Kurdish Oil Export Deal may Seal Iraq's Fate

The Turkish Energy Ministry said crude oil from the Kurdish north of Iraq would be stored at a Mediterranean port to cater to Baghdad's stake to Iraq's oil future. Nevertheless, with the Iraqi central government distracted by long-term Sunni grievances further south, it's oil, not violence, that may eventually split the country in two.

Turkish Energy Minister Taner Yildiz said oil started flowing through a pipeline from the Kurdish north of Iraq to the Mediterranean Sea port of Ceyhan. With an initial flow rate of 300,000 barrels per day, the pipeline will terminate with storage rather than exports to allay Baghdad's concerns over oil.

The central government in Baghdad has expressed frustration with claims made by the semiautonomous Kurdistan Regional Government over Iraq's vast oil wealth. Though the KRG and Turkey signed a lucrative energy deal last year, unilateral moves on oil violate national laws, Baghdad says.

Turkey, which values its role as a reliable transit country, has been trying to serve as a go-between in the oil dispute. Ankara says it would hold Kurdish oil in storage until it gets Baghdad's blessing for exports, something Yildiz said he expects by month's end.

Late last month, however, oil trucked across the Turkish border from the Kurdish north made its way to the export market when Gulf Keystone, which has headquarters in London, sold crude from the Shaikan oil field. Shaikan, which started commercial production in the Kurdish north in 2013, should start churning out oil at a rate of 40,000 bpd later this year.

Baghdad has threatened to take legal action over the oil dispute but now has pressing problems with national security. Iraqi Prime Minister Nouri al-Maliki hailed the recent move by the tribal Awakening Council to regain territory in Anbar province claimed by the Islamic State of Iraq and the Levant, a group with ties to al-Qaida. The Sunni tribal council, formed with the help of the U.S. military in 2005, took on al-Qaida at the height of the insurgency in Fallujah. The Shiite prime minister, however, has been unable to bring the Awakening Councils into the regular army and the situation is once again spiraling out of control despite recent security gains.

The Kurdish north of Iraq has been relatively shielded from much of the violence since war began in 2003. The KRG already has deals with supermajors Chevron, Exxon Mobil and Total. On Thursday, Oil Search Ltd. announced it started new drilling operations in the region as part of a production sharing contract with the Kurdish government.

The Turkish Energy Company, backed by Ankara, was set up to maneuver in the Kurdish energy sector and Minister Yildiz in December met his Iraqi counterparts in an effort to hammer out an export deal. The Kurdish region could eventually send 2 million bpd to the global market if Baghdad agrees on exports. Any concessions from Baghdad could signal it's ready to give an inch on Kurdish oil ambitions, but like the Arab proverb of the camel's nose, a Kurdish export deal may be just the tip of a broader wedge that could split Iraq in two.

By. Daniel J. Graeber of Oilprice.com