Kurdistan's Oil Industry Standoff Intensifies

Some 450,000 barrels per day of oil exports from the Kurdistan Region of northern Iraq remain shut in amid an intractable dispute over who should control the region’s oil sales. 

For the smaller oil companies operating there, it is now a choice that is really not a choice at all: Either redirect Kurdish oil exports through a newly completed Iraqi pipeline controlled by Baghdad or resume flows through the Kurdish pipeline to Turkey (which Turkey turned back on in October). The first option would make it extremely difficult–if not impossible–to continue to operate on territory controlled by the Kurdistan Regional Government (KRG) because it would amount to a betrayal. It would essentially mean handing over crude oil directly to Baghdad's state-run marketer, SOMO, without ever touching Kurdish hands. Companies might be tempted to choose this in hopes that SOMO will actually pay them, while the Kurds are in major arrears.

The second option would be to accept that the Kurds would be responsible for handing the oil over to SOMO for export to the Turkish port of Ceyhan, regardless of whether it goes through the newly resumed “Kurdish” pipeline. But at least with this option, there is room for some control and manipulation of volumes by the KRG. 

Threats have been flying from all sides: Badhad, Erbil, and independent oil producers. 

This week, the KRG warned UAE company Dana Gas against directing product through Baghdad’s newly built pipeline that hooks up to the disputed Kirkuk oil region. But at the same time, Norwegian DNO, another producer in northern Iraq, threatened the reverse: It would not restart flows for export through the pipeline to Turkey until the KRG settled its bills. 

Egged on and manipulated by Russia, betrayed by the U.S. and Britain, and thwarted by Iran and Turkey, the Kurdistan Region of Iraq has never been farther from any dream of independence than it is now. And its oil will, one way or another, pass through Baghdad’s hands, but even that is a major challenge with the KRG owing billions in unpaid bills to producers. 

While the UAE’s Dana gas said it received a $80-million payment back in August, this amount is but a drop in the bucket. For Dana Gas, in particular, Kurdistan has been a quagmire for its balance sheet, and the only other assets in its portfolio are in Egypt, where it’s also owed money. 

Norwegian DNO says it’s owed around $1 million, and it won’t restart flows for exports until it’s paid. 

And when Turkey shut off the taps in March when it lost arbitration with Iraq over Ankara’s facilitation of the KRG’s “illicit” oil exports, which bypassed Baghdad, it caused immense damage to all the smaller producers in the region–to the tune of an estimated $7 billion in losses. 

With oil prices now having lost their war risk premium and continuing to trend downward on fundamentals (hovering in the $80 range), Washington isn’t terribly pressed to intervene; nor could it really, to any effect. Washington gave up its clout in northern Iraq (to Russia) when it allowed Iran and Turkey to scupper an independence referendum. Across the Middle East, three successive U.S. presidents have withdrawn from strategic positions or strategic policies of leverage: Iraq, Syria, and Iran. Those days are over.