Apr 14, 2016 | 09:15 GMT

7 mins read

In Iraqi Kurdistan, Momentum Builds for an Iranian Pipeline

Engineers survey Tawke oil field in the Iraqi autonomous region of Kurdistan, about 400 kilometers north of Baghdad. In the absence of a taxable economy, Kurdistan relies almost exclusively on oil revenue to survive.

For years, Iraqi Kurdistan and Iran have been in talks to construct a pipeline that would transport Kurdish oil to the Iranian market. Until now, the negotiations have lagged as the Kurdistan Regional Government (KRG) instead focused on developing an oil export route through Turkey. But new momentum may be building in favor of the Iranian option, particularly as Kurdish coffers run low and Tehran maneuvers to minimize Ankara's influence. If finalized, the new pipeline would bring the KRG one step closer to the financial independence it seeks.  

Iraqi Kurdistan has long smuggled oil exports through Iran without Baghdad's blessing and without a pipeline to carry them. Over the past few months, though, solutions to the latter impediment have been gaining traction. On March 10, Iran's consul general in Sulaimaniyah said Tehran would soon award a tender for the construction of a pipeline that would enable the KRG to export its oil from Iranian ports in the Persian Gulf. The Kurdish government's top diplomat for Iranian affairs announced on April 4 that the two sides were in the process of finalizing the deal, which is expected to be complete by early May.

Media outlets run by the Patriotic Union of Kurdistan party have since confirmed the April 4 statement and shed some light on what the final deal might look like. Reports indicate that Iraqi Kurdistan will first export an unknown volume of oil to Iran's Tabriz and Kermanshah refineries, which have respective capacities of 110,000 and 22,000 barrels per day. Once those requirements are met, the KRG will send any additional oil to Iran's Arak and Tehran refineries, which both have capacities of 250,000 bpd. Though it is unclear what Iran will give to the Kurdish government in return, it will likely be some combination of refined products and Iranian oil to sell from export terminals on the Persian Gulf.

For Iran, the impending agreement makes practical, political and strategic sense. Iran's largest oil-producing regions lie in the south, well away from the country's northern refineries and population centers. Swapping oil with its western neighbor would give Tehran a way to support those areas without sending its own crude north. Furthermore, Iran's influence in Arbil has been steadily eroding as Iraqi Kurdistan has pushed for financial independence from Baghdad — a move that, though successful, has merely replaced Arbil's reliance on Baghdad with dependence on Ankara. The growing relationship between the KRG and the Turkish government has undermined Tehran's clout both with the Kurds and with its longtime political ally in the region, the Patriotic Union of Kurdistan. Now that Western sanctions hindering business with Iran have been lifted, Tehran will more aggressively pursue long-term deals with Iraqi Kurdistan — and the international oil companies operating there — to try to counter Turkey's rising regional prominence. Greater sway over Iraqi Kurdistan and its oil output would also give Tehran more leverage in future dealings with Baghdad.

Diversifying Trade Partners

The KRG stands to gain from a deal with Iran as well. The Kurdish government's relationship with Turkey, its primary partner in energy trade, is lopsided. Ankara controls not only the bank account that holds all of the KRG's oil revenue but also the sole oil export route for Iraqi Kurdistan. Though the Kurdish and Turkish governments have signed a 50-year contract protecting their arrangement, Ankara could easily nullify it at any time on the grounds that Baghdad — not Arbil — is the only entity that can negotiate a legally valid deal on Iraqi oil. Indeed, Baghdad itself has cited the Iraqi Constitution to make the same claim.

All of the parties in the Kurdish government agree that the region's situation is untenable, but they disagree on what should be done about it. The ruling Kurdistan Democratic Party has adopted a long-term strategy of trying to ensure that Turkey becomes equally dependent on the KRG. To that end, it is trying to position the KRG as an intermediary in Ankara's often-tense relationship with Turkey's Kurdish population. Iraqi Kurdistan is also becoming an increasingly important supplier of natural gas to Turkey, which is struggling to minimize its overreliance on Russian energy. (The KRG alone can supply at least 20 billion cubic meters of natural gas per year, and the two sides hope to build the first phase of a natural gas pipeline between them by 2018.)

That said, there are both physical and political limits to the amount of oil and natural gas the KRG can send to Turkey. The pipeline connecting Iraqi Kurdistan to Turkey's Mediterranean port at Ceyhan can supposedly carry up to 1.6 million bpd, but in reality this figure is closer to 600,000-700,000 bpd — far less than the KRG's total oil export potential. Additionally, the pipeline has been a constant target of attacks and theft, and outages frequently occur. Meanwhile, most of the KRG's natural gas reserves lie in the region's south, which is dominated by the Patriotic Union of Kurdistan. The party, which is more heavily aligned with Iran than with Turkey, opposes the KRG's burgeoning relationship with Ankara — especially since Turkey has allowed the Kurdistan Democratic Party to bomb Kurdistan Workers' Party (PKK) fighters in the Qandil Mountains with impunity in exchange for the KRG's friendship. (The PKK maintains closer ties to the Patriotic Union of Kurdistan than to the Kurdistan Democratic Party government.)

Weakening Baghdad's Hold

Any deal struck with Iran would also help loosen Baghdad's grip on Arbil. The KRG's primary goal is to gain fiscal independence from the Iraqi government, but Iraqi Kurdistan is sinking deeper into financial crisis. The Kurdish government, funded almost exclusively through oil revenue, is struggling to make its payments to oil companies, public servants and peshmerga fighters. It has no real taxable economy. In addition, Baghdad's objections to Arbil's operating as a sovereign entity have made it difficult, if not impossible, for the KRG to borrow money abroad.

The Iraqi and Kurdish governments are in talks over an oil export deal of their own, but neither side appears willing to make concessions, and in March, Baghdad cut off oil flows from fields in Kirkuk to the KRG. Iraq's North Oil Co. had previously shipped about 150,000 bpd through Iraqi Kurdistan's pipeline. The KRG sold that oil but did not give a share of the revenue to Baghdad. The Iraqi government has since said it will not resume its exports until it has reached a new deal with Arbil.

Still, despite its dire financial situation, the KRG probably will not sacrifice its independence to sign a deal with Baghdad, especially if an alternative option — whether an agreement with Iran or continued assistance from Turkey — is on the table. The Kurdistan Democratic Party would agree to a contract with Baghdad only if it yielded more revenue per barrel of oil than Arbil could get on the international market. Even then, that partnership would last only until oil prices recover. Moreover, Iraqi Prime Minister Haider al-Abadi has few incentives to offer the Kurdish government to land such a lucrative deal. Iraq has its own financial and political troubles to address, and al-Abadi is in no position to strike a deal that would be seen as (and essentially would be) subsidizing Iraqi Kurdistan at the expense of the country's other regions. The only scenario in which such a deal might make sense would be if the Kurdish government could no longer fund the peshmerga fighters staving off the Islamic State's advances.

As a landlocked region that is autonomous but lacks independence, Iraqi Kurdistan will continue to be pulled in different directions as Iraq, Iran and Turkey vie for influence over its government. Kurdish energy exports will remain the central focus of their rivalry. For now, Turkey's relationship with the KRG and its control of oil export infrastructure have given Ankara the upper hand, but Iran may be able to use its own energy sector to shift the balance in its favor. 

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