It's all about the oil | The Daily Star
12:00 AM, October 17, 2017 / LAST MODIFIED: 01:30 PM, October 17, 2017

It's all about the oil

While the world's focus is now squarely on the United States' (US) spat with Iran and North Korea, there may be trouble brewing elsewhere and that is northern Iraq. The Kurdish referendum, although not binding, has sent ripples through not just Iraq but the entire region. The arming of the Kurds by the US in the fight against Islamic State of Iraq and Syria (ISIS) was a controversial one. It was opposed by Turkey and to some extent Iran, primarily due to the fact that any Kurdish independence (in the long run) would automatically affect Kurds living in these countries. The Iraqi leadership must have had its own misgivings but at the time had nothing to say given its own dismal performance against the bigger enemy, i.e. ISIS.

As ISIS has lost ground to both a US-led coalition and a Russia-backed alliance (that includes the Assad regime), the Kurds have taken the first step towards independence. This issue is being contested not only out of fear of what it will do to spur nationalism in the Kurdish minority groups living in neighbouring countries, but what will happen to the oil reserves that are situated around Kirkuk. As we see ISIS forces being ousted from their strongholds in northern Iraq, the Iraqi military and its Iranian allies are now in very close proximity to Kurdish Regional Government (KRG) forces and all eyes are on those oil fields.

So, how large is the production base in those fields controlled by KRG? As per a Bloomberg article published on October 15 by Julian Lee, “The Kurdish Regional Government exports around 565,000 barrels of crude a day, about the same amount as OPEC member Qatar. Turkey, fearing the impact of the referendum on its own Kurdish population, has threatened to shut the pipeline from Kurdistan to its Mediterranean oil terminal at Ceyhan. The KRG has exported 160 million barrels through Turkey so far this year, according to Bloomberg tanker tracking. Although the flow has remained undiminished in the three weeks since voting took place, Turkey could stop it overnight. Around a third of this oil is produced by foreign investors like DNO ASA, Genel Energy Plc and Gulf Keystone Petroleum Ltd. Bigger companies with strong political backing have also invested in the region. Russia's Gazprom Neft and Rosneft both have interests in Kurdish projects, as does Chevron. Not only could any disruption hurt these companies, European refiners would also get squeezed.” If we are to take Lee's analysis at face value, there is reason to be concerned.

Control of oil in the Iraqi civil war has always loomed large. When the region was largely under ISIS control, proceeds from illegal transfers of oil provided the group with valuable income to finance its terror operations. Back in March, 2015 I wrote in a piece that while ISIS controlled up to 40 percent of Iraq's landmass, it ruled over 11 percent of gas and oil reserves. Indeed, a substantial portion of its cash flow at that time came from selling oil from existing oil fields to middlemen in an international “grey market”.

The Kurds have fared better than ISIS since the area they control in Iraq has known relative peace and not subject to concerted air bombing from any side for any sustained periods of time. It has given KRG time to consolidate not only its political base and hold onto territory, but to also set the building blocks of nation-building. Indeed, the government in Baghdad has been forced to sell its own crude (produced by North Oil Company) using Kurdish infrastructure, as it has no pipeline of its own in the north of the country. So, when we talk about “Iraqi” oil, we are actually talking about crude from both the Iraqi-sanctioned exports and that which is pumped up from oil fields under KRG control.

Push has come to shove in retaking control of Kurdish-controlled oil fields with Iraqi forces launching operations into Kirkuk with the aim of regaining control of the city on October 16. An Iraqi military statement issued says (as reported by Reuters) that it had regained control of an airbase called K1, the North Gas Company station, a processing plant, a power plant and the industrial district. This has not been confirmed by Kurdish forces.

The fallout from any disruption of oil supply will be felt more by Europeans than anyone else. Indeed, Italy is said to be the biggest importer of Kurdish oil followed by a slew of other countries including Croatia, Greece and Spain. Interestingly, Israel also imports oil from the region. Given that oil from KRG is not exactly “legal” and the trade in the oil that goes via Turkey is controlled by grey market operators, the pricing of the oil is also negotiable and not a price regime agreed upon by OPEC.

It will be interesting to see precisely what the US will do to contain the clashes taking place since both the Kurds and the Iraqi government are its allies in the fight against ISIS. Earlier, the peshmerga (Kurdish forces) general command had voiced a warning of a “grave catastrophe” in the midst of all this sabre-rattling by Turkey, Iraq and Iran and has called for dialogue. Now that Iraq has made the first move, we will have to wait and see if there is any chance of peace being brokered by outside powers.

The sooner a ceasefire can be brokered the better. Because at the end of the day, it's all about oil revenues and negotiations must focus on how to manage control of and revenue generated from these oil fields (once there is a ceasefire in place). A negotiated settlement that is binding in nature and where there are clear-cut clauses on how revenue will be shared between KRG and the Iraqi government. The longer hostilities are allowed to continue, the greater are the chances of this conflict turning into the second Iraqi civil war—one that Iraq can ill afford to wage. Such an event could potentially revive the fortunes of ISIS and that is something the world can do without.

Syed Mansur Hashim is Assistant Editor, The Daily Star.

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