MESOP : WHO DID IT ? ERDOGAN OR PKK ? – A Mysterious Pipeline Closure Is Bankrupting Iraqi Kurds

The export pipeline connecting Kurdish oil fields to Turkey has been offline for two weeks, costing Erbil at least $200 million.

By Keith Johnson – March 2, 2016 – FOREIGN POLICY – Iraqi Kurds’ dreams of energy-financed political independence are taking a beating — and not just because of low oil prices.

Since the middle of February, Iraqi Kurdistan’s tenuous export link to the outside world has been totally shut down. As recently as January, the Kurds were exporting 600,000 barrels a day in exchange for desperately needed revenue. But the mysterious closure of the pipeline that connects Kurdish refineries to the Turkish coast has brought that number to essentially zero.

Kurdish officials say they don’t know for sure why the pipeline has been shut down; theories range from a terrorist bombing to simple sabotage to a precautionary shutdown by Turkish authorities carrying out big military operations in the area.

What’s crystal clear is that a region dependent on oil export revenues — one that was already struggling mightily to make ends meet during its costly war against the Islamic State — now has its back to the wall. The Kurdish region earned about $630 million a month from direct oil sales in 2015, which still fell short of the $850 million or so it needed every month to pay its soldiers and civil servants, as well as foreign oil companies for the crude they’ve pumped. The two-week pipeline closure has now cost Erbil an additional $200 million — and the Kurdish losses will continue to grow until it comes back online.

“The pipeline interruption has further damaged KRG finances and could not have come at a worse time,” a Kurdish official speaking on condition of anonymity told Foreign Policy, referring to the semi-autonomous Kurdistan Regional Government.

Adding insult to injury, the future prospects of Iraqi Kurdistan’s oil patch also got hammered this week. Genel Energy, a U.K.-based oil company that is one of the big foreign players in Iraqi Kurdistan, on Monday slashed its estimates for how much oil it has in its main Kurdish field. Genel, which is chaired by former BP boss Tony Hayward, said that new analysis suggests its main field holds only about half the recoverable oil the company initially thought.

That’s bad news for Genel, whose shares plunged 40 percent on Monday, but also for Erbil. Genel’s main field was one of the most prolific in Iraqi Kurdistan, so geological question marks could well cast a shadow over the other oil-producing prospects there.

“For the Kurds and all those who bet on them, it’s the sucker punch they didn’t need at the worst possible time,” said Matthew Reed, vice president at energy consultancy Foreign Reports.

The financial and political stability of Iraqi Kurdistan isn’t just of concern to the region’s residents, who have carved out a semi-autonomous niche in the northern part of the country and spent years battling Baghdad for a larger share of the country’s oil revenues. Iraqi Kurds have been for the past two years the staunchest fighters in Iraq against the Islamic State and are expected to lead the push to retake major cities like Mosul from the terrorist group. That makes a solvent Iraqi Kurdistan a priority for Washington as much as Erbil.

Beginning last June, landlocked Iraqi Kurdistan finally seemed to hit on a recipe for financial — and possibly, political — independence from Baghdad. It started exporting crude oil through a pipeline, across Turkish territory, to waiting tankers on the Mediterranean coast. The change in Erbil’s fortunes was dramatic: In the first half of the year, while it was dependent on cash transfers from Iraq’s central government, the KRG earned about $350 million per month; in the second half of the year, fueled by direct exports, Erbil earned about $630 million a month.

And that came despite a host of obstacles. Oil prices themselves plunged in 2015, and Kurdish oil trades at a discount to global benchmark oil prices both because of the quality of the crude and because it has no easy export options. That means each barrel brings Erbil less income than the prevailing market price. Iraqi Kurds made about $36 a barrel last year — when global prices averaged $52 a barrel — but only about $20 a barrel in February before the pipe was shut.

Additionally, lingering concerns over the legality of exports from one of Iraq’s regions, rather than the central government, bedeviled a number of early shipments and even led to a showdown in U.S. courts. Shipping out oil by truck — an expensive expedient the Kurds used before the pipeline route was open — is no longer financially viable, given lower oil prices. Truck exports fell from 38,000 barrels a day in the spring of last year to 500 barrels a day in December.

But despite it all, Kurdistan seemed to be just hanging on, thanks to its lifeline across Turkey. In January, the region exported 600,000 barrels a day from the Turkish port of Ceyhan — about 450,000 barrels produced from Kurdish fields and about 150,000 barrels from Iraqi fields near Kirkuk — that brought in $650 million.

Then, on Feb. 16, the pipeline stopped shipping crude — and it still isn’t entirely clear why.

Turkey initially said that it had to suspend pipeline operations due to ongoing security operations in southeastern Turkey against the Kurdistan Workers’ Party (PKK), a militant Kurdish separatist group that the United States and the European Union consider a terrorist organization. Later that month, Ankara said an apparent PKK attack hit the pipeline. Reuters reported Tuesday that repair work on the pipeline has begun, and it could be working again next week. Either way, it will be the longest pipeline outage in the last two years.

The Kurdish official said that “the KRG is not in a position to confirm the cause of the disruption” but noted figures linked to the PKK had made public threats about an attack. He added, “The pipeline interruption happened in Turkey, and therefore all questions related to it should be directed to Turkish authorities.”

Turkish officials did not respond to requests for comment.

The PKK attacked oil pipelines last summer, and the group has a tense relationship with Iraqi Kurdistan, especially due to Erbil’s close economic ties with Turkey. Relations have further frayed due to bad blood between the KRG and the People’s Protection Units (YPG), a Kurdish group affiliated with the PKK fighting in Syria. That makes a PKK attack on the KRG’s oil lifeline a possibility, said Marina Ottaway, a Kurdish expert at the Wilson Center.

But Turkey’s long delay in repairing the pipeline also reinforces suspicions that Ankara may be trying to send an unmistakable signal to Erbil. Last month, Turkey’s ruling party said that Iraqi Kurdistan’s plans to hold an independence referendum “would not be very appropriate,” kindling speculation that Ankara is getting nervous about an increasingly autonomous Kurdish region on its borders.

“It’s not impossible that the Turks are sending a warning to Iraqi Kurdistan saying, ‘You can only go so far before we yank your leash,’” said Ottaway.