The Fuse

The Kurdish Predicament: When Oil isn’t a Golden Ticket

April 26, 2016

Guest Post by Matthew M. Reed | @matthewmreed

Matthew M. Reed is Vice President of Foreign Reports, Inc., a Washington, DC-based consulting firm focused on oil and politics in the Middle East.

The Kurds have never had it better in some ways—even if ISIS sits on their doorstep like a rabid dog. The Kurdistan Regional Government (KRG in Iraq) and Rojava (or Western Kurdistan, in Syria) enjoy more autonomy than ever. Baghdad and Damascus are focused on existential threats at the moment, leaving the Kurds to advance their own interests. Kurds in both countries are also backed by foreign powers including the United States and Russia.

On both sides of the Iraq-Syria border, the Kurds have expanded their territory at the expense of ISIS and government forces. With that territory they’ve also acquired oil.

In the half-decade before ISIS took over stretches of northern Iraq, the Kurds there built up an oil sector with help from international oil companies in spite of Baghdad’s angry complaints. Within days of the ISIS blitz, in June 2014, Kurdish fighters rushed to defend oil-rich Kirkuk after the Iraqi army collapsed. With it the Kurds took over the nearby Avana Dome and Bai Hassan field, which were previously run by Iraq’s North Oil Company. They thus acquired 200,000 barrels in daily production capacity, which only they could export using their own pipeline network (the official “federal pipeline” was knocked out by ISIS in March 2014; the Kurds are using an alternate route inside Kurdish territory that connects to the old pipeline inside Turkey). Until recently, the KRG also exported oil from Kirkuk-area fields that were run by North Oil, although that arrangement is dead until a revenue-sharing deal is revived.

Estimates are hard to come by but trade press speculated last year that the Kurds in Syria produced 30,000-40,000 b/d at fields jointly run with the Assad regime.

The situation is different in Syria, where the Kurds produce much less. Unlike the KRG, which releases reliable data, Rojava’s oil sector is a black box. International oil companies aren’t active there. Estimates are hard to come by but trade press speculated last year that the Kurds in Syria produced 30,000-40,000 b/d at fields jointly run with the Assad regime. Since the civil war started in 2011, Damascus has done business with seemingly everyone after it abandoned oil and gas assets—ISIS included. Oil from Kurdish areas in the northeast has reportedly been piped through ISIS territory to regime-held refineries in the west. It’s unclear whether that arrangement stands today, but it’s assumed that locals consume most of Rojava’s oil.

A familiar formula holds that “oil = revenue = independence” but it’s more complicated for the Kurds. A variety of factors have conspired against them.

In Iraq, KRG leaders like President Massoud Barzani seek independence, hoping that oil fortunes pave the way. To their credit, the Kurds overcame the initial problems they had finding customers a few years ago, and by discounting barrels they’ve managed to place steady supplies in Israel and across Europe. Iraq hasn’t sued to stop KRG oil exports around the world, except in the case of a cargo destined for the U.S. The Kurds ultimately gave up on the market after a 14-month legal battle.

Exports may have stabilized but the KRG’s fortunes depend on the Kirkuk-Ceyhan pipeline, which their fields tie into near the border with Turkey. The pipeline proved vulnerable in 2015 and even more so this year. The line was closed for 25 days in February and March due to insecurity inside Turkey, where oil smugglers have been known to tap the line and the army is fighting Kurdish nationalists and the PKK, a designated terrorist group. Anti-PKK operations were blamed for the extended pipeline closure.

These closures cost the KRG dearly and they have no control over them. There are some rumblings that the KRG might pursue a new pipeline through Iran to refineries there or export terminals along the Gulf coast—but for now these are literally pipe dreams. For years to come, the Kurds will depend on the Kirkuk-Ceyhan line. The Kurds are thus hostage to political turmoil on the other side of the border.

For years to come, the Kurds will depend on the Kirkuk-Ceyhan line. The Kurds are thus hostage to political turmoil on the other side of the border.

Political turmoil in Baghdad could yet change the tenor of the conversation between the central government and KRG. Relations were nasty under Iraqi Prime Minister Nouri al-Maliki, who tried and failed to prevent the Kurds from attracting foreign investment, but they improved markedly under Maliki’s successor, Haider al-Abadi. At the moment, angry Iraqis are demanding that ministries be entrusted to technocrats who aren’t politically-inclined crooks; this could create a good atmosphere for reconciliation. However, if the Kurds push for independence, the response from Baghdad will likely be harsh no matter who is in charge.

There will be consequences. Kurdish independence would again raise thorny questions about disputed territories and the oil that comes with them. The stage would be set for legal battles around the world. Even today Baghdad could pursue those cases but it chooses not to (except in the case of Israel, which Iraq doesn’t recognize, meaning it can’t sue the KRG in Israeli courts). These legal fights wouldn’t necessarily have to be resolved in order to crimp Kurdish exports. Turkey, which fears Kurdish independence anywhere will inspire an independence movement at home, will also have a say in the matter, seeing as it controls KRG exports.

The Kurds are in a deep financial hole right now thanks to low oil prices. Civil servants and fighters haven’t been paid in months, while only recently was a regular payment scheme arranged for IOCs. If handsome rewards drive IOCs to invest, the KRG isn’t so attractive these days. Some have warned that today’s compensation plan isn’t good enough to keep production steady—let alone increase output. The Kurds desperately need higher prices and higher volumes. Prices are completely out of their hands, while volumes depend on foreign investment, which is drying up, and the integrity of their only major pipeline, which is in doubt.

In Syria, the Kurds produce much less oil and swear they want an arrangement like the KRG has in Iraq—not independence. While Turkey flirts with the Kurds in Iraq, it views Syria’s Kurds as allies of the PKK, which it’s fighting inside Turkish territory and bombing occasionally inside Iraq. What little reporting we have suggests the gatekeepers for Rojava oil (i.e. the YPG) are those the Turks distrust the most.

The bottom-line is that both the KRG and Rojava are landlocked and trapped in tough neighborhoods. Independence aside, each will always be dependent on those neighbors who enable exports.

Looking at a map, there’s no easy outlet for oil in northeast Syria. Exports would have to go through Turkey or Syria in order to reach the Mediterranean. Turkey is off-limits and Syria will be a no-go zone for oil companies for years to come. Exports would only be possible if production was raised significantly, which won’t be possible any time soon, with foreign help or more help from the Assad regime. Looking forward, it’s unlikely that Damascus would enable exports from a semi-autonomous statelet. Rather it would be inclined—like other states—to refine the oil domestically or sell it and and share revenues. All of this is extremely hypothetical, given the chaos in Syria. This exercise merely serves to underscore how large and numerous the obstacles are.

The bottom-line is that both the KRG and Rojava are landlocked and trapped in tough neighborhoods. Independence aside, each will always be dependent on those neighbors who enable exports. Because of that they will remain hostage to regional politics. For the foreseeable future, the Kurds of Iraq and Syria will suffer from low prices and lower volumes.

The Kurdish predicament suggests oil is not the golden ticket to independence. If either side pursues independence soon it will be in spite of oil rather than because of it.

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