Saudi crude oil exports fell…
Oil prices fell again on…
As fighting rocks northern Iraq’s oil-rich Kirkuk area, and air strikes attempt to take out Islamic State positions, the dust will likely either settle in favor of the Iraqi Kurds, who have played a key role in protecting this area from the ISIS advance and who could use Kirkuk to cement their independence ambitions, or in favor of Baghdad, which knows that the loss of Kirkuk means the loss of northern Iraq.
Last weekend, military operations targeting ISIS in northern Iraq took out some 60 Islamic State fighters, according to Iraqi security forces, both in the provinces of Nineveh and Kirkuk—both oil venues.
Some 30 militants were reportedly killed in air strikes near Nineveh’s Qayyarah oil field.
Related: Why Oil Prices Will Rise And Many Pundits Will Be Caught By Surprise
While ISIS has terrorized northern Iraq—a swathe of territory that lies between that controlled by the Kurdistan Regional Government (KRG) and the central government in Baghdad—since June 2014, the Sunni jihadist group is only the immediate threat to this area. The real game here, once the dust settles, is between Baghdad and Erbil, the Iraqis and the Iraqi Kurds.
And as ISIS loses ground to the combined force of the Iraqi military and the Kurdish Peshmerga, this end game is getting closer to its climax.
Kirkuk is multi-ethnic, so winning it over has been more challenging, both for Baghdad and for Erbil. But fair percentages of all ethnic groups in the disputed city are now showing support for a referendum that could change the status of this oil-rich venue and bring it closer to Iraqi Kurdistan—or at least further out of Baghdad’s grip.
The referendum would decide whether Kirkuk would become part of Iraqi Kurdistan, or whether it would simply seek greater autonomy from Baghdad—especially when it comes to its oil wealth. But many still favor union with Iraq. The same referendum will be held in Iraqi Kurdistan, which will decide the question of independence from Iraq. The referendum could take place by the end of this year.
Related: Oil Edges Up After Biggest Draw In U.S. Crude Stocks This Year
It has not fallen on blind eyes among the local leadership of Kirkuk that the Kurdish Peshmerga have been the key force keeping them safe from ISIS.
There is a vacuum right now in the north because the Iraqi army was forced largely to retreat when ISIS moved in the summer of 2014, leaving the Peshmerga in charge—at least in areas that are closer to the Kurdish borders.
Baghdad has been trying to prevent this for some time—most notably since the Kurds started exporting their own oil unilaterally, bypassing the Iraqi central government and getting product to market directly through Turkey.
But the pipeline that runs through Kirkuk concerns both Baghdad and Erbil.
Kirkuk has already decided it wants its own oil company, which means separating off from the Iraqi North Oil Company (NOC), and the Kurds are publicly supporting Kirkuk’s bid, which is intended to gain more localized control over the province’s oil wealth. There isn’t much Baghdad can do about this legally, because constitutionally Kirkuk can launch its own oil company if it starts producing over 100,000 barrels of oil per day. It already produces over 150,000 bpd.
Related: DOJ Files Lawsuit Against Halliburton-Baker Hughes Merger
It’s all about the oil, and Kirkuk is home to about 10 percent of Iraq’s total reserves of 140 billion barrels.
And now Baghdad will start punishing Kirkuk for its disloyalty. It’s already decided that it won’t allow the province any budget for railway development, which is much-needed. It’s not a brilliant move on Baghdad’s part, and will likely only strengthen the resolve for a referendum as the move is seen to be an overt attempt to keep Kirkuk from taking on strategic projects.
Baghdad is also hitting out at the Kurds by holding back 150,000 bpd from being exported from Kirkuk, through Iraqi Kurdistan. Essentially, the Iraqi’s have turned off the northern taps. This strikes out at an already stretched budget for the Kurds who were also hoping to add 150,000 bpd to their supply this year, but will likely have to settle for 100,000 bpd. In all, that would mean 200,000 bpd less going through Iraqi Kurdistan, and it had already lost big with a pipeline problem that saw the Kirkuk-Ceyhan leg closed down for the month.
Baghdad is trying to starve them out by holding back oil. It’s taking a gamble here because it needs the Kurdish Peshmerga to protect Kirkuk from ISIS—but it’s a gamble Baghdad thinks it will win because it knows exactly how important Kirkuk is to the KRG’s independence ambitions. With Kirkuk’s oil, Kurdistan has a better chance of going it alone. But whether the Peshmerga will keep fighting if they aren’t being paid is another question.
When they root out ISIS, that’s when the real game will begin.
By Charles Kennedy for Oilprice.com
More Top Reads From Oilprice.com:
Charles is a writer for Oilprice.com