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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Kurdistan's Oil Independence Dream Just Got Shattered

  • IOCs active in Iraqi Kurdistan finally yielded to Baghdad’s calls for oil sales to be handled by SOMO.
  • For China, a fractious independent Kurdistan with strong former ties to the U.S. would make the administration of Iraq’s oil and gas sector much more difficult.
  • Despite controlling Iraqi Kurdistan's oil sector post-2017 independence vote, Russia prefers to work with Baghdad's central government.

Kurdistan oil

It is likely to be around 100 degrees Fahrenheit this week in Iraqi Kurdistan’s capital of Erbil, but few regional commentators will doubt that many in the semi-autonomous region will feel a chill somewhere deep inside their bones. Having voted for independence on 25 September 2017 by 92.73 percent in favour and 7.27 percent against, the Kurds of northern Iraq are now looking at being subsumed into the rest of the country and ruled in all material ways directly from Baghdad. This follows the announcement last week that the Association of the Petroleum Industry of Kurdistan (APIKUR) – a group representing international oil companies (IOCs) in Iraqi Kurdistan - that its members would agree to direct sales agreements with the State Oil Marketing Organization (SOMO), which is controlled by the Oil Ministry in Baghdad. This came after a statement from the Kurdistan Regional Government (KRG) that such direct sales are the best option for resolving the suspension of oil flows from the region to Turkey that has been in place since 25 March 2023.

Given the rapid deterioration of the KRG’s finances since the embargo began, it is little wonder that it has finally yielded to Baghdad’s calls for the IOC’s oil sales to be handled by SOMO. However, to those who have been watching the struggle between Erbil and Bagdad for decades, the KRG’s statement does look highly akin to the notion of turkeys voting for Christmas. The Federal Government of Iraq (FGI) has been looking at the optimal way to roll Iraqi Kurdistan into a unified Iraq since the U.S. announced its intention in July 2020 to end its combat mission in Iraq later that year, as analysed in full in my new book on the new global oil market order. In essence, according to a very senior European Union (E.U.) energy security source spoken to exclusively by OilPrice.com, the key to the implementation of the ‘One Iraq Plan’ as it is informally known is to cut off all sources of external revenue from the government of Iraqi Kurdistan – most significantly from independent oil sales by IOCs operating there – thereby making it entirely dependent on Baghdad for its survival.

Related: U.S. Drivers Could See The Lowest July 4 Gasoline Prices Since 2021

There are three powerful reasons why the FGI in Bagdad – and its key global sponsors, China and Russia – do not want Iraqi Kurdistan to continue to operate with any degree of independence. A basic geopolitical one is that for a long time, the region was a key ally of both the U.S. and its predecessor as the leading global power, the United Kingdom. Indeed, the very idea of the 2017 independence referendum came from what Kurdistan thought had been a tacit agreement with Washington in late 2013/early 2014 when Islamic State (IS) had begun to emerge as a significant regional concern. The understanding was that Iraqi Kurdistan’s push for independence would be supported by the U.S. and its Western allies in exchange for its providing the boots on the ground in the fight against IS through the fearsome Peshmerga army, as also analysed in full in my new book on the new global oil market order.

Once victory against IS had been assured, the independence referendum did indeed take place but following the violent reaction to the result from some key players in the region, meaningful support from the U.S. and its allies for further moves towards Iraqi Kurdistan independence failed to materialise. The strong opposition to the result of the 2017 independence vote underlines another reason why the ‘One Iraq Plan’ in moving full ahead now. For key Iraqi regional sponsor Iran, and for Turkey and Syria, rising Kurdish independence feelings would also pose a distinct threat to the existing regimes, given the size of these populations in these countries. Iran’s Kurdish population is around 9 percent of its total, Syria’s 10 percent, and Turkey’s about 18 percent. For China, a fractious independent Kurdistan with strong former ties to the U.S. would make the administration of Iraq’s oil and gas sector much more difficult. Similarly, despite Russia’s having effectively taken control of Iraqi Kurdistan’s oil sector after the 2017 independence vote, as also detailed in my new book, it would rather work with a centralised government in Baghdad, which is heavily influenced by Moscow’s principal ally in the region, Iran. It is certain, according to the E.U. source, that Russia will not lose any of its existing deals in Iraqi Kurdistan once it is rolled into a unified Iraq. There is a deeper motivation at play here as well, as delineated by a very high-ranking Kremlin official just after the 10 March 2023 signing of the Iran-Saudi Arabia relationship resumption deal brokered by China, relayed to OilPrice.com by the E.U. source. Specifically: “By keeping the West out of energy deals in Iraq – and closer to the new Iran-Saudi axis - the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.”

Financially as well, the FGI sees no benefit in having Iraqi Kurdistan continue to operate with any meaningful measure of independence. The original deal agreed between the two sides back in 2014 was for 17 percent of the federal budget after sovereign expenses (around US$500 million at that time) to be made from the FGI in exchange for oil from the Iraqi Kurdistan region exporting up to 550,000 barrels per day (bpd) of oil from its own fields and Kirkuk via the FGI’s SOMO. However, from very early on the deal never worked properly, with both sides claiming the other was not living up to its part of the bargain. “Without the deal working, Baghdad was losing out on billions of dollars a year in revenue from oil sales done independently by the Kurds, so why would it continue to put up with this?” a source who works very closely with Iraq’s Oil Ministry exclusively told OilPrice.com recently. Legally speaking as well, there is no obvious reason why Baghdad should not remove the KRG’s primary source of financial independence either, given the 2005 Iraqi Constitution’s lack of clarity on the issue. Article 111 states that oil and gas is under the ownership of all the people of Iraq in all the regions and governorates. Consequently, Baghdad argues that all such oil flows such be considered as Iraq’s, and therefore be handled by the FGI’s nominee for such matters, that being SOMO. The KRG, however, believes it has authority under Articles 112 and 115 of the Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005.

That the ‘One Iraq Plan’ remains the key ideological thrust of what is happening to Iraqi Kurdistan was underlined on 3 August last year when Iraq Prime Minister, Mohammed Al-Sudani, stated that the new unified oil law – run, in every way that matters, out of Baghdad - will govern all oil and gas production and investments in both Iraq and its autonomous Kurdistan region and will constitute “a strong factor for Iraq’s unity”. The most potent practical manifestation of this idea is the intended full rollout of Baghdad’s own oil export pipeline to Turkey, bypassing any input from the Iraqi Kurdish region. Baghdad’s 600-mile pipeline was the original Iraq-Turkey Pipeline, running from Kirkuk in Iraq’s north to Ceyhan in Turkey, before it was closed in 2014 after repeated attacks by various militant groups in the region, including Islamic State.  It consisted of two pipes, with a nameplate capacity of 1.6 million bpd combined (1.1 million bpd for the 46-inch diameter pipe, and 0.5 million bpd for the 40-inch one). It was only after it was closed that the Iraq Kurdistan regional government oversaw the construction of a new single side pipeline, from the Taq Taq field through Khurmala, which runs into the Kirkuk-Ceyhan pipeline in the border town of Fishkhabur. “With the Kurds cut out of the new pipeline and their own pipeline shut down, the new oil law can move forward, unifying the country’s oil sector as originally intended,” concluded the Iraq oil source.

By Simon Watkins for Oilprice.com

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