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Will Kurds use oil to break free from Iraq?

For sale: One million barrels of crude oil. Attractive discount offered. Currently sitting off Moroccan coast.

That’s what the Iraqi Kurds are offering potential buyers, much to the fury of the government in Baghdad. It amounts to a declaration of economic independence, fraying the already tattered ties holding Iraq together.

Here’s how it works:

The Kurdish Regional Government, or KRG, deals with oil exploration companies independent of the central government.

Exxon Mobil, Chevron and Total are among the companies working in Iraqi Kurdistan.

The crude produced there goes through a pipeline to the Turkish port of Ceyhan in the Mediterranean. Then it’s loaded onto tankers and floats about until it finds a buyer.

The proceeds are held in a Turkish bank; the Kurds say they will take 17% and the Iraqi government is entitled to the rest.

Who are the Iraqi Kurds?

Along with the Shiite Arabs and the Sunni Arabs, the Kurds are one of the three dominant groups in the fractious and diverse nation of Iraq.

While most Kurds are Sunnis and a minority are Shiite, they identify first as an ethnic group. They are distinct from Arabs and speak an Iranian language.

The Kurdish population numbers 15% to 20% of Iraq, which has a population of 32,585,000, according to an estimate from the CIA World Factbook. There are also large Kurdish populations in the neighboring countries of Iran, Syria and Turkey, with varying levels of independence aspirations.

The KRG rules an autonomous region with its own Cabinet, parliament, president and military forces. The region consists of three provinces In Iraq’s north: Irbil, Sulaimaniya, and Duhuk.

The Kurds had been oppressed by Iraq’s Saddam Hussein government, but the area has avoided much of the country’s warfare since Hussein’s overthrow in 2003.

Today, Iraqi Kurdistan is regarded as a relatively stable and economically booming Middle East success story, thanks to its oil clout.

Scaling up

The KRG began exporting small amounts of crude oil in trucks last year, but the pipeline to Ceyhan gives it the opportunity to scale up.

Industry sources say more than 100,000 barrels are flowing through the pipeline every day, and more than 2 million barrels are already stored at Ceyhan.

Altogether, there may be the equivalent of 45 billion barrels of oil under Kurdish land in Iraq, according to the KRG.

Aligning with Israel

The most recent buyer appears to be Israeli.

Late Friday, the SCF Altai docked at the port of Ashkelon, having taken on a load of Kurdish crude from another tanker in the Mediterranean a week ago.

Why Israel? It’s not clear who the buyer is, or whether the oil changed hands once or more before finding its final destination.

But the Israelis may see the Kurds as a natural ally in a region where both feel they are threatened minorities.

Problems offloading

Another much larger cargo — said to contain 1 million barrels — has been at sea for more than a month.

According to shipping sources, the United Leadership tanker was at anchor off Casablanca in Morocco late last week, still looking for a buyer. Ship tracking databases had the vessel listed as “For Orders,” meaning its cargo does not yet have a destination.

The United Leadership’s limbo suggests that despite reportedly offering big discounts for its crude, the KRG is having problems offloading it.

Some buyers are worried about Baghdad’s threat to sue anyone who buys Iraqi oil other than through the state company. The Iraqi government has already blacklisted some agents and importers of Kurdish oil, including the Austrian company OMV.

Other buyers

Reuters reported earlier this month that Russian oil company Rosneft had bought a cargo of Kurdish crude for a refinery in Germany that it co-owns.

Forty one thousand tonnes of oil — which had been trucked from Kurdistan to Ceyhan — were carried by the Minerva Antonia tanker to Trieste in Italy and then sent by pipeline to Germany, the agency reported.

Turkey says it regards the sales and the use of a Turkish port as legitimate, but also has political interests at stake in a complex regional picture.

Prime Minister Recep Tayyip Erdogan has developed close ties with the Kurdish leadership in Iraq — partly to dissuade it from making common cause with Turkey’s restive Kurdish minority. Turkey also wants to diversify its sources of energy. It concluded a 50-year deal with the KRG this month (though details of the agreement remain sketchy).

‘Playing with fire’

The Iraqi government has begun legal action against Ankara at the International Court of Arbitration.

Iraqi Deputy Prime Minister Hussain al-Shahristani warned Turkey that it was “playing with fire” and “plundering Iraq’s wealth.”

The United States also opposes the Kurdish sales as a further destabilizing factor in a country at risk of breaking apart. Producing or refining companies working in parts of Iraq still under the control of the central government seem to be avoiding involvement with the Kurds’ unilateral action.

Need for cash

But the KRG needs cash — lots of it and quickly — because negotiations with Baghdad over the Kurds’ share of oil revenues have stalled. It has also borrowed heavily.

Its monthly wage bill is more than $700 million — that’s 70% of the entire budget just going on salaries. And now that its peshmerga forces are fully mobilized in protecting Kurdistan from the Islamic State in Iraq and Syria, or ISIS, that spending is likely to rise.

According to a recent study by BoA Merrill Lynch, the KRG would need monthly sales from 20 tankers holding a million barrels of oil each to make $340 million.

Fraught with peril

But Denise Natali, senior research fellow at the Institute for National Strategic Studies at the National Defense University in Washington, believes the sales are fraught with peril.

“The key issue is transparency and risk-free exports,” she told CNN. “If something is legitimate or legal — as both the Kurds and Turkey claim — why then does the sale of Kurdish crude remain shrouded in so much mystery and murkiness, with transfers at sea, and buyers and prices not being identified?”

“Any sales that may eventually occur will still be considered illicit trading by Baghdad; and that will entail litigation and brings with it reputational damage.”

A price

As the government of Prime Minister Nuri al-Maliki in Baghdad tries to stave off advances by ISIS, the Kurds are in a strong bargaining position. Their peshmerga forces have been able to repulse ISIS attempts to infiltrate the Kurdish region — and might yet help government forces go on the offensive.

But there will be a price.

Above all, the KRG wants the major city of Kirkuk — which it now occupies and where Kurds, Turkmen and Sunni all live — to be recognized as part of the Kurdish autonomous region.

The KRG’s President, Masoud Barzani, told CNN’s Christiane Amanpour on Monday that Iraq was “falling apart … and it’s obvious that the federal or central government has lost control over everything.”

“And we cannot remain hostages of the unknown,” he added.

A new confrontation?

Peshmerga forces last week took control of the Kirkuk oilfield, strengthening the Kurds’ hold over Iraq’s northern oilfields. The Kirkuk oilfield is Iraq’s fourth largest but badly in need of investment.

But Natali, who has followed events in Iraq for more than 20 years, says the Kurds’ assertiveness may end up generating a new confrontation.

“Barzani does have leverage over the Maliki government because it is so weak, and the Kurds’ occupation of the Kirkuk fields does strengthen their short-term bargaining position. But such weakness and politically expedient alliances may not last forever,” she says.

“The Maliki government may be replaced by a more inclusive and therefore stronger government in Baghdad, or a Sunni Arab state may emerge on the Kurds’ doorstep that may not be amenable to Kurdish demands.”

Relying on Turkey

The Kurds are also very reliant on Turkey’s goodwill.

“The Iraqi Kurds are increasingly dependent on Turkey as a conduit for their oil and financing,” Natali told CNN, “and the close relationship between Barzani and Erdogan is largely responsible for the current arrangement. But some groups in the Turkish parliament and some Iraqi Kurdish politicians have been very critical of this opaque arrangement,” wary of ruining relations with Baghdad and alienating Washington.

For now, the Turkish and Kurdish governments appear to feel that the retaliation threatened by Baghdad can be ignored.

Turkey’s Energy Ministry said last week it expected another shipment of Kurdish oil to leave Ceyhan soon. According to a ship tracking database, that oil is aboard the 85,000-tonne Greek-registered United Emblem, which left the port at the weekend — destination unknown.


7 Comments on "Will Kurds use oil to break free from Iraq?"

  1. Davy, Hermann, MO on Sat, 28th Jun 2014 7:15 am 

    I have read the Kurds have already said the inevitable that the Kirkuk debate is over. The Kurds are the most rational of the three de facto states in Iraq having lived on the precipice of existence for so many years. They have learned the hard way on what it takes to make a state work. They will play the game with the other two sides where it suits their end game. They are embracing Turkey and the Turks are embracing this new Kurdistan. We hear very little about Kurdish rebels in southern Turkey anymore. I imagine the Kurdish regional government and Turkey have worked out an arrangement with the Kurdish question there. These rebels have probly joined the ranks for the Iraqi Peshmerga with a better pay and a better life than living in a tough mountainous environment. The Kurds are experiencing an economic and cultural renaissance. The big question is can they stand up to whatever morphs out of the Sunni and ISIS situation. Will the Sunni’s go after Kurdistan if they become a stable solid power? Iraq is moving towards Balkanization. This will allow the Kurds to develop the Iraqis northern fields and allow the world some much needed stable supply of quality crude with its high net energy. It is a big if and much must be done. The northern pipeline in Sunni hands looks to be down for a while. It will take the Kurds time to build a new one into Turkey. The current Kurdish pipeline is insignificant to what is needed. If the world does not unravel in the meantime Kurdistan has a bright future.

  2. Plantagenet on Sat, 28th Jun 2014 7:53 am 

    The Kurds have already broken free from Iraq. The real question here is whether the Obama administration will supply military aid to the quasi independent Kurdistan as thet are now providing military aid to the Shia in Iraq and the Sunni in Syria.

  3. longtimber on Sat, 28th Jun 2014 1:15 pm

    No mention of the pipeline reversals.

  4. J-Gav on Sat, 28th Jun 2014 2:33 pm 

    A certain Dr Shaways, a Kurd, is presently vice-prime minister of Iraq, so I’m not so sure the Kurds have already completely cut ties with the govt in Baghdad.

    Barzani, the president of Iraqi Kurdistan, wants oil revenue to start coming in at a faster rate. Al-Maliki doesn’t like the way they’re going about it (trucking it out and then waiting to sell, by-passing the central Iraqi govt)). Turkey will be the key in that since the Kurds can only get Kirkuk oil out through them.

    Turkey also does not want to see an independent Kurdistan (possibly straddling Iraq and Iran) get any ideas about taking a chunk out of Turkey. They’d like to keep it prosperous enough so it doesn’t foment terrorism in their country while limiting its reach as much as possible.

    It’s a very complex part of the world, folks.

  5. Makati1 on Sat, 28th Jun 2014 10:06 pm 

    J-Gav, what part of the world is not complex today? With the Empire beating the stick in every hornet’s nest it can to get a war going, there cannot be anything but trouble in every form they can buy with their Charmin paper. Putin is frustrating them in East Europe, the ancient Muslim feud is in the Middle East/North Africa, South America is banding together to resist the West, China is blocking them in most of Africa and Asia. Must be very frustrating for the DC Mafia these days. They cannot seem to get anything right. Even their own serfs are waking up to their lies. The rest of the world already has.

  6. J-Gav on Sun, 29th Jun 2014 5:33 am 

    Makati – What you is true but I would still maintain that some regions are more intractably complicated than others. These are generally recognizable by the size of NATO’s footprint (or should I say ‘bootprint’) on them.

  7. Makati1 on Sun, 29th Jun 2014 8:08 pm 

    J-Gav, so true.

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