Reuters reported yesterday that Kurdish oil is again flowing at a rate of 100,000 b/d. It’s been shut down since April because of a dispute with Baghdad and is only expected to pump until the end of August. The Kurdistan Regional Government (KRG) is waiting for payments from the central government; they say they will halt exports again if payments are not made before September.
“This is a goodwill initiative and we sincerely hope that the federal authorities in Iraq respond positively, making all the outstanding payments due to the IOCs [international oil companies] and implementing all the measures agreed upon between the KRG and the federal government,” a KRG spokesman said last week. The oil is passing through the Kirkuk-Ceyhan pipeline, which we’ve talked about before on this blog.
Energy expert Steve LeVine recently commented on Kurdistan’s prospects for Foreign Policy. On August 1, he argued that international oil companies might soon create an independent state in northern Iraq by pursuing oil deals with the KRG. He points to deals dating back to October, including those signed by Exxon Mobil, Chevron, and Total. Russian major Gazprom signed a similar deal just last week. In total, four majors have now defied Baghdad and bought stakes in Kurdish oil. All of those four rank among the top 10 oil companies in the world if we judge them by market value.
LeVine is right when he says, “Foreign oil companies are exasperated with Baghdad’s stinginess and allured by the Kurds’ more liberal terms for oil contracts.” He also stresses that these companies are risking huge investments in southern Iraq when they do deals with the north. Companies like Exxon, for instance, have been blacklisted by the central government as punishment. LeVine goes on to argue that, if this trend continues, then “it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous.”
The article quickly passes over the thorny–but critical–issue of export capacity, however. As LeVine writes: “When [new deals] combined with the Kurdish authorities’ already-existing plans to build independent oil and natural gas export pipelines out of Kurdistan that avoid the Arab regions of Iraq entirely, the oil deals look increasingly like a robust, commercial-led carving out of the region as a stand-alone entity. Some might call it another substantial piece of the puzzle toward the creation of the Kurds’ longstanding national dream — a state of their own.”
It’s important to note that the KRG’s ambitious plans for new pipelines are still only plans. There is no ink on paper. No deals have been confirmed. No financing has been secured. The problem for Kurdish authorities is that their export capacity is limited today and its expansion will be decided by Turkey later. The fact is: Kurdistan cannot achieve “de facto statehood” without Turkey, simply because any new pipelines or even the utilization of old pipelines will require their approval. The Turks controls the spigot even if the Kurds control the flow.
Before the Kurds stopped production in April, they exported 100,000-150,000 b/d through the Kirkuk-Ceyhan pipeline. Here is what I had to say about this pipeline and the KRG’s export plans in June:
As far as I can tell, when we talk about expanding Kurdistan’s oil exports, we’re talking about two separate projects. One is real and plausible; the other is still imaginary. The first—and plausible—project is a pipeline renovation project that will re-open the 46” pipeline connecting Kirkuk to Ceyhan. The Kirkuk-Ceyhan pipeline is actually composed of two lines. One is 46” with a capacity of 1 million b/d. It’s been shut down since 1990 [but sections are still used for rerouting oil in case of emergencies]. The other is 40” with a capacity of 500,000-600,000 b/d. It currently operates at a diminished capacity of about 300,000 b/d. Renovating the 46” line would allow Kurdistan to pump 1 million b/d through Turkey to the Mediterranean Sea. It could be completed as soon as next year.
The second project, which made the most headlines last month [in May], is a genuinely new pipeline, the contract for which will not be awarded until August 2013, Kurdish Energy Minister Ashti Hawrami says [emphasis added]. It’s supposed to carry 1 million b/d but may be years away. The Turks, however, have yet to give this project even a wink or a nod. In public statements, they emphasize the renovation project. Since a new pipeline would stretch hundreds of kilometers through Turkish territory, Ankara’s silence is very, very telling, I think.
If the contract mentioned above is awarded next year, then 600 miles of pipe still have to be ordered and placed, meaning it might not be finished until after 2015. So the Kirkuk-Ceyhan pipeline remains the only way for Kurdistan to transport oil. Interestingly, the Turks have supposedly contacted Baghdad, recently asking the Maliki government if they ever plan to utilize the remaining 1.3 million b/d of unused pipe.
As a matter of principle, Turkish authorities want the pipeline operating at max capacity because a state-owned monopoly (Botas) is responsible for maintenance and repairs even when it is unprofitable. Kurdish oil is the only alternative if Baghdad told Ankara it will not increase crude pipeline flows. And it’s even more appealing now that major oil companies are investing in the KRG. Majors must believe the oil will find a way to market; Turkey could cash in if it helps Kurdish oil escape.
The biggest obstacle then would still be marketing. Right now, Iraq’s state-run oil marketing company, SOMO, controls metering and sales at Ceyhan, the Mediterranean terminus for the 600-mile pipeline. For years Kurdish oil has been blended with Iraqi crude at Kirkuk and shipped into Turkey. Fixing these problems would be tricky: they’d need a new pipeline or a separate one–like the 46” line that is rarely used–and a new marketing arrangement. Going by the official estimate for when a new pipeline might be contracted (next August), we’re still a year away from knowing for sure that the Kurds will have their very own release valve. In that part of the world, however, one year is an awfully long time, and politics could still dash or delay Irbil’s hopes.
Rage will boil over in Baghdad if the Kurds try to export through an existing pipeline, break ground for a new one, or start a marketing scheme at Ceyhan that bypasses SOMO. Since Ankara is in a position to enable any combination of these options, it will have to decide whether transit fees from Kurdish oil are worth even more friction with the Maliki government. That said, Turkish-Iraqi ties are very tense already, with the two prime ministers trading insults, and Baghdad blaming Turkey’s Foreign Minister for intervening in Iraq’s “internal affairs” by visiting the disputed city of Kirkuk on August 2. New revenues might be worth the diplomatic cost.
Kurdish politics could still derail the KRG’s plans to export 2 million b/d by 2019. KRG Regional President Massoud Barzani’s support for Kurdish fighters in Syria has alarmed many in Turkey. Officials fear that he might accidentally help PKK terrorists gain a foothold along Turkey’s southern border. Again, Barzani is no friend of the PKK and this is not his goal; Turkey knows this. But Ankara could still hold the KRG’s crude export plans hostage if they concluded that Barzani failed to restrain Kurdish nationalism.
Kurdistan might ultimately become a major exporter. Some day it may even become an independent state like the one Mr. LeVine describes. But politics and logistics can still prevent exports from rising–and the KRG’s ambitions from being fulfilled. For these reasons, Turkey’s role cannot be overlooked.