Iraqi Kurdistan Pushes Limits on Oil, Autonomy

A series of recent petroleum deals signals a direct challenge to Baghdad's claim of total control over the country's oil exports and a possible step by the Kurds toward their longstanding aspirations for increased autonomy, or outright independence.

Within the last few months, Iraq's Kurdistan Regional Government, or KRG, has begun construction on a major international oil and gas pipeline project with neighboring Turkey that would allow the Kurds direct access to world markets via the Mediterranean.

The KRG has also expanded exploration deals with foreign oil majors and boosted a growing crude-for-products trade with Turkish companies.

The moves reveal that Iraqi Kurds want to make their own economic choices.

Deals cause tensions

The deals have not only rankled Iraq's central government but also deepened the diplomatic rift between Ankara and Baghdad.

And they present internal problems for energy-hungry Turkey, too, which is fighting insurgents among its Kurdish minority who have long pushed for more freedoms.

Ankara faces enormous risks were it to throw its economic support solely behind Iraq's Kurds.

"Turkey wants to retain Iraq’s territorial integrity and political stability. It doesn’t want to encourage any kind of autonomy in Turkey or with any of the other Kurdish populations nearby," said former U.S. international energy envoy David Goldwyn.

"Also, Kurdistan’s economic prosperity keeps Kurds happy there and is a significant commercial opportunity for Turkish companies. So [there are] complicated, mixed interests on both sides," he said.

Rich oil reserves

The Kurdish-run districts of northern Iraq have significant, nearly untapped reserves.

But years of legal disputes between the KRG and federal authorities in Baghdad have kept its oil largely excluded from international markets. Most oil produced in Kurdistan is sold locally for up to $60 a barrel, well below world prices.

With its sole grip on federal authority, Baghdad receives all Iraqi oil revenues and distributes a share to the Kurdistan region. Iraq also controls the vast, lucrative oil fields in the south.

In April, the KRG temporarily halted exports to protest what it said were overdue payments from the central government. Shipments were restarted in August and increased in September, when Iraq’s federal Cabinet ratified a new agreement with the Kurds.

Kurdish Oil Minister Ashti Hawrami told an energy conference in London the deal could lead to exports reaching 250,000 barrels per day by 2013. Kurdish officials project levels of one million barrels a day by 2015.

The heady outlook is contingent on the KRG’s recent deal with Ankara, which bypasses the federally-controlled Iraqi pipeline and is due to be operational by early 2014.

"If the new pipeline[s] go through," said Middle East expert Gregory Gause, "Baghdad’s leverage over the Kurds would be reduced to zero."

Over-stated oil claims

But some analysts say Kurdish oil claims are over-inflated.

Roughly 75 percent of Iraq’s proven reserves are concentrated in the south. The Kurds control only about six percent of the remaining northern reserves while another 20 percent is in the disputed Kirkuk area, according to the U.S.-based Revenue Watch.

"Kurdistan does not have 45 million barrels of oil as it claims. Most of that is in disputed territories that would never be included or accepted by the central government," said Denise Natali, a Kurdish expert at the National Defense University in Washington, D.C.

Iraq's southern oil fields are the country's "real jewel," she said.

But Iraq remains in political turmoil and the south, in particular, has faced repeated deadly attacks from extremist elements seeking to destabilize the country.

For now, the Kurdish regional government provides better financial terms to oil companies. "Its stable political environment is attracting international investment in a way Baghdad has been unable to do," Gause said.

Last year, ExxonMobil became the first oil major to sign with the KRG, aggravating relations with Baghdad "by taking exploration blocks located squarely in disputed territories," according to a report by the International Crisis Group.

Chevron, France’s Total and Russia’s Gazprom have followed. An estimated 45 smaller petroleum companies also are operating in Kurdistan.

Last month, Iraq’s finance ministry belatedly transferred an initial $650 million payment to the Kurdish government to reimburse two of these firms. But Baghdad does not view the compensation as an endorsement of the Kurdish contracts.

In a further slap to the Iraqi government, diplomatic sources said last month that Exxon is looking to sell its stake in a flagship project to develop the giant West Qurna-1 oil field in southern Iraq, because profits there are thin.

Exxon has declined to comment.

Kurds cautioned

Former envoy Goldwyn cautioned Kurdish leaders not to overplay their hand.

"The Kurds have some serious cards. But if Baghdad continues to refuse to reimburse costs once those costs become significant — four-five years out — [it] could decidedly hamstring the KRG’s economic development," he said.

Iraq's federal government maintains it alone has the right to negotiate contracts and export oil and gas. The Kurdish view is that Iraq’s federal constitution provides delegated authority to the provinces over their own petroleum production.

"The constitution gives us the right to develop our oil infrastructure and share it with the rest of the country," said Fuad Hussein, chief of staff for the KRG presidency.

"Each community, each citizen, has a share in the wealth, along with the Iraqi government," he said.

Ultimately, Goldwyn and others say, the crux of the dispute is about sovereignty, not money. In the near term, the Kurds will remain part of Iraq even as they seek to increase their oil hand.