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The Transformational Effects of the Oil and Gas Strategy of the Kurdistan Regional Government of Iraq
Submitted by corinne.deloy on Wed, 2014-04-23 14:04
An entity — or entities — existing within and across the boundaries of sovereign states established in the aftermath of World War I, Kurdistan, or the ‘Kurdistans’ of Turkey, Syria, Iraq, and Iran, have rarely engaged in actions and activities that may be considered to be ‘transformational’ in terms of how they would impact upon the broader milieu of Middle Eastern political and economics lives. Despite the impact the Kurds living in each of the extant states may have had an on the considerations taken and policies implemented by the sovereign power, these have rarely resulted in ‘transformations’ of the kind that would prove enduring and sustained. Perhaps because of this subordination within the state structure, academic theorization of Kurdish space has also tended to eschew the cross-border linkages and transformational impacts of Kurdish actions—mainly because they have been, until recent years, largely inconsequential to the greater patterns of power politics unfolding around them. However, it is possible that this inconsequentiality may be resigned to the historical record as developments of potentially great consequence unfold in the Kurdistan Region of Iraq.
The transnational effects of the growing oil and gas sector in the Kurdistan Region of Iraq are set to become significant following the signing of an agreement between Ankara and Erbil in November 2013. This agreement, the legality of which is very strongly contested by the Government of Iraq, would promulgate a significant change in the ordering or authority in the Kurdish dominated border areas of Iraq, and could also impact upon the socio-economic development of the Kurdish regions of Turkey, and the emergent autonomous Kurdish enclaves in Syria, and particularly the region focused upon Qamishli-Derik. Within Iraq, the agreement is a clear challenge to established notions not only of de jure sovereignty but also of de facto control of territory, resources, and boundaries which may constitute, in their final iterations, a challenge not only to modalities of state operations, but the very integrity of the post-World War I state system.
It has turned into something of a truism that Turkey would never facilitate the enhanced consolidation of the Kurdistan Region of Iraq, beyond its autonomous setting with Iraq, for reasons that are inherently political. However, developments that occurred at the beginning of November 2013, and have been ongoing since then, have introduced a new and potentially transformative factor into how Ankara now views the emergent Kurdistan Region in Iraq, and this is the combination of Turkey’s energy deficiency and the Kurdistan Region’s preponderance of hydrocarbons reserves. The importance of this economic factor became public on 6 November 2013. On this date, a comprehensive package of deals and arrangements were signed between the Kurdistan Regional Government and Turkey that allowed for oil and gas pipelines to be developed to export the Kurdistan Regional Governement (KRG)’s hydrocarbons to Turkey and world markets. The plan gives the KRG the ability to export 2 mbpd of oil, and in excess of 10 bcm of gas to Turkey.
How will this work?
A first ‘KRG’ pipeline is nearly complete and will link into the extant Kirkuk-Ceyhan pipeline. A new metering station, north of the Iraqi government station of Fishkhabor, will be in place that will allow the KRG to monitor and control its own exports independently of the government of Iraq. But this pipeline is only an interim measure, allowing the KRG to move its current inefficient export by road to a pipeline that has the capacity for some 700,000 bpd.
Still, there remain problems for the KRG. Firstly, the Government of Iraq still has considerable control over this pipeline, legally and practically. Secondly, the KRG cannot simply ‘turn on the taps’, as the heavier KRG-derived oil cannot be mixed with the lighter product of Kirkuk. The resulting quality of both products would be lower. Beyond this qualitative concern, the KRG has a legal problem as well. In 2010, Turkey and Iraq re-signed their 25 years long Pipeline Tariff Agreement, which restates that all oil in this pipeline (even up to Ceyhan) belongs to the Iraqi government. Unless Ankara is prepared to renege upon this arrangement, the Turkish government would be obliged to pay Baghdad for all of the oil received, then leaving the redistribution discussion between Erbil and Baghdad.
Some analysts see this as being the final word on the situation—that, ultimately, even with exports in place, the KRG will still remain at the mercy of Baghdad with regard to payments, and with Turkey also being able to use the export route as pressure on the KRG leadership to ensure they act ‘appropriately’ towards the demobilization of the PKK. In this scenario, the Barzani leadership and the Maliki government would also play short-term games of political brinkmanship on the run-up to the 2014 Iraqi elections, with meaningless promises and limited payments to oil companies being granted by Maliki to ensure Kurdish support, but ultimately with the Kurds remaining in a position of weakness.
However, this analysis would suggest that the KRG oil and gas strategists are short-sighted to a very significant degree, and I would venture that they are far from this. Figures such as PM Nechirvan Barzani and his natural resources Minister Ashti Hawrami have proven themselves to be very astute at building the oil and gas sector in a staged and cumulative fashion. And Barzani in particular has established extremely strong ties with the political, business and security elites of Turkey. It would be impossible to imagine that the KRG team have not played out the possible consequences of their actions, even to the point of having agreement that Turkey would choose to pay Erbil directly for its oil, rather than to Baghdad.
It is at this point that the second pipeline becomes relevant, and shows the real depth of the Erbil-Ankara relationship—a relationship built as much upon their alliance in security and political matters (in Syria and with reference to the future of the PKK) as it does in energy matters. With KRG projections of their oil outputs showing rapid increases, there is clearly a drive towards having a new pipeline. Turkish state company Botas seems to have been tasked with building this, and would give the pipeline a capacity of in excess of 1 mbpd, according to Minister Hawrami, with estimates then seeing a rise to 2 mbp by 2019. The plan, according to Kurdish sources, would then see revenues paid to the KRG, and with the KRG repeating its readiness to redistribute revenue to Baghdad in accordance to the revenue sharing agreements in place.
This development will also be partnered with what is perhaps, from Ankara’s perspective, the crown jewels of the arrangement: the construction of gas export capability from the Kurdistan Region to Turkey. Not only is the Turkish economy becoming increasingly gas dependent, but it is also currently reliant on expensive Russian gas. Exporting from their friendly and pliant Kurdish neighbors represents a cheaper alternative for Turkey, and one which they have more political control over. Sources suggest that an agreement on pipeline construction could be reached by December, 2014, with gas flowing in 2017.
Interestingly, Washington DC has remained very quiet about these proposals despite negative statements made towards such plans in the past.
The Politics of the Erbil-Ankara Agreement, and Baghdad’s consternation
Once the deal was made official, Baghdad became increasingly and vociferously opposed to the relationship, threatening legal action to prevent the export of what it considers ‘Iraqi oil.’ Meetings took place between KRG and government of Iraq delegations throughout January 2014, with Iraqi Deputy Prime Minister Shahristani maintaining his usual opposition to Kurdistan’s actions, warning of ‘fiscal’ actions Iraq could take if oil was sold outside the regulatory framework of SOMO (State Oil Marketing Organization). The position of Nechirvan Barzani has been similarly resolute: Kurdistan will not accept a situation whereby the operation and success of its oil and gas sector will be controlled by institutions of Government of Iraq.
Out of what seemed to be the usual stand-off in negotiations some optimism emerged, surprisingly, at the beginning of February. Possible compromises could be found. A solution leaked from the Government of Iraq camp, that envisaged Erbil being able to sell its oil, through SOMO, and then have a seemingly automated process of fund-transfer that would see the KRG receive its 17% share of revenue, in addition to securing funds for the KRG security forces. However, the Kurdish negotiators seemed to remain focused on the question of ownership—sovereignty—of the process of export and revenue redistribution, being opposed to any sort of deal that sees the KRG tied to, and managed, by SOMO and with it in effect waiting for its revenue to appear from Baghdad. Instead, the Kurds began to talk more about their KOMO (Kurdistan Oil Marketing Organization) and continued to push for the direct repatriation of revenue derived from Kurdish oil and gas, directly to Kurdistan. For Barzani, the fact that the 17% allocation has rarely, if ever, been achieved by the Government of Iraq makes it difficult to accept promises that new structures would allow it to be delivered in the future. Kurdish officials have consistently complained that they have only ever received about 10% of the allocated amounts.
The dispute illustrates very clearly that the question of oil has become increasingly entangled with notions of sovereignty, if not independence. The KRG has carefully positioned its export plans at 400,000 bpd by 2015 — at current prices, this would give some $14.6 billion, which is what the KRG would contend should be accruing to them as part of the 17% deal. The fact remains that they probably would not generate this level of income—either because of the oil price, or production, or other costs — but for the KRG, it is the control, the sovereignty, of the process which seems to be the most important matter, rather than the absolute amounts themselves, particularly as they seem to have been existing on considerably less than 17% for several years.
The impact of the KRG-Ankara deal
Whatever the outcome of the stand-off with Baghdad, the trajectory on which the KRG finds itself suggests that Erbil will continue to build its oil and gas sector and, as many International Oil Companies (IOCs) contend, oil will find its way to market. But what will be the consequences not only of the growth of a KRG oil and gas sector, but the export of KRG oil and gas to Turkey and beyond?
For Turkey, the prize is indeed significant. With an economy that is driving an annual energy demand growth rate of 4%, and with its energy sources derived largely from Russia and Iran, Turkey’s future economic development has a clear single point of failure: energy security, and associated energy import costs. Turkey’s gas usage in 2013 stood at 45.3 bcm, and so any reduction in costs would be significant. Of this amount, some 58% is derived from Russia. Very easily, the Kurdistan Region, with infrastructure installed by Turkish firms, could move towards providing in excess of 10 bcm, if not more, and at a cost some analysts believe would be a third that of importing Russia gas.
Very easily, if this scenario were to unfold, the transnational effects of energy security would begin to be manifest on the ground, in Kurdish areas on both sides of the Iraq-Turkey border. While the KRG region may remain part of sovereign Iraq, its importance to the energy security of Turkey would very quickly see the construction of economic, and political, ties that bind Ankara and Erbil in ways that would see the latter increasingly maintain its position in Iraq as a relic of the twentieth century state system, but with its de facto orbit being firmly around Ankara. Whether the political map would then alter to reflect the political-economy map would remain to be seen.
How would this development impact upon other parts of the Middle East, and especially those areas that are home to Kurdish populations? Maybe the question is already being answered. In rojava (Kurdish Syria), for example, the leadership of the newly established Kurdish autonomous cantons (there are three) have already aired the possibility, with Turkey, of exporting oil from ‘Block XXVI’, located to the south of Qamishli, and have reportedly reached out to the KRG administration in Erbil for assistance in developing their oil and gas sector. These developments are very much in a nascent phase, and the sensitivities of matters pertaining to Syria may mean that they do not advance quickly. But clearly this particular genie of local control of oil and gas reserves is very much out of the bottle and mechanisms of regional control over oil and gas reserves are set to become a key theme of the development of the twenty-first century Middle East state, as they move to accommodate heightened aspirations of democracy and devolved authority.
And then there are very real questions to address concerning the overall structure of the world’s oil and gas sector, with it dominated by major IOCs, and cartels such as OPEC. With the world energy market facing a glut in production, with Saudi Arabia producing some 10 mbpd, with Iraq (optimistically) planning to match Saudi Arabia in a matter of years, with the KRG moving to 2 mbpd by 2019, and with Iran planning an expansion to 6 mbpd, world energy price stability could well be challenged by these new, and returning, producers. For the Kurdistan Region of Iraq, however, the market will remain very much Turkish, and the leadership of Erbil would do well to consider the pros and cons of having a singular, guaranteed buyer of their products, who would also have the ability to keep the pricing very low.
The Economic Challenge to the Middle East State System
From seemingly out of nowhere, the truism that the Kurds of the Middle East will only have the mountains as their friends is coming to an end. This adage, coined in a time when ‘the Kurdish Question’ was a function of political stability, nationalist mobilization, and utilization of the Kurds as proxy forces, now needs to be reviewed in the light of the emergence of the Kurdistan Region of Iraq as an actor with economic value, as well as military/insurgent usage. This economic value may well see alliances of a far more durable nature develop, particularly between Ankara and Erbil, but also conversely between Erbil and Baghdad, as mutual economic self-advancement crowds out the fractious politics of ethnicity and the imposition of dominant nationhoods. Whether this economic imperative will challenge the extant Middle East boundaries that exist today remain to be seen. Perhaps, rather, Iraq, KRG, and Turkey may happen upon new forms of sovereignty, recognizing political legacies and economic realities. But challenges to the style and nature of how sovereignty is practiced are already happening, and the realities of tomorrow are being shaped by the actions of today.