alliance.

Iraq’s future will have a direct regional and global impact, as the global oil and gas markets will have to keep a wary eye. The 25th of September referendum and its outcome should be calculated into any oil and gas demand-supply scenario.

Until now, it seems not to be the case. Underestimating the impact of two seemingly separate developments (Al Sadr, Kurdistan) in Iraq could be the biggest mistake to be made by oil traders, hedge funds or investors. They are linked, as all is in the Arab world.

By Cyril Widdershoven for Oilprice.com

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  • RLL on August 24 2017 said:
    It is perhaps a symptom of the sickness of the mid-east that any lessoning of tensions by two states is seen as a deterioration in establishing peace.

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