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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Who Controls The Oil As Kurdish Independence Looms?

Kurdish Flag

Kurdistan, the autonomous region of northern Iraq that is rich in oil resources and has proven an effective force against the spread of the Islamic State, has announced that it will hold an independence referendum on September 25 of this year, in order to determine whether the region will remain part of the Republic of Iraq or split off to form a new, independent state.

Thus far, the official international support for the referendum has been minimal. On June 19, the European Union released a statement discouraging the Kurdish autonomous government from holding the referendum, joining the United Kingdom, United States, Turkey and Iraq in officially opposing the vote.

But this hasn’t deterred Kurdish leaders, who say the vote will go forward no matter the resistance. The referendum will not declare an independent state, but rather determine whether Kurdistan will remain part of Iraq or eventually become independent, though there are hard-liners in Kurdistan pushing for a “divorce” from Baghdad. It is a first step, not a fait accompli.

The matter of Kurdish independence, one of the most fraught, divisive and complicated issues in Middle Eastern politics, could potentially inflame tensions in the region and generate secessionist ambitions among the Kurdish minority populations of Syria, Turkey and Iran.

But how will Kurdish independence affect Iraqi oil? For years, divisions have grown between Baghdad and Erbil, the Kurdish capital, over how Iraq’s oil resources and revenues will be shared.

Kurdistan is sitting on reserves of at least 45 billion barrels and exports hover around 600,000 bpd. Most of the oil passes out of the country via a pipeline from Kirkuk to the Turkish city of Ceyhan, thence to export markets in Russia and Europe.

While Iraq suffered widespread destruction to its oil industry during the 2003 US invasion and subsequent civil war, Kurdistan escaped relatively unscathed, while its autonomous government solidified control over the northern regions, home to 40 percent of Iraq’s oil reserves.

The Kurdish Regional Government (KRG) has made deals with international oil companies to develop fields within the bounds of the autonomous zone, without any interference from Baghdad. Major deals were signed with American companies and Turkey, which emerged as a chief customer for Kurdish oil and its main transit route.

According to the Iraqi federal constitution, oil is marketed through a government organization while revenues are shared, with the KRG receiving 17 percent. The conditions governing whether the KRG could make oil deals independently of Baghdad are hazier, and the commissioning of the KRG-Turkey oil pipeline gave the Kurds a major outlet for oil exports that were independent of Baghdad, which had hitherto managed the country’s major export facilities. Related: How “Zombie” Funds Are Disrupting Oil Prices

In 2014, the argument between Iraq and the Kurds over whether the KRG could offer Kurdish oil to companies without cutting in Baghdad had become heated, with a deal struck between Erbil and ExxonMobil nearly inciting violence. For a time, revenue sharing by Baghdad was cancelled and the KRG struggled to balance its budget, which is dependent on oil revenues.

Things were put on hold when the Islamic State emerged as a major threat to internal Iraqi stability, seizing the city of Mosul and a huge chunk of territory right on the KRG’s border. Kurdish fighters played a crucial role in pushing back the Islamic State, emerging as the most effective military asset in play against the militants.

Yet the dispute over oil has not gone away, and it remains a sticking point between Erbil and Baghdad, one which the independence referendum could complicate.

Kurdistan did not adhere to the OPEC production deal in November 2016, nor did it join the production cut extension agreed to in May. Indeed, the KRG has pressed ahead with plans to expand oil production and exports, signing a twenty-year deal with Russia’s Rosneft in early June. The Russian company will invest $3 billion in the KRG while exporting Kurdish oil to refineries in Germany.

This deal comes after an accord signed in February 2017, which gave Rosneft access to transportation for 700,000 bpd. This capacity could expand to 1 million bpd by the end of the year, if Kurdish production goals are met.

Oil is a central component to the independence referendum. The current KRG government, led by the Kurdistan Democratic Party (KDP) led by President Massoud Barzani, is pushing for the referendum in part to put pressure on the Iraqi government, which disputes the Kurdish claim over some oil-producing areas.

Early in the war against the Islamic State, KDP forces seized control of the oil fields west of Kirkuk, which lie largely outside the Kurdish majority region. A rival political group, the Patriotic Union of Kurdistan (PUK), moved to block KDP control of the oil fields. There has been an ongoing competition between each party over the future of the oil-producing regions, with a PUK force storming a pumping station in March and temporarily shutting down oil production.

It is also a factor in wider Iraqi politics. Iraq will hold elections next year, and the central government is hoping for Kurdish participation.

Some Kurds speculate that the independence referendum is really just a bargaining ploy, used by Barzani to get better terms from Iraq’s central government, with which he has cooperated in the past. The KDP is struggling with a popularity problem, as Kurds become disillusioned with the party’s promises of economic prosperity, the hardships of the on-going war in northern Iraq and stagnant oil prices. The referendum, even if it isn’t meant to lead to formal independence, is an effective distraction from domestic political problems.

There is also the question of Kirkuk itself, which is not definitively Kurdish and may hold its own referendum to determine whether it joins the KRG or remains a part of Iraq. Some Kirkukis consider the de facto Kurdish occupation in place since 2014 and the sale of Kirkuki oil by Kurdish authorities as “pillaging” and may resist attempts to fold Kirkuk into a larger Kurdish state. Despite these sentiments, Barzani has indicated that Kirkuk will participate in the general referendum in September, declaring that it is no longer “disputed territory. Related: OPEC Production Spikes – Has The Cheating Begun?

There are doubts that a Kurdish referendum could lead to independence without international recognition. A de facto independent state, the KRG lacks any kind of international presence, a crucial pre-condition to full statehood. So far, resistance to Kurdish independence has been strong, for the usual reasons. Turkey and Iran don’t want an independent Kurdish state, as it could encourage separatism among their own Kurdish minorities. Turkey’s position is more nuanced, as its economy and state finances could benefit from greater Kurdish oil exports.

The United States has expressed its opposition to the vote, but it is currently the KRG’s most important strategic partner and has cooperated with Kurds in both Iraq and Syria, relying on them to carry out the fight against the Islamic State. Russia has emerged as a potential ally for the Kurds, as the Rosneft deal indicates; it could use the promise of energy contracts to pull the Kurds away from the American orbit, at a time when tensions between Russia and the United States in Syria are at an all-time high.

All this means that the Kurdish referendum, when it is held in September, could have a major impact on the state of northern Iraqi oil. If free to pump more, the Kurds could ignore attempts by Iraq and OPEC to reduce production; Kurdish production could join rising output from Libya and the United States, continuing the present supply glut and keeping prices depressed.

Alternatively, if a major dispute breaks out, Iraqi output could fall the country’s internal stability could be affected. Recently there has been a decline in the correlation between Middle East instability and the price of oil, but that could change.

The situation surrounding the future of Kurdish independence and Kurdish oil is therefore one worth watching, particularly as the war against the Islamic State slowly comes to an end, international tensions in neighboring Syria heat up and the oil market continues to battle low prices.

By Gregory Brew for Oilprice.com

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