by Ekin Ozbakkaloglu, an analyst at Global Risk Insights
The tension between the Kurdish Regional Government (KRG) and the Iraqi central government once again escalated as a new pipeline links oil fields in Northern Iraq directly to Turkey.
Turkey has bought oil from the Kurdish region in northern Iraq before, but oil transfer was carried out by trucks, which kept the amount of exports at a minimal level. Construction of the Kirkuk-Ceyhan pipeline between Turkey and the semiautonomous region of northern Iraq, however, is well beyond what the Iraqi central government is willing to overlook. It would allow Kurdistan Regional Government to drastically increase its exports.
Officials at oil companies operating in the region see the new pipeline as a “game changer” because of its capacity to export “as much as 400,000 barrels a day of oil to Turkey, rather than relying on smaller amounts of oil shipped across the border by truck.” Currently, the region’s export capacity is around 255,000 barrels per day (bpd), and capacity will not reach 400,000 bpd before to late 2014 or early 2015.
The relatively stable Kurdish region has attracted oil companies with estimated oil reserves at 45 billion barrels as claimed by the KRG. More than 40 companies including Exxon Mobil, Chevron, and Total of France are operating in the region under production-sharing agreements with the KRG. Signing deals directly with the KRG means reducing the chances of getting a lucrative deal in other parts of Iraq, but with greater expected benefits, companies are willing to take the risk.
Crude oil exports from the region reach world markets through the national Iraqi pipeline infrastructure under the control of Baghdad. This has caused several conflicts. The KRG suspended crude flows in April 2012, arguing that the Iraqi government did not make payments to producing companies in the region.
In 2013, the KRG did not pay any oil revenue to the federal Iraqi government. According to KRG, Erbil has the authority to sign energy contracts for fields discovered after the enactment of the Iraqi constitution in 2005. The Iraqi federal government insists that it is the only authority that can govern Iraqi energy contracts.
When the pipeline to Turkey became operational, the Iraqi government raised the stakes. On 17 January, the Iraqi Minister of Oil, Abdul Karim Luaibi Bahedh, declared that government was preparing to take legal action against “Turkey and Iraqi Kurdistan, as well as foreign companies, for any involvement in Kurdish exports of “smuggled” oil without Bagdad’s consent.” The pipeline first started pumping oil in December 2013. According to the Minister of Natural Resources of the region, pipeline exports will increase to 1 million bpd by 2015 and to 2 million bpd in 2019.
The Turkish Minister of Energy, Taner Yildiz, assured the Iraqi government that so far, no oil has gone through the Ceyhan export terminal and that Turkey would notify the Iraqi government if even one barrel of oil passes through “because it is an issue related to Iraq’s income.” On the other the hand, the Minister also stressed that this does not mean oil will not be exported in the future.
The implications of the stalemate are critical for the future of Iraq. The head of the Iraqi parliament’s treasury committee warned that Iraq’s budget would collapse if the Kurdish region does not contribute oil revenues. If the KRG does not pay oil proceeds, Iraqi government threatens to stop all spending in the Kurdish region, which amounts to around 17% of the overall state expenditure. The KRG argued that North Iraq’s contribution was calculated based on 400,000 bpd, which exceeds the current capacity of 255,000 bpd.
The stalemate is about the oil proceeds, but it is also about the Kurdish semiautonomous region gaining more independence. The federal government fears that economic autonomy will contribute to further separation, which will destabilize Iraq’s already trouble economy. This puts more pressure on the relations between the Iraqi central government and the KRG, and it further complicates the larger controversy of how to share the profits from Iraq’s natural resources.
The deepening of the crisis on the oil exports from northern Iraq only makes things more unpredictable. As of the last week of February, the negotiations continue. However, the longer the stalemate drags on, the higher the risk investors will see in Iraq. More importantly, how this crisis is handled will set the tone for the bigger problem of sharing oil and gas wealth of Iraq.
