Tag Archives: Oil

Your Move, Zeidan.

(For background, see my February 3 article for Foreign Policy, “Federalism and Libya’s Oil“.)

The big news out of Libya this morning is that Ibrahim Jadran–the renegade federalist and mastermind behind the country’s 8-month old oil crisis–has found a buyer. A North Korean tanker was reported to have entered the Gulf of Sidra on March 4. Jadran’s men control three terminals in the Gulf: Es-Sider, Ras Lanuf and Zuietina, with a combined export capacity of 600,000 b/d. The tanker approached Es-Sider earlier this week but docked this morning. It is highly unusual for North Korean tankers to enter the Mediterranean via the Suez Canal. The deal certainly proves Jadran is desperate to sell oil; no reputable company will do business with him.

A spokesman for the group told Reuters, “We started exporting oil. This is our first shipment.” Now it’s up to the besieged and broken government in Tripoli, led by Prime Minister Ali Zeidan, to act fast and make sure that ship never reaches its destination. Zeidan may be distracted by yet another no-confidence vote scheduled for tomorrow. He’s overcome previous attempts to remove him from office but dissatisfaction with him as at an all-time high. However risky, Jadran has given Zeidan the perfect opportunity to show the kind of leadership Libyans so desperately need right now.

Zeidan should start with the following:

1) Mobilize Libya’s modest navy. By world standards, Libya’s navy is nothing special. But on two previous occasions, forces loyal to the central government have mobilized small fleets carrying men with rifles and rocket-propelled grenades. Warning shots were good enough to turn away tankers last August and again in January. In those cases, the tankers were driven away while empty. Now, however, with the tanker loaded and presumably trying to exit the Gulf of Sidra soon, it may be wiser to keep the tanker bottled up near the port.

2) Zeidan needs to work the phones starting with Egypt. This is absolutely essential. The North Korean tanker entered through the Suez Canal and it will take the same route back. Zeidan could demand that the ship be denied access because it is carrying a stolen cargo. The Egyptians might even be convinced to let the ship enter and then have it redirected to a port before it can exit the 120-mile waterway.

Libyan-Egyptian relations have seen a rough patch lately due to border insecurity and the targeting of Egyptian citizens within Libya. But, by every indication, Zeidan’s relationship with Egyptian authorities is still in good shape. Egypt saw it’s first post-Morsi government quit early this month. That shouldn’t prevent Zeidan from appealing to decision-makers, like Field Marshal Abdel Fattah al-Sisi, or managers at the Suez Canal Authority who are ready to deny illicit shipments.

One NOC official told Reuters that the 250,000 barrel tanker is owned by a Saudi company, presumably a privately-owned one. If so, Zeidan can call on Riyadh to intervene, withdrawing whatever insurance the ship has or preventing any payment for Suez tolls.

3) Contact European allies and the U.S. to intercept the vessel if all else fails and direct it to a friendly port, perhaps in Europe. Libya’s navy is simply not equipped to pursue this North Korean tanker. If it escapes the Gulf of Sidra, a more sophisticated force will have to intervene. For all of Zeidan’s failures, he is well-respected by his international peers; he just met with foreign ministers from the EU, U.S. and Gulf Arab states in Rome on March 6 for the Friends of Libya conference. All have proclaimed their willingness to help however they can. The U.S. ambassador to Libya, Deborah Jones, has repeatedly warned separatist groups not to sell oil outside of official channels. She had this to say on Twitter when news of Jadran’s heist broke today:

Safira Deborah Tweet 3-8-2014

safiradeborah tweet 2

The loading of a tanker in Libya’s east is a game-changer. But Jadran hasn’t won yet. In fact, this could backfire badly, hurting his brand even more. No one knows where the ship will go after loading oil. But if it’s destined for North Korea, Jadran will have to face the fact that he’s doing business with a regime that is in many ways reminiscent of Qaddafi’s brutal, arbitrary rule. Jadran’s revolutionary credentials may be compromised as a result.

What’s more, Jadran has not once hinted at what he’ll spend the money on if he’s successful in selling oil for tens of millions of dollars. Roads? Highways? Hospitals? Schools? We just don’t know. What we do know is Jadran’s men haven’t been paid in six months or more. It’s not too cynical to assume that paying his small army with oil revenues is his first priority. How might that shape public opinion going forward? Can you be a man of the people after taking your cut off the top? Countless Arab leaders have done that for decades. But Libyans won’t stand for it–not after forty years under Qaddafi.

This stunt confirms how desperate Jadran has become. It also provides Prime Minister Zeidan a chance to shine.

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Update: No “Geneva bump” for Iran after EU insurance ban lifted

A few weeks ago I blogged about what the six-month suspension of the EU insurance ban could mean for Iran’s oil exports. My reading of events was optimistic for Tehran. India looked like the country best positioned to increase oil imports because it was never able to develop an alternative arrangement. Imports fell dramatically as a result. Other, more marginal barrels could be headed for Turkey, officials also said. “For Iran, every barrel is significant,” I argued on January 17. But it’s looking more and more like the “Geneva bump” will not materialize.

EU-based insurers issued a series of warnings last month, calling for caution. Gard AS of Norway–the largest protection and indemnity (P&I) insurer–had this to say: “Members and clubs should proceed on the basis that beyond 20 July 2014, clubs will not be able to respond to any claims presented in respect of liabilities arising during the 20 January/20 July suspension period… This has the effect of rendering the current suspension of sanctions on insurance cover, and in particular P&I cover, of very limited, if any, value to shipowners.”

Testifying today at a Senate Foreign Relations Committee hearing, Treasury Undersecretary David S. Cohen confirmed that all insurance claims, “from contract to delivery to payment,” must be settled by July 20. P&I claims regularly take a year or more to collect, process and pay out. This is understandable given that huge amounts of money involved. However, for Iran, it means selling more oil won’t be easy. Without EU insurance, tanker owners will be left on the hook to pay for any accident, damage or disaster. We will still see month-to-month variations in Iran’s oil exports but a sustained boost is hard to imagine without EU insurance.

In my January 17 post, I also suggested China might decide to import more oil from Iran it sees P5+1 talks going in the right direction. Chinese imports climbed in the last two months of 2013 but it’s too soon to tell whether or not Beijing is really rolling the dice–and daring the U.S. Treasury to act if talks with Iran fail.

Negotiations for a comprehensive, final nuclear deal will begin on February 18.

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Post-Geneva Oil Prospects for Iran

In keeping with the Geneva deal, the EU ban on insurance (and reinsurance) of Iranian crude oil will be lifted for six months beginning on January 20. As a result, some customers may import more Iranian oil. China could also surprise the U.S. and buy more Iranian crude if talks between Iran and the P5+1 go well. How much more is anyone’s guess but Iran will view any improvement as significant.

The EU ban helped slash Iran’s oil exports from about 2.3 million b/d to an average of 1.1 million b/d over the last 18 months. It exacted the most pain in the summer of 2012, when it first went into effect. Many of Iran’s customers were caught unprepared and had to scramble for alternatives. Iranian oil exports collapsed in July of that year, falling to a shocking low of about 850,000 b/d.

So what does the suspension of the EU ban mean for Iran’s customers?  That depends. Japan is currently the only country providing a “sovereign guarantee” in case of disaster. Tokyo is on the hook for up to $7.6 billion in the event an Iranian tanker is damaged or blamed for an environmental disaster. It will be happy to see EU insurers step in soon. Import volumes will not be affected, according to recent reports.

India stands to be the biggest winner because it never found an alternative to the EU. Some refiners could not accept Iranian-based insurance and a sovereign guarantee never materialized. As recently as December, Indian imports from Iran were in doubt.

Indian imports from Iran fell 40 percent in the first nine months of last year after EU firms refused to insure facilities processing Iranian oil—not just tankers carrying it. Deadly fires at two different facilities, one in May and another in August, forced Hindustan Petroleum to play it safe and cut off Iran. MRPL didn’t accept Iranian insurance until late summer. Essar Oil Ltd., another major Indian refiner, accepted Iranian insurance earlier but Iran still lost about 150,000 b/d in sales last year compared to 2012.

India’s steep drop-off of crude imports from Iran may be used as an excuse to ratchet up imports this year. Though India received a new sanctions waiver from the U.S. in November, the argument can and will be made that reductions were so severe in 2013 that the U.S. should be more understanding in 2014. Total imports may be lower than previous periods but the suspension of the EU ban will allow Indian refiners to achieve more “normal” volumes, at least for six months while the Geneva deal is observed.

Chinese officials were tight-lipped throughout 2012 but supposedly accepted Iranian insurance. This was a gamble given that Iranian-based insurers like Kish P&I were unproven. The risk was easier for Beijing to shoulder because it could presumably pay for any disaster if Iran failed to do so, thus creating a backstop sovereign guarantee for oil imports. For China—Iran’s number one customer—replacing all or most Iranian oil was not an option. Imports averaged about 420,000 b/d in 2012-2013. Volumes so large are not easily replaced.

Like China, South Korea accepted Iranian insurance in October 2012. Turkey, which has averaged about 105,000 b/d going back more than a year, never officially acknowledged how it is insuring Iranian imports. Japan took a different route with its sovereign guarantee of $7.6 billion. Those that took Iranian insurance accepted much smaller offers of $1 billion per tanker, per disaster. Iran’s national tanker fleet has a good record of safe carriage, however, allowing some to settle for less without fearing the worst.

The EIA says Iran’s oil exports are “not expected to increase significantly.” That’s fair. But how would Iran define “significantly”? Turkish Energy Minister Taner Yildiz said his country might take 35,000 b/d more now that EU insurance is an option; Indian officials say refiners could import an extra 50,000 b/d through March, maybe more if Iran is ready to agree to better terms. Privately-owned companies could still push the envelope.

While Japan and South Korea have slashed imports hard and fast, China could play chicken with the U.S. Treasury if Beijing believes P5+1 talks with Iran will succeed. China received a new waiver in November although imports from Iran were stable compared to the previous 180-day review period. Knowing there is a one-month delay between imports and the release of customs data, China cut imports from Iran to just 250,000 b/d in October. The sharp decline was reported just before the U.S. extended waivers in late November. The following month, China revealed November imports from Iran had jumped to 538,000 b/d.

The White House has played nice with China so far. Will China return the favor or go after cheap Iranian barrels? The possibility can’t be dismissed. Zhuhai Zhenrong, a Chinese state-owned trader, was sanctioned in 2012 for its relationship with Iran. But it remains less vulnerable because it has little or no exposure to the U.S. financial system. Last month, a former trader from the company asked Reuters, “More pressure? Do you think they [Zhuhai Zhenrong] really care?”

Combined, China’s Unipec and Zhuhai Zhenrong are contracted to purchase 505,000 b/d from Iran this year—about 85,000 b/d more than the imported average over the past two years. What they actually lift is up to their discretion but it could be influenced by ongoing talks.

The Geneva deal holds that Iran’s customers will be allowed to import “current average amounts” of 1 million b/d total. But that depends on enforcement. Some, like Turkey and India, may try to recover lost crude and satisfy existing contracts. China could use the Geneva deal and its seat at the P5+1 talks to as a guide for imports as well. It might even bet on a breakthrough and buy more oil.

Iran, for its part, should be expected to pursue any and all angles to increase exports, even if that means serious discounts or extended credit terms to begin retaking its market share.

For Iran, every barrel is significant.

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One graph says a lot–my article says the rest

The Atlantic Council just published my newest article on the strikes that are crippling Libya’s oil industry, titled “No End in Sight for Libya’s Oil Drama.” How bad is it?

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The Atlantic Council has produced some of the best research and analysis on Libya this year–and I’m thrilled to contribute to their MENA Source blog. I highly recommend recent reports on Libya’s General National Congress and economic prospects. Yesterday, the Council hosted an event, Libya’s Transition and the Future of US-Libyan Relations, that is now available on video and worth watching.

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Kurdish Aspirations Gaining Speed

The Middle East Policy Council posted my new briefing titled “Maliki Visits Kurdistan.” It focuses on recent events that prove the Kurds have lost patience with Baghdad. Two episodes are raised specifically. First is the expected completion of a new pipeline connecting Kurdish oil fields with the Turkish border. And second: the mass desertion this month of  Kurdish troops who quit the Iraqi Army in order to join Kurdistan’s independent military force–the Peshmerga. Either case is important. Together they suggest Iraqi Kurdistan is slowly retreating from Baghdad’s orbit.

Unrest in predominantly Sunni provinces of Iraq has also altered the landscape.  The Peshmerga have reportedly advanced in those areas vacated by the Iraqi Army as it prioritizes security in places that have seen protests and renewed violence (like Anbar province). Iraq is clearly entering a new period of negotiation, tension, and violence. The Kurds are making the most of it.

The KRG has seemingly begun a campaign to change facts on the ground both by way of design and opportunism. Officials may phrase it differently, but it seems the KRG’s strategy is to advance their interests now so that they can deal with Iraqi PM Nouri al-Maliki on their own terms whenever he is ready. The past two days have only confirmed this reading of events.

At a conference in London this week, Iraqi officials released new targets for Iraqi oil production in the coming years. Kurdistan’s contribution was not included, however, because Kurdish exports via the federal pipeline were halted in December due to a payment dispute between Baghdad and Irbil. Clearly, Baghdad has very little confidence that the disagreement will be resolved soon. KRG Minister for Natural Resources Ashti Hawrami also made an important announcement at the same conference: the KRG will tie its new pipeline into the underutilized Kirkuk-Ceyhan pipeline across the border in Turkey, allowing it to sell up to 300,000 b/d without Maliki’s blessing. This had previously been assumed. But now it is confirmed–on the record.

Today the Kurds are on track and gaining speed. It remains to be seen whether their aspirations will be derailed. Two spoilers are worth noting. First is Iraq’s Prime Minister, who has–so far–held his fire and focused more so on his country’s deteriorating security. This could change. Tensions between the regional and central government could worsen quickly as they have in the past. Neither side wants open conflict but it doesn’t take much to stumble into one. The second spoiler is Turkey’s Prime Minister, Recep Tayyip Erdogan. Mass protests at home and international criticism are hurting his brand. Meanwhile, the ongoing peace process with Turkey’s Kurdish minority is showing the first sign of cracking. Erdogan’s handling of the bloody Syria crisis next door has also opened him up for criticism. He may seek to deflect more controversy by delaying his approval of Kurdish oil exports.

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KRG’s Talking Points on Display in DC

From the Facebook page of the KRG’s Representative in the US.

A high-profile delegation from the Kurdistan Regional Government visited Washington, DC last week. Speaking on behalf of the KRG were: Fuad Hussein, chief of staff to KRG President Massoud Barzani; Natural Resource Minister Ashti Hawrami; Falah Bakir, Director of the KRG’s Foreign Relations Department; and former KRG envoy Qubad Talabani, now Director of the KRG’s Coordination and Follow-Up Department.

The timing of the mission’s visit is telling: it arrived in Washington just weeks before Turkish premiere Recep Tayyip Erdogan is set to visit the White House. The main topic discussed by the delegation—during joint panels and speeches—was Iraqi Kurdistan’s relationship with Turkey. Over the past five years, this relationship has grown rapidly. It constitutes a majority of Iraq-Turkey trade.

Normally, the U.S. would champion prosperity and peace between neighbors who, just years before, were totally at odds over the question of Kurdish independence. But today, U.S. officials worry that Turkey and the KRG are ready to forfeit Iraq’s unity in favor of a comprehensive energy deal. That deal—if signed—would presumably connect Kurdish oil fields to Turkey and world markets. Conventional wisdom dictates that this move would grant the KRG independent oil revenues and enable it to withdraw from Baghdad’s orbit. In the worst-case scenario, the KRG would go its own way; Iraq would become a less diverse rump state with a weaker political opposition.

The KRG came to D.C. to relieve these fears and change minds before Prime Minister Erdogan arrives. Their talking points were sharp and polished. I say this as someone who saw the mission in person at George Washington University and the Atlantic Council on April 8.

Over the course of last week, the delegation met with Deputy National Security Adviser Tony Blinken and Acting Assistant Secretary of State for Near Eastern Affairs Beth Jones. According to an April 16 press release: “The delegation met with Congressional leaders and other key members of Congress, both Democrats and Republicans including the House Majority Leader, Rep. Eric Cantor (R-VA); Rep. Christopher Van Hollen (D-MD); Foreign Affairs Committee chairman, Rep. Ed Royce (R-CA); Intelligence Committee chairman, Mike Rogers (R-MI); Senator John McCain (R-AZ); Senator Roger Wicker (R-MS), as well as members of the Kurdish American Congressional Caucus including its new Democratic co-chair, Rep. Jarred Polis (D-CO).” (For pictures see last week’s entries on the KRG’s Facebook page.)

With this post I want to give readers a sense of how officials are framing the issues and what they’re seeking from the U.S. Much of this blog post is paraphrased unless quotation marks are used. The two events I attended were on-the-record and covered by media outlets so nothing confidential is contained herein. You can find audio and a copy of Hawrami’s prepared remarks on the Council’s website. Also be sure to read his April 14 op-ed for Real Clear World.

The delegation focused on the constitutionality of any future arrangement with Turkey. The KRG believes Iraq’s constitution allows the region to sign a bilateral trade deal with a foreign government without Baghdad’s input. Officials maintain that revenues from oil sales will be divided according to long-standing oil revenue-sharing agreements. Kurdish officials frequently cite a legal finding provided by a British law firm that upholds their claims—and they referenced it in D.C. more than once. Until it is tested in court, however, there is no telling how the argument will hold up if challenged by Baghdad, which has threatened to sue companies that export Kurdish oil.

Iraqi Prime Minister Nouri al-Maliki gives the KRG no choice but to sign these deals and pursue new infrastructure. Maliki represents the greatest threat to Iraqi unity because of his sectarian approach and refusal to apply the constitution. In his remarks at the Atlantic Council, Hawrami, the energy minister, said that the concentration of power for Iraq’s oil sector is unfair: “It’s what it was under Saddam Hussein.” He argued that oil and revenues are key sources of power in Iraq. As such, the U.S. cannot insist that Baghdad has final say on oil deals or export agreements. Maliki has no interest in developing Kurdish oil fields.

The sense of frustration and urgency felt by the Kurds was very real. They want to act now. In order to improve ties between Baghdad and Erbil, the only choice is to change the situation on the ground, and pursue reconciliation after the KRG’s success makes the central government reconsider its hard-line position. This argument makes sense given the long time horizons associated with the oil and gas industry (pipelines take months to build; commercial oil production levels are only achieved after years of surveys and drilling; etc.).

The Kurds want to initiate deals now because other options are no good. They could wait years more for an Iraqi oil law. Or they could wait for Maliki to change his mind or leave office.

Kurdish independence is a “myth,” Hawrami said. For the foreseeable future, the KRG wants its fair share of Iraq’s wealth, as guaranteed by the constitution. Erbil wants a federal system. But a decentralized oil policy is essential to that arrangement, meaning that the Kurds must be allowed to exploit resources and sell oil. A bruising fight over the Iraqi budget earlier this year has only confirmed for the Kurds that they need control over a revenue stream of their own. They cannot trust Maliki and his allies in parliament to produce a fair budget.

Hawrami’s most memorable line was delivered with a smile: “Iraq is a rich country. We want a share of that wealth… If even we have any motive for independence, we will wait until the last drop of Iraqi oil [is pumped and sold]—and then we might do something” (25:00 minute mark). The Kurds don’t want to prematurely cut themselves off when Iraq’s production could double or triple in the coming decades. Kurdistan may contain 45 billion barrels of recoverable oil. Iraq now estimates that the country holds 150 billion barrels total, placing it fifth in the world for proven reserves.

There is another upside to a Turkey-KRG deal and it has to do with Kurdish independence beyond Iraq. Hawrami suggested that the KRG’s dealings with Turkey had actually buoyed Erdogan’s outreach to Kurdish insurgents in his own country. How so? Cooperation with the KRG proved that the Turkish government was reliable; these ties gave the PKK confidence in Ankara’s sincerity.

Washington must adopt a neutral policy instead of backing Baghdad. Supporting Maliki in the name of “Iraqi unity” is a mistake. Supporting the constitution (i.e. the Kurdish reading of it) will prevent the country from fracturing. The Kurds recognize that U.S. influence over Baghdad is limited today. Washington prioritizes Iraqi “stability” above all but it has no real vision or policy for achieving that end, they say. Instead, Washington insists on reconciliation with Maliki, which favors central authority by default. Hawrami said the KRG can’t wait another seven years and do nothing. (Note: Maliki became PM in 2006.) The US approach is “outdated.”

Publicly-traded oil companies operating in the KRG slashed production in December because they could not rely on prompt payment from the central government. The newest Iraqi budget, which Hawrami called a “punishment,” provides only $650 million for operator costs in Kurdish territory, whereas the KRG demanded $3.5 billion. Kurdish oil exports flirted with 200,000 b/d late last year; volumes have since fallen to roughly 50,000 b/d, all of which is trucked across the border into Turkey because the federal government can’t be trusted to ship oil and compensate the Kurds as they see fit.

Looking forward, Hawrami believes the KRG can produce 2 million b/d by the end of the decade, most of which would be exported. A new pipeline like the one being considered by Turkey and the KRG would allow Iraq to sell ~3 million b/d through a northern corridor if the Kurdish and federal pipelines all become fully operational. As a rule, supply diversity is the best guard against energy insecurity. Hawrami mentioned “market stability” as an incentive for a deal with the Turks, something the U.S. can get behind.

Finally, the U.S. should not deter companies from operating in the KRG, the delegation said. The region is no different from anywhere else in Iraq. This goes back to the central theme of neutrality.

Kurdish prosperity will serve Iraq’s interests even if it angers Maliki. Speaking at the Atlantic Council, Hawrami said, “The KRG is confident that once oil export revenues are generated by KRG, and shared constitutionally, then Baghdad will become more reasonable, accepting a constitutional settlement on power and revenue sharing, thus creating lasting stability and unity in Iraq.”*

This kind of success, reinforced by timely transactions, will convince the people of Iraq—not just politicians—that the KRG was right all along. It will change minds and encourage the adoption of the constitution in practice. Kurdistan’s reputation for development and better services may even trickle down to the rest of Iraq, as more and more people ask: what are the Kurds doing right?

Conclusion: It’s hard to tell how successful the KRG mission was. We know who they met with but it’s impossible to tell how receptive their American counterparts were. Jackson Diehl of the Washington Post wrote an approving editorial on April 14 after meeting with at least one member of the delegation. That article ended with Diehl, a critic of Obama’s foreign policy generally, arguing that the U.S. policy towards the KRG was “wrongheaded.” Instead, Washington should encourage what he called Kurdistan’s “renaissance.”

The Kurds made a strong case last week. The rest is up to Erdogan when he raises the issue with Obama next month.

* Note: Revenue sharing is a thornier issue than first glance might suggest. Right now, the two sides disagree on the number and cost of “sovereign expenses,” which have cut the Kurds’ budget share year-on-year from 17 percent to about 10 percent. Might the Kurds push back once they control revenues? Could they retake 17 percent in full or compromise closer to 15 percent? Hawrami told the Associated Press on April 12 that the KRG will return revenues to Baghdad “after it has taken its legal allocation and paid contractors.”)

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Erdogan’s Case for KRG Oil Exports

The Middle East Policy Council published my new briefing yesterday on the Turkish prime minister’s upcoming visit to Washington. Titled “Erdogan’s Case for KRG Oil Exports,” the article skips the issues that the U.S. and Turkey agree on, and instead focuses on a much thornier problem. By all indications, the Obama administration opposes future energy deals between Turkey and Iraqi Kurdistan. The White House is afraid that any comprehensive deal could supercharge Kurdish aspirations for independence, dissolve Iraq, or at the very least heighten the risk of conflict. Although American anxiety is sincere, the Turks and Kurds believe it is misplaced. They are convinced an energy deal will benefit all Iraqis–even if Baghdad appears irreconcilable for now. To paraphrase the KRG’s Minister of Natural Resources, who spoke this week at the Atlantic Council, “Baghdad will be more reasonable after they get their cut.”

From the section Erdogan’s Challenge:

If Erdogan is serious about pursuing a comprehensive energy deal, then he will have to explain the Kurdish side of their dispute with Maliki and point to the absence of the U.S. as an honest broker. As long as the U.S. and other members of the UN Security Council take Baghdad’s side in the dispute, any KRG exports to world markets could be rigorously challenged by Baghdad in various judicial venues. Erdogan’s case is made stronger by other negative developments in Iraq that reflect poorly on Maliki.

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