The paradox of Kurdistan’s oil: a curse or a boon? / KAMAL CHOMANI

By Kamal Chomani: Kurdistan Tribune – 12.9.2013 – With oil reserves of about 45 billion barrels, the Kurdistan Region of Iraq has become a production hub for giant oil companies. These reserves play a vital role in shaping the Kurdistan Regional Government’s (KRG) domestic, regional and international politics. KRG officials claim that oil has shown its potential to be a boon for developing the region’s economy. Yet its curse has also shown its face, as people question whether oil is leading the country to become a more democratic region, or rather towards a quasi-Gulf country system, in which people seem to live in good economic conditions with a ‘corrupt government’ but they also enjoy less democracy, human rights and freedom of speech.

The history of Kurdistan’s oil starts at the end of the 1920s and beginning of the 1930s, but the Iraqi governments did not develop the region’s oil industry for two reasons: first, Iraq has never needed Kurdistan’s oil and Iraq’s oil technological and industrial potential has been inadequate to fully develop this resource; second, Iraq’s governments did not dare reveal the region’s rich oil reserves because this might have further inspired Kurds to seek their region’s independence, let alone have encouraged international powers, thirsty for oil, to back Kurdish revolutions and press Iraq to grant Kurds their human and political rights. The international powers might also have used the Kurds to oblige Iraq to accept their own oil demands.

Interestingly, the only good thing that Saddam Hussein’s dictatorial regime did for Kurds was to not extract Kurdistan’s oil. Kurdistan’s oil fields remained so undeveloped that Kurds can now enjoy the huge reserves. If Saddam’s regime had developed Kurdistan’s oil fields, their reserves would have become much smaller.

The Ministry of Natural Resources has divided Kurdistan’s oil into 56 blocks in which 52 contracts have been signed between the KRG and 52 oil companies. Giant oil companies that have signed lucrative oil contracts with the KRG are: ExxonMobil, Total, Hunt Oil, Gazprom Neft, Murphy Oil, Marathon Oil, DNO and Oryx Petroleum.

The most controversial of the KRG’s oil contracts were with ExxonMobil, which the Baghdad government considered as illegal, but ExxonMobil didn’t paid attention to Baghdad’s threats. This year the super-giant oil company, ExxonMobil started ramping up activities across operated licenses in the KRG.

The KRG’s recent plans for oil and gas have made the Iraq central government more concerned, especially when KRG signed an oil pipeline project with Turkey to transfer 200,000 bpd (barrels per day) to the international markets.

The KRG’s oil contracts are production-sharing contracts, which is the main reason that giants are rushing to invest in the region’s rich oil fields. The companies earn considerable interest from the KRG’s contracts compared to Iraq’s service-contracts and that’s why ExxonMobil didn’t pay attention to the threats of Baghdad’s government to exclude the company from its Southern oil fields. Meantime, the costs of drilling a barrel of Kurdistan’s oil are the lowest in all of Iraq’s oil fields. In Kurdistan, a barrel of oil costs less than two dollars to extract whereas, in Iraq’s oil fields, it costs more than five dollars. Companies earn five dollars interest from each barrel of oil in Kurdistan’s oil, whereas in other Iraq’s oil fields they earn only a dollar. The KRG’s excuse for giving such lucrative contracts and bigger interests to giant companies is to argue that these companies would not otherwise be holding contracts with the regional government because investing in the region was a risk in that they not be sure of the extent of the local reserves. The KRG also says that, to attract the giants, they had to give them more interest than Baghdad.

In response, critics of the KRG’s oil policy say that the KRG should not have been in such a rush issue contracts and the region could develop its oil industry more calmly. Meantime, if KRG had not started the flow of oil, it would still be getting its 17 per cent share from Iraq’s budget.

Hawler and Baghdad’s differences over oil contracts have led to serious tensions to the extent that many were expecting a new war.

I talked to an Iraqi MP and member of the Committee of Energy Sources in Iraq’s Assembly. Dr Bayazid Hassan, from Gorran’s bloc, told me that there are different disagreements between Baghdad and Hawler regarding oil contracts and exporting oil. “The most recent one is that the KRG is trying to construct an oil pipeline through Turkey. Apart from other disagreements, Baghdad doesn’t agree with KRG on that as Iraq says exporting oil is central government’s authority not regional. Let alone that Hawler wants to have a metering oil station separately from Baghdad on the Pishkhabur border, something that Baghdad doesn’t accept.”

The controversial Iraqi constitution gives the right to regional governments to have control over their oil. But the ambiguity of articles 111 and 112 leaves a space for controversy and the two governments have still not reached an agreement.

In an article the appeared in ‘The Oil & Gas Year: The Kurdistan of Iraq 2013’, Nechirvan Barzani, the KRG’s Prime Minister, asks for the passing of the Oil and Gas law in Iraq’s Assembly: “Iraq’s long-delayed oil and gas legislation must be passed as soon as possible.” Kurdistan Region’s Parliament passed the Oil and Gas law number 22 in 2007 and this is at odds with Baghdad’s guidelines on oil policies.

Dr Bayazaid Hassan said that, in a nutshell, managing oil and gas in Iraq requires a shared management between the central and regional government. In the constitution, there are two articles that clearly talk about oil and gas. Article 111 which says Iraq’s oil is for all the Iraqi people. Article 112 is two items: the first says that Iraq’s federal government with the regional government and provinces that have oil together extract oil in the oil fields that do exist now but the income should be distributed equally to all Iraqi people; the second item says that the federal government with the regional government and provinces that have oil together construct an oil policy, using the highest technological to get the highest benefit to the Iraqi people.

The differences have remained unsolved. US policy has not backed the KRG over this, and the US has failed to broker a solution. The US has taken the position that Iraq should not be fragmented, fearing the rising tensions between Hawler and Baghdad. Washington doesn’t mind an autonomous Kurdish area, but it will resist independence.  The US  have supported central government control of Iraqi oil and gas, going against the wishes of their two largest oil firms, Chevron and Exxon Mobil.

This shows that the KRG was wrong in thinking that, if ExxonMobil and Chevron entered Kurdistan’s oil fields, these two giants would lobby for Kurdistan’s interests and protect Kurdistan from the regional countries’ threats and from central government. Although the US is a close ally with Turkey in the region, it has taken a position against Turkey in dealing with the KRG without getting Baghdad’s green light.

Critics of the KRG’s oil policy have attacked the KRG for not being transparent about oil income and have also condemned the sacrificing of all the other economic sectors for the sake of the oil industry. The critics have also attacked the KRG for leading the state to a quasi-Gulf country system, in particular like Saudi Arabia, where freedoms are curbed and an elite of oil lords are at the top and everyone else at the bottom.

A special Gorran Movement (the main opposition party) report on oil reads: “Nothing is more secret than the oil income in the KRG, even talking about national security.”

In October 2009 Dr Ashti Hawrami revealed that, from signing oil contracts, the KRG had earned five billion dollars. In the same month, Nechirvan Barzani, said that his government had spent one billion from that five billion and that four billion went to the sixth cabinet (Dr Barham Salih’s cabinet). But when Barham Salih left the government two years ago, he insisted that he did not have any information about those four billion dollars.

The Gorran Movement gives detail about the four billion dollars: “The amount of money that has been earned through 35 oil contracts till November 2009 or is taken for projects is 4 billions and 963 millions of dollars.”

In response to that, Ashti Hawrami refuted the claims and said the money was used for reconstruction of Arbil International Airport but soon media reports revealed that the reconstruction’s budget was from public budget in which the ministry of finance had provided 619 billion Iraqi dinars. This is only one example of the reasons to be suspicious.

The Kurdistan Region’s Parliament has not been informed about this amount of money. I talked some of members of Kurdistan’s parliament, and all have said that they have not been informed about this. Nasik Tofiq, a Kurdistan Parliament member from the Islamic Union bloc, told ‘Weekly Awene’ that the MPs do not know about oil income. She also said that although the oil contracts were brought to parliament, MPs were not allowed to take them outside so as to investigate with experts.

Oil and gas has enabled the KRG to appear as a regional energy player. With the completion of the KRG-Turkey pipeline at the end of 2013, Kurdistan’s oil can reach international ports. Turkey-KRG relations are at a peak although, in reality, these relations are more between the ruling Kurdistan Democratic Party (KDP), led by Masoud Barzani, and Turkey.

There are about 1,000 Turkish companies in the Kurdistan Region: no other country has so many. The 10 billion US dollars of Turkey’s investment and trade in the KRG has made the KRG a new colony of Turkey. The KRG has become a dependent country of Turkey, although Turkey is also dependent on the KRG’s market.

The KRG-Turkey pipeline has tensed the relations between Turkey and Iraq on the one hand and, on the other, the disagreements over controlling oil between the KRG and Baghdad.

Aside from that, if the KRG and Turkey continue the pipeline without Baghdad’s agreement, it is not clear how the KRG can meet its payments to the oil firms because the KRG doesn’t have any other sources of income apart from oil and its 17 per cent share of Iraq’s public budget – which Baghdad has cut.

In the past eight years, relations between the KRG and Turkey have dramatically developed. Oil is the reason behind this. The PKK-Turkey peace talks can also be considered in this context because the PKK can be a real threat to the pipeline if the PKK’s demands are not met.

There are several reasons why Turkey is courting the KRG: first, Turkey wants to replace its dependency on Russia with the KRG, which indirectly strengthens Turkey’s position in regional politics; second, Turkey doesn’t have the KRG’s natural resources; third, Turkey has become an industrial country that needs natural resources which the KRG can supply; fourth, the pipeline can make the KRG forever dependent on Turkey’s policies.

Since December 2012, the KRG has stopped exporting 250.000 bpd – as previously agreed with Iraq’s federal government – via the national Iraqi pipeline, due to Iraq’s refusal to meet the oil firms’ payments. Instead the KRG has been exporting oil via tankers to Turkey and Iran, an action which Iraq’s federal government considers illegal.

In April 2013, a KRG delegate visited Baghdad to resolve the issues of Dijla Operation Command. The two sides reached a seven point agreement, in which one point was to arrange a commission to resolve the disputes between the KRG and Baghdad over oil. But there have been no developments since then. Leaving these disputes unsolved has badly affected the KRG’s oil sector, as well as Iraq’s.

The KRG and Baghdad disputes have also affected Kirkuk’s destiny. For Kurds, Kirkuk is more important than anything. Some Kurdish intellectuals and political analysts have suggested that Masoud Barzani does not want to work for Kirkuk because Kirkuk is not his party’s stronghold. If Kirkuk returns to KRG territory, then the KDP can no longer be the winner in any elections in the Kurdistan Region. The US will not support an independent Kurdistan, which Masoud Barzani usually rhetorically argues about, but for the US to back Kurdish desires for Kirkuk to join Kurdistan is not inconceivable.

All in all, Kurdistan’s oil can warm all of the Kurdish people in Kurdistan’s cold winters, but it can also burn them. The KRG’s current oil policies suggests the latter is happening, because the people’s demands for transparency and sharing the income equally have not been heard.