State Department Sends Mixed Signals on Kurdish Oil Exports

A week-long drama surrounding the arrival of a Kurdish oil tanker in U.S. waters abruptly ended July 29 when a Texas judge ordered U.S. Marshals to seize the ship.

Judge Nancy K. Johnson of the U.S. District Court for the Southern District of Texas ruled in favor of the Iraqi central government, which argued that the oil was "misappropriated" - i.e. stolen - and that delivery would run contrary to Iraqi law. The United Kalarvta is holding around $100 million worth of Kurdish oil and is sitting near Galveston Bay in Texas.

The ruling is a blow to the Kurdish Regional Government (KRG) in its campaign to erode Baghdad's influence over its oil sector. Since the invasion of the jihadist Islamic State of Iraq and the Levant, and the near-disintegration of the Iraqi state, the KRG has taken the opportunity to consolidate its grip over key areas of northern Iraq, including Kirkuk and its surrounding oil fields.

The KRG also completed the sale of its first oil shipment in late June, to Israel. Perhaps emboldened by the achievement, Kurdistan sent another tanker to a buyer in the United States. CNBC reported that the mystery buyer of Kurdish oil was Talmay Trading of the British Virgin Islands.

The U.S. has long maintained that oil exported from Iraq should be done under Baghdad's auspices. In late June, U.S. Secretary of State John Kerry paid a visit to Erbil, the capital of Kurdistan, to urge Kurdish leaders to work to keep Iraq together in the face of ISIS attacks, instead of pursuing a path towards greater independence.

But at the critical moment of decision - as the tanker of Kurdish oil floated off the Texas coast - it wasn't the Obama administration but a lone judge in Texas who made the call that backed up the U.S. position.

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Officially, the State Department has stuck to its line that shared oil resources support a stronger Iraq. "Iraq's energy resources belong to all of the Iraqi people and that is why we have urged the Iraqi federal and sub-national governments to reach an agreement on how to best manage their energy resources," State Department spokesman Edgar Vasquez told the Wall Street Journal on July 21.

But as the United Kalarvta approached U.S. waters, the official line seemed to soften. State Department deputy spokeswoman Marie Harf said on July 25, "Iraq's energy resources belong to all of the Iraqi people. The U.S. has made very clear that if there are cases involving legal disputes, the United States informs the parties of the dispute and recommends they make their own decisions."

The wording between the two statements is subtle, but significant. Harf went on to add, "[t]hese are commercial transactions. The U.S. government is not involved in them." With that, the U.S. appeared to be backing away from its earlier position that the KRG should not sell oil without Baghdad's approval.

Behind the scenes, while not a full-fledged change in policy, there appears to be an air of resignation among U.S. diplomats. Steve LeVine of Quartz reported on July 24 that the State Department has decided to stop actively fighting the sale of Kurdish oil. Instead, U.S. officials would pursue "passive policy action," LeVine reported, which consists of discouraging buyers from purchasing oil from the KRG only if they call and ask for advice - no more badgering or warning buyers against moving forward.

The change in tone could open the door to Kurdish oil exports. The Kurdish quest to complete the sale of oil to a buyer in Texas would have granted significant legitimacy to the KRG and its bid for independence, potentially opening the taps to much wider exports, while also contributing to the breakup of Iraq.

For now, the seizure order for the Kurdish oil is a major setback for the KRG and could make it difficult to find buyers elsewhere. But if the shifting U.S. position is any indication, the issue is far from settled.

7/31 Update: The federal judge in the case says she "has no jurisdiction" to order the tanker's seizure because it is 60 miles offshore and beyond the reach of the court's authority. Judge Nancy K. Johnson says the dispute should be settled between the Regional Government of Kurdistan and Iraq's central government.

By Nick Cunningham of Oilprice.com