Thursday, 2nd August 2012

Oil export dispute pushes Kurds into heart of regional crisis

Lured by a combination of extraordinary prospectivity and attractive fiscal terms, international oil companies (IOCs) are more and more prepared to discount the political risks of signing production-sharing contracts (PSCs) with the Kurdistan Regional Government (KRG), even though those risks are increasing exponentially with the growing acrimony between Erbil and Baghdad. In the past fortnight, France’s Total and the US’ Chevron have accepted blacklisting by Baghdad as the price of securing a stake in potential Kurdish hydrocarbons assets. On 19 July, Chevron bought out the 80% interests in the Rovi and Sarta blocks acquired by India’s Reliance in December 2006, and was immediately blacklisted. Less than two weeks later, Total farmed into Marathon Oil Corporation’s Harir and Safen blocks, which the US company acquired in 2010. It bought a 35% working interest in each block, reducing Marathon’s working interest to 45%. Total signed up before Marathon had completed 2D seismic exploration, indicating its appetite for the Kurdish play.

There is no prospect of any of the IOCs active in Kurdistan being able to export crude oil or gas with Baghdad’s blessing while Nouri Al-Maliki remains in charge. The crisis between Erbil and Baghdad, which International Crisis Group described in a 31 July paper as “a chronic crisis that could bring down the existing political structure”, is the result of a series of missteps originating in Maliki’s failure to honour the terms of the February 2011 Erbil Agreement. Kurdish oil lies at the heart of the conflict.

The Erbil agreement set the terms under which Iraqiya leader Ayad Allawi and KRG President Massoud Barzani would support a Maliki government. One of the most important commitments was to pass the draft hydrocarbons law, effectively legitimising Kurdish PSCs. This has not happened. Baghdad has also refused to hand over payments for oil exports due to IOCs operating in the KRG region. In response, the KRG suspended official exports through the Kirkuk-Ceyhan oil pipeline in April and started trucking crude to Turkey, receiving refined products in return (GSN 923/9). Erbil justified this arrangement, which some sources say has gone far beyond the token quantity of six road tankers, saying Baghdad had damaged the regional economy by blocking the sale of refined products from southern refineries in KRG territory.

In early July, Maliki made Kurdish “smuggling” of Iraq’s oil a lead agenda item at a meeting of the council of ministers, arguing that it owed $8bn to the treasury and threatening to deduct this amount from Erbil’s share of the national budget. Speaking to Al-Jazeera English TV on 29 July, Barzani repeated three times that the KRG would consider any budget cut “a declaration of war”, stating that Baghdad would be held responsible for the consequences. Barzani has also repeatedly threatened to hold a referendum on independence should there be no progress through dialogue (GSN 921/1).

Not long ago, such extreme threats would have been unthinkable. Now they form part of a rapidly changing geopolitical scene. Turkey has abandoned its zero-problems-in-the-neighbourhood strategy and appears to be encouraging unilateral Kurdish oil exports. It has expressed interest in building new oil and gas pipeline connections with Iraqi Kurdistan. Prime Minister Recep Tayyip Erdogan also appears to have fallen out personally with Maliki both over Iraq’s support of the Iranian position on Syria and the marginalisation of Sunnis in Iraq. As Syria implodes, Barzani also plans to host a regional gathering of Kurds from Syria, Turkey and Iran as well as Iraq sometime this year which he said would enable the Kurds “to have a united statement... that stresses peace and peaceful coexistence”. It remains to be seen if it is taken in this spirit.