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Gregory Brew

Gregory Brew

Dr. Gregory Brew is a researcher and analyst based in Washington D.C. He is a fellow at the Metropolitan Society for International Affairs, and his…

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The Kurdish Oil Gamble Has Backfired

Oil

Since September’s independence referendum and October’s dramatic Kirkuk re-capture by Iraqi troops, the drama over Kurdish oil continues, with new developments occurring early this week.

On Sunday, the government of the Kurdish autonomous region of Iraq indicated it was prepared to hand over oil facilities, airports, border points and state revenue to Baghdad, provided the central Iraqi government agreed to hand over the Kurdish share of the national budget.

The long-running dispute over the country’s oil revenues is at the center of tensions between Baghdad and Erbil, the capital of the Kurdish region. Since 2014, Iraq hasn’t shared of its oil revenues with Kurdistan, and the autonomous region signed its own oil deals and funded itself independently.

For a time, the Kurds were able to entice major oil companies like Chevron, ExxonMobil and Total SA with lucrative offers, persuading them to ignore the threats of legal action from the Iraqi government. Yet the original promise of the Kurdish oil fields has diminished, with Total and Chevron both backing away from further investing in Kurdish exploration.

The independence referendum was widely interpreted as a move by Erbil to challenge Baghdad. The re-capture of Kirkuk was thus a dramatic setback and an indication that the Kurds possessed far less leverage than once thought.

The Kurdish announcement on Sunday came in response to news that Baghdad, which is currently in the middle of drafting the 2018 state budget, plans to slash the Kurdish share from 17 percent to 12.6 percent. While government officials have said the new figure reflects population distribution and trade data, the Kurds have interpreted the move as a punitive response to the independence referendum, one designed to place greater pressure on Erbil.

Related: Google Gets There First: Autonomous Cars On The Road

The whole country needs oil money to fund a reconstruction effort, but the Kurds claim they’re particularly worse off, having borne the brunt of fighting against the Islamic State since 2014.

Part of the new budget is a distribution agenda that would leave the three provinces that make up the Kurdish area with separate shares, rather than a single large apportion for the Kurdish government, further weakening the central Kurdish authority and forcing the three provinces to compete with one another.

On Sunday, Kurdish prime minister Nechirvan Barzani—nephew of former prime minister Masoud Barzani, who resigned in the wake of the defeat in Kirkuk—claimed that Kurdistan was prepared to hand over its oil money in return for a proper share of the budget.

Rudaw, the Kurdish news service, called the gesture an “olive branch” and an indication that Erbil was prepared to talk through the issues that have pulled Iraq and its Kurdish provinces apart.

When Iraqi forces retook Kirkuk, it triggered a minor shockwave in global energy markets. The Kirkuk-Ceyhan pipeline, through which most Kurdish oil is exported, was temporarily and partially shut down, taking 275,000 bpd offline. Prices spiked as regional tensions rose and Kurdish exports dipped. The Iraqi government increased exports from southern Iraq by 200,000 bpd to compensate.

Iraq is OPEC’s second-largest producer, with an output of 4.5 million bpd. By itself, the Kurdish region possesses one-third of Iraqi’s total oil reserves, 45 billion out of a total 150 billion barrels, and produces 250,000 bpd, increasing its output to 550,000 bpd after capturing Kirkuk.

Related: Shell Gears Up For Peak Gasoline

Kirkuk, a city that the Kurds occupied during the war with the Islamic State, which they claimed was part of the ancestral Kurdish-speaking region and hence a part of Kurdistan, sits atop a massive oil field. Had the Kurds retained it, they would have been in a much stronger position to dictate terms to Baghdad.

The Baghdad government led by Prime Minister Haider al-Abadi—who has proven capable of excelling at what is arguably one of the toughest jobs on earth—will press its advantage with Erbil. If al-Abadi succeeds in marshalling support in the Iraqi parliament, it’s possible the budget will be accepted, even with the drastically reduced Kurdish share.

Then again, it’s possible the move is an opening gambit in what could prove to be long and acrimonious negotiations over the future of Iraqi oil and the country’s oil wealth. The Kurdish government gambled for a larger share of that wealth and lost. It must now be prepared to negotiate from a weaker position, a reality reflected by the statement issued on Sunday.

With prices rising, potentially reaching $70 by the end of the year, the question of who will get what has become more prevalent than ever. With luck, the Iraqis and Kurds will be able to negotiate a settlement that avoids fresh violence, though it likely won’t be one that the Kurds will be happy with.

By Greg Brew for Oilprice.com

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