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May 30, 2013 | 18:00 GMT

A Looming Showdown Over Iraqi Kurdish Oil Exports

A Looming Showdown Over Iraqi Kurdish Oil Exports
Stratfor
Summary

Another showdown is building between the Kurdistan Regional Government and the government of Iraq, only this time Turkey has entered the fight. Ankara and Arbil's coordinated efforts to export northern Iraqi oil against the wishes of Baghdad are gaining momentum, but Turkey will have to provide credible security guarantees for these energy projects if it wants to avoid another stalemate on its borders.

Turkey has a dilemma. Its competition with Iran in Syria has already been exposed — Turkey is backing the Sunni rebels, who are struggling to sustain their momentum against the Iranian-backed Alawite regime. Turkey also cannot effectively pursue its interests in Iraq, where the Shiite-dominated government is tightly aligned with the Shia in Tehran. Turkey's decision to reach beyond its borders and re-enter the ethnic and sectarian competition in the region has cost it its effective working partners in Iraq, Syria and Iran. Even issues of common interest, such as containing the Kurds' ambitions for autonomy, have become part of the regional struggle, with the Iranian and Syrian regimes seeking to exploit Kurdish militancy to keep Turkey occupied at home.

Turkey has come up with an ambitious plan to try to free itself of these constraints. The ruling Justice and Development Party does not share the deep-seated fears that its Kemalist-minded predecessors had with regard to pursuing Turkey's interests abroad. Turkish Prime Minister Recep Tayyip Erdogan and his team believe it is Turkey's rightful and historical place to assume the role of regional power, despite the challenges of such a policy. Recognizing the inherent limits of dealing with Iraq, Syria and Iran, Erdogan is trying to carve out a more independent foreign policy for Turkey, relying on previously unlikely allies, such as the Kurds, to achieve its goals.

Opportunities in Kurdish Oil

In northern Iraq, Turkey sees an embattled Kurdish Regional Government with the resource potential to help meet its growing demand for energy. Turkey, a country of 73 million with an economy ranked 17th in the world by gross domestic product, consumed around 40 billion cubic meters of natural gas and 700,000 barrels per day of oil in 2012, and consumption is steadily rising in line with the country's economic growth. Iraqi Kurdistan has 4 billion barrels of proven oil reserves — a figure expected to rise if the investment climate permits further exploration — and current production would give Iraqi Kurdistan the potential to deliver around 215,000 barrels per day of crude to Turkey. That is, if the Kurdistan Regional Government can find a way out of its row with Baghdad.

The Iraqi Kurdish government has resigned itself to the fact that there is no enduring solution to its dispute with Baghdad over energy rights. So long as Baghdad meters and pumps Kurdish crude and controls the budget and all Iraqi oil revenues, Arbil's attempts to attract and follow through in paying foreign firms to develop its fields will meet endless obstacles. The Kurds, caught between Syria, Iraq, Turkey and Iran, cannot avoid working with their regional adversaries, so at this point, they find it far more compelling to work with an interested Turkey than with a hostile Baghdad.

The Turkish vision is to establish a bond with the Iraqi Kurds built on economic dependence, in which the flow of Kurdish energy exports will rely on Ankara's — not Baghdad's — good will. In theory, such a relationship would also grant Turkey the political leverage to prevent Kurdish militants in Turkey from using northern Iraq as a haven — a critical component to Turkey's ongoing and delicate peace process with the Kurdistan Workers' Party.

A Risky Endeavor

This is a vision that requires a great deal of cunning, not to mention a sober understanding of the intent and capabilities of Turkey's opponents in Iraq, Syria and Iran. Turkey and the Kurdistan Regional Government have been carefully avoiding a major confrontation with Baghdad while creating confusion over their projects in northern Iraq.

This endeavor began in mid-2012 when Iraqi Kurdish authorities in dispute with Baghdad began trucking small volumes of oil to Turkey in exchange for refined goods, such as gasoline, for local consumption. Things escalated in early 2013 when crude oil trucked from Iraqi Kurdistan to Turkey was sold on the global market without Baghdad's consent. Presently, between 30,000 and 40,000 barrels per day of crude is being trucked by Turkish drivers from northern Iraq to Turkey, including oil produced at the Taq Taq field. Meanwhile, the Baghdad-controlled Kirkuk-Ceyhan oil pipeline has been operating at roughly one-fifth of its official capacity of 1.6 million barrels per day due to frequent bombings, poor maintenance and lower output overall.

The trucked crude irritates Baghdad, but the high cost of transport across mountainous terrain naturally limits the profitability and volume of the operation. If the Kurdistan Regional Government wants a reliable export link to the outside world, it needs pipelines — preferably ones that run exclusively through territory administered and protected by Iraqi Kurds.

The next phase in Kurdish-Turkish ambitions begins at Taq Taq oil field, where production is managed through a joint venture between Anglo-Turkish consortium Genel Energy and China Petroleum & Chemical Corp. Iraqi Kurdish firm KAR Group has built an oil pipeline from the Taq Taq oil field to the Khurmala Dome complex, which connects to the Baghdad-controlled Kirkuk-Ceyhan pipeline network. Several sources claim the Taq Taq-Khurmala pipeline is operational, but crude from Taq Taq continues to be trucked — the more expensive of the two transport options — raising questions about the actual condition of the pipeline.

A Looming Showdown Over Iraqi Kurdish Oil Exports

Kurdistan Regional Government Energy Projects

From Khurmala, the crude can take a circuitous route through the Kirkuk-Ceyhan pipeline, with Baghdad's consent and at the risk of more pipeline sabotage attacks. The alternative is for the crude to travel along a new pipeline route being built by KAR Group that heads northwest through Kurdish-administered territory. There has been a deliberate amount of ambiguity surrounding this particular pipeline project. The project began as a seemingly uncontroversial natural gas pipeline that would travel from Khurmala to feed the Sumel power plant in Dohuk province. The trouble with that story was that the pipeline was built with a capacity of at least 11 million cubic meters per day, at least four times the capacity of the power plant it was to feed. Soon enough, reports started trickling out that the mysterious natural gas pipeline was being transformed into an oil pipeline, with oil pumps taking the place of gas compressors along the line. Trenches that have been dug for the pipeline leading up to the power plant have now been rerouted to the northwest, running parallel to the main road from Dahuk to Zakho, only a few kilometers from the Turkish border. So far, this pipeline has been laid but not welded.

The question now is what will be the final connection of this pipeline before it enters Turkish territory. Turkish officials are affirming that the pipeline will ultimately run through Fishkhabor, the Baghdad-controlled pumping and metering station that receives crude for the Kirkuk-Ceyhan pipeline and from a 100,000-barrel-per-day oil pipeline from Tawke field owned and operated by Norway's DNO. This would mean that Baghdad would theoretically have the power from its federally administered oil facilities to shut off the flow of oil through this line at will, seemingly undermining the original aim of the Turkish-Kurdish plans.

More audacious Kurdish officials are claiming that the pipeline will actually avoid Fishkhabor altogether and that another pipeline extension will be built directly into Turkish territory. This would be unacceptable for Baghdad, however. In spite of Kurdistan Regional Government maps that display such plans, the Turkish government has cautiously distanced itself from such claims publicly, reaffirming instead that Baghdad cooperate and that crude will flow through Fishkhabor unheeded. In fact, Turkey has said it will ensure the uninterrupted flow of crude through this route by directly managing Kurdish energy revenues — or even Iraq's entire energy revenues — through an escrow account to prevent either side from withholding product or payment.

Not surprisingly, Baghdad has balked at the idea of Turkey managing Iraqi energy revenues. From Baghdad's point of view, this is a fundamental sovereign right, certainly not to be trusted to a larger and more powerful ethnic and sectarian adversary to the north. This is where Turkey's strategic vision and dilemma once again collide.

Turkey's Constraints

Turkey simply does not have the diplomatic wherewithal to convince Iraq, the United States or the major foreign firms eyeing these projects that having Ankara manage energy revenues and infrastructural investments in northern Iraq will fundamentally resolve Baghdad's energy dispute with Arbil. The further Turkey goes in these energy endeavors with the Kurds, the more resistance it will encounter from Baghdad — and by extension, from Iran.

The Kurds understand this and thus are counting on Ankara to go further and bypass Baghdad altogether to pump crude to Turkey. The Kurdistan Regional Government is even escalating the pressure by passing legislation that essentially issues an ultimatum to Baghdad to produce an estimate within 90 days and pay the amount it owes to Iraqi Kurdistan from the federal budget. If Baghdad does not respond within 30 days, the legislation authorizes the Kurdistan Regional Government to begin unilateral operations to export its oil. The Iraqi Kurds are not expecting a favorable response from Baghdad but are trying to at least get paperwork in order to claim that they have the legal right to pursue their projects with Turkish backing. But a decision to bypass Baghdad-controlled infrastructure and receive payment for oil independent of the central government is one fraught with danger, and it is unlikely that Turkey is ready for that level of confrontation.

Before heading to Washington for talks with U.S. President Barack Obama, Erdogan made it a point to announce that ExxonMobil had struck a deal with Turkish state-owned subsidiary TPIC to develop oil and natural gas in Iraqi Kurdistan for export to Turkey. Unnamed Turkish officials also told Iraq Oil Report that both Chevron and ExxonMobil have shown interest in constructing and financing these plans. The Iraqi central government has so far relied on threats to blacklist foreign firms that unilaterally sign energy exploration and production deals with the Kurdistan Regional Government from energy development in the south. Erdogan was undoubtedly trying to create the impression that Turkey and the Iraqi Kurdish government had the backing of U.S. super-majors to force Baghdad to accede to its plans in the interest of maintaining foreign investor interest in southern energy production.

However, both ExxonMobil (which has a stake in Iraq's West Qurna-1 operations in the south) and Chevron have remained silent on the matter. The firms are likely watching with interest the Kurdistan Regional Government's energy plans with Turkey but are unlikely to make any firm moves until they can be assured that Turkey will be able to physically secure these projects against an irate Baghdad and Tehran. Turkey still has a couple thousand troops in northern Iraq, but it does not necessarily want to find itself in a situation where it is fighting alongside Kurdish Peshmerga forces against Iranian-backed Iraqi federal forces, creating an ideal conflict zone for jihadists to also exploit.

Moreover, Turkey is still trying to manage a very shaky and slow-moving peace process with the Kurdistan Workers' Party at home and cannot afford a security crisis in northern Iraq that could derail that effort. The multi-step peace process depends heavily on the cooperation of the Iraqi Kurdish government, specifically Kurdistan Democratic Party leader Massoud Barzani. After decades of a fairly predictable duopoly between Barzani's party and Iraqi President Jalal Talabani's Patriotic Union of Kurdistan, the incapacitation of Talabani and rise of third parties raises questions about whether Turkey will be able to maintain strong enough alliances in this increasingly competitive Kurdish political landscape to pursue its energy goals.

Erdogan may well be bluffing at this point. Though the chase of profit versus strategic interest does not always allow U.S. energy giants and the U.S. government to work in sync, Washington has made clear that it is not interested in seeing Turkey provoke a Kurdish fight with Baghdad when the United States has no appetite to intervene and when the Syrian civil war is already causing enough problems. This is why the United States has instead urged Turkey to pursue pipeline projects that connect Iraqi southern production to northern export lines as a holistic approach to dealing with Iraq. But U.S. attempts to treat Iraq as a cohesive entity may be as unrealistic as Turkey's expectations of winning Baghdad over. There are no easy next steps, and no player, especially Turkey, has the option of decisive action to grant Iraqi Kurdistan an independent and reliable export route to sell its crude against Baghdad's consent.

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