“!KNOW BETTER WITH MESOP NEWS!” – Unraveling the Oil Geopolitics Intertwined in the Kurdish Independence Referendum

Amy Myers Jaffe – October 04, 2017 – COUNCIL ON FOREIGN RELATIONS

David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change

For over a decade, U.S. efforts to promote stability across the Middle East have run afoul of many complexities. The recent independence referendum in the Kurdish Regional Government (KRG) territory of Iraq is no exception. Both the sudden actualization of the referendum and some of the related geopolitical maneuvering associated with it, could provide new challenges for the United States in the region and harken back to a repeating failure of even seasoned American diplomats to head off conflicts over the final dispensation and control of important disputed oil and gas assets. The idea that Iraq’s Kurdistan region meets the prerequisites for nationhood is compelling. An independent Kurdistan was, in fact, drawn into the Treaty of Sevres almost a century ago in 1920.

But the devil will be in the details of how the long-term status of the KRG gets resolved. Many complicated variables have to be navigated in the post referendum equation. Seasoned experts will weigh in on the complicated politics that has led to the KRG action and how it should be handled by the United States. This blog is aimed to underline specifically how any effort to mediate conflicts arising from the referendum will need to consider carefully the oil geopolitical aspects to the crisis. At issue is not just the possible loss to the global oil market of 500,000 to 600,000 barrels a day of Iraqi oil exports from KRG controlled territory via Turkey. In today’s oil world, this volume would eventually, if not quickly, be replaced. Rather, it is the dangerous precedent of letting subnational political and military “events” and shifting regional geopolitical alliances dictate the final dispensation of the Kirkuk oil field, which sits in historically disputed territory, before an adequate effort at a negotiated (read, internationally legally binding) resolution can be attempted.

The History of Kirkuk

The area surrounding the Kirkuk oil field houses many different regional peoples, including Arab, Kurdish, and Turkoman communities, the latter of which historically represented roughly 8% of Iraq’s total population according to some estimates. During the reign of Saddam Hussein, “Arabization” of the region changed its complex mix amid efforts by the Baath regime to guarantee its better access to the oil region, which in the 1980s represented close to 1 million b/d of Iraq’s total oil output of 2.0 to 2.5 million b/d. Kirkuk field holds reserves of 9 billion barrels. ISIS began to encroach on the area of the field in 2014 and when the Iraqi army’s defense of the region collapsed in June of that year, Kurdish Peshmerga forces interceded and took control of most of the oil producing region. Production at the oil fields in and around Kirkuk have been producing about 400,000 b/d of which 160,000 b/d come from three fields, Baba Dome, Jambur, and Kabbaz, which were at one point administrated by the central Iraqi government controlled North Oil Co. With Kirkuk squarely under Kurdish control, it remains unclear what the long-term status of the oil producing assets will be.

The KRG has for years made its claim to Kirkuk clear in words and actions. U.S. oil companies, including ExxonMobil, have given stature to such claims by signing oil exploration deals with the KRG for oil fields in disputed territories, including blocks in and around Kirkuk. Notably, one ExxonMobil block attained from the KRG, the Bashiqa block, was taken over by ISIS militants. The firm has since relinquished several of its exploration blocks in Northern Iraq given both political and geological difficulties. Baghdad maintains all Northern region fields should be under Iraqi central government control, and especially the Kirkuk fields, and Iraqi prime minister Haider al-Abadi is forced to stake his reputation on it, with negative consequences for the unity of Iraq if he cannot prove to the KRG, and by extension, other oil and gas regions, such as Anbar and Basrah, that they cannot go their own way. Iraq’s parliament is calling upon Al-Abadi to deploy national security forces in disputed areas. Iraq’s oil ministry recently ordered North Oil Company to take immediate steps to rehabilitate the Nineveh fields set ablaze by retreating ISIS troops in a possible effort to try to reassert claims to oil resources in the region.

For the past several years, Turkey has supported, financially and through transit for exports, the KRG’s oil and gas industry. But the changing domestic political landscape inside Turkey has made such positions more difficult of late for Turkey’s President Tayyip Erdogan. Last March, the leader of Turkey’s Nationalist Movement Party (MHP) stated the territorial integrity of Iraq was indispensable to Turkey’s national security and called claim to Kirkuk, “Historically, Kirkuk was Turkish. It remains Turkish even now and will become one of the most glorious Turkish cities in the future.” Erdogan has been more circumspect on the referendum saying Kurdish authorities would pay the price for the independence referendum and threatening economic sanctions. Turkey has held joint military exercises with Iraqi national troops on the border. So far, Ankara has not made good on its threat to shut down Kurdish oil exports which also are critical to Turkey’s economy.

Enter the Russians

Finally, ever opportunistic, Russia has recently expanded its influence into the controversy about who should control Kirkuk in the long run, via moves by state oil firm Rosneft, run by U.S. sanctioned Putin crony, Igor Sechin. Rosneft in recent weeks accelerated its negotiations of a major energy collaboration with KRG. The mooted deal is said to include a possible stake in the Kirkuk oil field, investment in the expansion of the Kirkuk to Ceyhan oil export pipeline, and a possible investment in a natural gas pipeline from the KRG to Turkey and Europe. Last June, Rosneft took five exploration blocks in the KRG and signed a memorandum of understanding to create a 300,000 b/d oil offtake agreement. The KRG reportedly discussed the Avana, Baba, and Khurmala domes as part of the deal, which include areas previously operated by the Iraqi state’s North Oil Company.

Rosneft has also stepped in as a white knight to Kurdish finances, offering a capital injection of up to $3 billion in part to refinance debt coming from $1 billion in pre-financed oil sales deals with international traders. Firms Glencore, Vitol, Trafigura, and Petraco had loaned the KRG finance based on future oil sales. The trader oil has been going to Spain, Greece, Germany, Italy, and Croatia. The KRG’s annual oil revenues are projected at roughly $8 billion. With so many parties affected by any decision to stop oil exports from the KRG, Turkey’s Erdogan finds himself boxed in by domestic and international concerns.

The involvement of Rosneft in KRG oil affairs adds additional tricky dimensions to any negotiation about the future of the KRG and purposely so. The Kurdish referendum gave the Kremlin a convenient possible out to peace negotiations in Syria by disincentivizing the Syrian Kurds from voicing cooperation. It also allowed Russia to counter checkmate Turkey, which saw energy cooperation with the KRG as a means to break the vice Moscow had on its own Turkish national energy supply. For the past several years, Ankara has been offering Turkish finance and technical support to promote KRG oil and gas export pathways to Turkey. Ankara had hoped to diversify itself from Russian energy and by extension, Europe, through its own link-up to the KRG energy supply. But the cost to Kurdish leader Masoud Barzani of high dependence on Turkey must have proved too restrictive. In effect, for the Kurds, the offer to sell oil assets to Russia would potentially solidify Russian assistance at the United Nations Security Council, should Baghdad or other regional powers seek to solicit U.N. sanctions against the KRG. What’s left is a geopolitical mess that will take skill and patience to disentangle. Possible outcomes that displease Iran could propel it to back local Shia militias to try to defy Kurdish Peshmerga control of Kirkuk. Iran has its own concerns, given its own restive Kurdish population which numbers 6.7 million or a little under 10% of Iran’s population. Iran was the first to move against the KRG after its referendum, closing its air flights and borders to the KRG. In other words, through Rosneft’s activities, Russia has gained leverage over Turkey and Iran’s interests in the Kurdish question and potentially reasserted oil and gas export leverage over not only Turkey but also major economies in southern Europe.

The Oil Element and U.S. Interests

The geostrategic element of Kirkuk as an oil producing province nearby to Turkey, Iran, and the Syrian conflict, makes the stakes higher than just the kind of economic conflict that has spurred localized military action by warring factions in South Sudan or Libya. The fate of Kirkuk will also be closely watched by other parties from contested oil regions who will look to U.S. and U.N. responses towards the KRG for some hints to their own aspirations. The United States has long kicked the can regarding the arduous task of navigating the finer details of oil revenue sharing shuttle diplomacy in failing states. The consequences of this failure has turned out badly in several locations, including Libya. Now, in the case of the aspirations of the KRG, is the time to redouble efforts to establish sustainable precedents. The principal of revenue sharing geographically by census/population count was rejected in the early days of reconstruction in Iraq, in my opinion, to the detriment of the entire experiment of trying to re-forge a national identity. To help the KRG and Baghdad create a viable path forward, the oil resource control and revenue sharing issue should be settled once and for all, peacefully and through binding negotiation that can include a payout or ongoing revenue sharing, depending on final deliberations. The consequences of a failure to diplomatically steer this “whose-oil-is-it” struggle to a successful outcome have been devastating for the people of the region. Militias throughout the Middle East have learned that they can undermine the authority of established political leaderships by overtaking oil producing areas. So far in the process of such conflicts, the oil and gas industries of Syria, Yemen, and to a certain extent Libya, have been destroyed. The United States should consider more active diplomacy on the resolution of the future of Kirkuk in hopes that persistence this time around might show better results than past efforts. Such an investment of diplomatic time, effort, and prestige could yield long-term benefits, not only for the people of Iraq and the KRG but also in other regions around the Middle East where oil revenue sharing and border fields remain in dispute. A win for a diplomatic settlement on the future dispensation for Kirkuk would offer a productive path for many other oil producing regions. This is not to say that the task is not a gargantuan one, but just that it is one well worth pursuing.