The KRG’s Predicament and Turkey’s Involvement

Turkey’s PM Erdogan (L, blue tie) with KRG President Barzani (R, in tan uniform) in 2011 (Source: KRG.org)

The Kurdistan Regional Government enjoys a special status inside Iraq’s federal system. It administers the provinces of Erbil, Duhok and Sulaimaniya, while Kurdish control of Diyala, Ninewa, and Kirkuk are challenged by the central government in Baghdad. The KRG has its own president, parliament and military force (peshmerga)—even though it is part of Iraq. This unique arrangement was formalized ten years ago after Saddam Hussein was deposed in 2003 and a new constitution was finalized in 2005.

The status of disputed and oil-rich territories was supposed to be settled by referendum before 2007. However, no such vote has taken place, primarily because the result is anyone’s guess. In the meantime, Iraqi Kurdistan has enjoyed an economic rebirth thanks to its oil wealth. Over the past year, exports climbed to nearly 200,000 b/d, and major international oil companies like Exxon and Chevron have signed exploration contracts with the KRG. Unlike Baghdad, Erbil—the capital of Iraqi Kurdistan—is happy to extend generous terms to foreign companies.

Friction with Baghdad

The central government insists that these deals are illegal and that only Baghdad can negotiate contracts. It also maintains a tight grip on Kurdish exports because it controls the federal pipeline connecting Kurdistan’s fields to international markets. Unfortunately for the KRG, Baghdad controls the national purse too. Parliamentarians opposed to Kurdish designs are currently threatening to slash the KRG’s share of the federal budget, which stands at 17 percent.

Last year, the KRG halted oil exports from April until September because Baghdad refused to compensate producers operating in the north. Iraqi officials demanded audits and only delivered one tranche of payments in October. A deal hammered out in September collapsed before year’s end, leading the Kurds to cut exports again in December. Today, the KRG has no choice but to truck oil across the border to Turkey; any oil shipped through the federal pipeline is essentially forfeited as long as Baghdad withholds payment. KRG exports have fallen from 200,000 b/d to just 20,000 b/d as a result.

Turkey Enables

The party that enables this conflict is Turkey. Its leaders and business class should not be faulted, however. As a landlocked territory, the KRG needs an export route and customer. Turkey satisfies both needs. For decades, Turkey exported Kurdish oil, which was mixed into Iraq’s Kirkuk blend and transported by pipeline to Ceyhan, on Turkey’s Mediterranean coast. Now the Kurds have two options. They can export at the mercy of the central government and hope for payment later, which no foreign company would accept. Or, if they want to come anywhere close to their production targets of 1 million b/d by 2015 and 2 million b/d by 2019, they can pursue a new pipeline separate from the federal one. Look at a map and you’ll see Turkey is the only option for this project (see August post).

I wrote about the Kirkuk-Ceyhan pipeline last year because it seemed like the natural path for new Kurdish oil exports (see my May, June and October articles). When officials from Kurdistan or Turkey spoke about forming closer ties, this pipeline appeared to be the only feasible option for increased exports, so long as it was refurbished. This assumption was based on my reading of official statements and silence in some cases.

The Kurds, for their part, began talking seriously about bilateral energy cooperation last year. The Turks did nothing to check this notion but in public they never expressed the same kind of enthusiasm. Instead, the Turkish Energy Minister appeared beside his Kurdish counterpart at conferences (most notably in May 2012) and insisted that existing pipelines should operate at max capacity. Others echoed this statement while the Kurds spoke vaguely about export targets and infrastructure, some of which connected fields inside the KRG.

Converging Sentiment

Turkey’s silence made the KRG’s excitement impossible to substantiate. But 2013 already feels different. Turkey seems to be shifting gears as it tackles its own Kurdish problems, thus enabling it to invest in Kurdish territory beyond its borders.

Turkey still hasn’t shown its cards when it comes to energy and Iraqi Kurdistan. And yet both official and private sentiment is converging. To get a sense of where many in the Turkish business community stand, look no further than Abdullah Bozkurt’s recent commentary for Today’s Zaman. Titled “Turkey and Hydrocarbons in Iraq,” it is essential reading, as it neatly argues why Turkey must commit to Kurdistan’s energy sector.

When interviewed this month by the same publication, Turkey’s ambassador to Washington, Namik Tan, made a similar case. “As a growing country, Turkey cannot turn its back on resources that are nearby. We do the same things American companies do,” he said. Ambassador Tan spoke more bluntly to Hurriyet Daily News just days before. He also confirmed that the U.S. and Turkey disagree on the political risks of speedy development inside the KRG.

“They [the Americans] say, ‘You cannot convince us,’ and we go, ‘You cannot convince us either.’ We will not have a conflict here on this issue. We will talk and find a common basis for a solution. However, if they think that we will turn our back on those resources and shelve [this opportunity inside Iraqi Kurdistan], they cannot convince us on that,” Tan said. Washington worries that Erbil might declare independence once it secures its own revenue stream. This position should sound familiar. Until recently, Turkey feared the exact same thing.

Changing Minds

Three developments have changed minds inside Turkey these past few months. Without these, a serious and consequential relationship on energy matters would not be possible with the KRG.

First among these is the fallout between the prime ministers of Turkey and Iraq. Though never close, the relationship between Prime Minister Erdogan of Turkey and Iraqi PM Nouri al-Maliki soured so much last year that they sniped at each other in dueling interviews. Erdogan accused Maliki of bullying minorities and, in return, Maliki accused Erdogan of meddling in his country’s affairs. Erdogan’s tendency to personalize relations may lead him to choose Erbil over Baghdad.

The second issue affecting calculations in Ankara is the Kurdish question inside Turkey. Turkey is home to a large Kurdish minority (15-20 percent) which has been subjected to second-class status for generations. Next year, the conflict between Turkey and the PKK, a Kurdish rebel outfit, will turn thirty years old after having killed more than 40,000 people. There is a chance, however, that it could be resolved before reaching that anniversary.

Right now Turkish officials and the PKK are discussing a ceasefire and disarmament plan that ends the conflict. PKK leader Abdullah Ocalan is reportedly participating from his jail cell. Prior to these dealings, it was hard to imagine Turkey doing swift business with Iraq’s Kurds while fighting its very own Kurdish insurgency. On a more practical level, it’s worth noting that unrest in Turkey’s southeast, where the Kurdish insurgency is most active, also threatens oil infrastructure, including the Kirkuk-Ceyhan pipeline. A raging conflict would only make a new project less appealing for investors.

A third development underpins those noted above and that is the increasing non-oil commercial activity between the KRG and Turkey. This contact has bred familiarity. And, more importantly, it has proven lucrative for both sides. About 70 percent of Turkey’s trade with Iraq is conducted with the regional government. Estimates last year placed the annual value at about $8.5 billion, up from $5 billion in 2008. There should be no doubt that oil deals could multiply current figures.

New Deals

Going forward we should look for two mile-markers in particular. The first is the announcement of a new pipeline connecting Turkey and the KRG. This would be a direct challenge to the central government in Baghdad. Such a move would strain relations between Ankara and Baghdad even more, perhaps to the breaking point, thus confirming that the Turks are betting on Erbil and are done with at least this iteration of the Iraqi government. In 2012, KRG Energy Minister Ashti Hawrami speculated that a contract for a new pipeline could be wrapped up by August 2013. An announcement may come sooner.

We should also look for Turkish oil companies to enter the KRG’s upstream sector (i.e. exploration and crude production) in a big way, perhaps even before a pipeline is announced. These companies might have a better sense of which way the government is leaning and so they may take the plunge early. Chances are the Turks will be rewarded with real estate if they take such a bold risk.

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