July 11, 2014 | 1654
Early July 11, the Kurdistan Regional Government deployed its peshmerga forces to take control of Iraq’s state-owned North Oil Company operations in the Kirkuk and Bai Hassan oil fields, which are located in disputed territory. These fields will theoretically add about 500,000 barrels per day to the Kurdistan Regional Government’s production capacity. Their ability to bring it to market, however, will be greatly limited by their current infrastructure and technical capacity, not to mention the security challenges that lie ahead.
For now the peshmerga is able to take advantage of Baghdad’s distraction as it tries to contain Islamic State and other Sunni militants. However, this situation will not last forever and the Kurdistan Regional Government faces an inevitable confrontation with Baghdad over Kirkuk once Baghdad regains enough military bandwidth. The Kurdistan Regional Government knows it will be some time before Baghdad can regain enough military focus to challenge the Kurdish forces. In order to take advantage of the lag Arbil is trying to create a new political reality while it can.
The Kurds have a strong infantry force, but are unnerved by the growing strength of Baghdad’s air power thanks to Russian military transfers. Additionally, Iraqi forces have the advantage in the deployment of mechanized and armor units. With the assistance of outside players such as Iran, Baghdad can also mobilize a number of unconventional militant forces in the disputed territories. The Kurds will also face local resistance from Sunni Arab and ethnic Turkmen groups reluctant to allow the region’s resources to come under Kurdish control.
The Kurdistan Regional Government will also face technical and political impediments to producing oil from the Kirkuk and Bai Hassan fields and in transporting it by pipeline to Turkey. Before the eruption of the Islamic State crisis, Arbil and Baghdad had been negotiating an oil revenue distribution deal. The two sides were considering a plan to connect Baghdad’s fields in Kirkuk to the Kurdish pipeline for export. The idea was for both Baghdad and Arbil to establish a more secure route for Kirkuk oil through Kurdish territory. This would be an alternative to Baghdad’s Kirkuk-Ceyhan pipeline, which runs through Sunni-majority and disputed territory and has been taken offline frequently by attacks.
There was also potential for Baghdad and Arbil to use this compromise as a basis for a broader settlement of the long-running dispute over the legality of northern oil exports. The proposal called for KAR Group to build a 100-kilometer pipeline connecting the Kurdish-controlled Khurmala dome to the K-1 pumping station near the Baba dome. KAR Group is a company based in Kurdish territory that built the newer pipeline that runs exclusively within Kurdistan Regional Government territory to Turkey. Ownership of the pipeline would be divided between the Kurdistan Regional Government and the North Oil Company, with the Kurds owning the pipeline section between the Khurmala and Avana domes and North Oil Company owning the section from the Avana dome to the K-1 pumping station.
This cooperation plan is now clearly off the table. The Kurdistan Regional Government, however, will likely deploy KAR Group to build the pipeline with Kirkuk under peshmerga control. Timing will be essential as the Kurdish authorities try to take advantage of Baghdad’s multiple distractions. KAR Group has the capacity to complete the basic construction of the pipeline, but connecting the infrastructure nodes to production from these fields is far more complicated and subject to delays. Previously Baghdad had contracted BP to provide technical assistance to the North Oil Company in arresting the decline of the Kirkuk oil field, now producing 220,000 barrels per day. The Kurdistan Regional Government contested the deal, arguing that it needed to be included in any contract concerning Kirkuk oil.
The next question is whether the Kurdistan Regional Government will be able to recruit an energy firm capable of maintaining production at the challenging Avana and Baba domes. It will be critical that this be done relatively quickly, in order to prevent the inevitable security challenges in and around Kirkuk from deterring foreign investors. The Kurdish pipeline has its own technical issues to work out and is pumping only around 100,000 barrels per day although it has a claimed technical capacity of 400,000 barrels per day. Once oil arrives at the Turkish port of Ceyhan and is loaded onto tankers, the Kurdistan Regional Government then must secure a willing buyer. Of the four tankers that left Ceyhan since the Kurds started transporting oil there, one was sold anonymously through Israel and the remaining three are still in the Mediterranean as the government tries to convince the market that its moves are legal. As a sign of growing desperation, Arbil is now threatening legal action against buyers of oil who have restricted payments to the cash-strapped government.
The Kurdistan Regional Government is trying to seize a unique moment of opportunity but there is a lot more work to be done before it can secure and hold this disputed territory to produce and export oil from Kirkuk. For the Kurds to have any hope of success in this endeavor, they need a strong foreign backer. The Kurdistan Regional Government and Turkey are strategically aligned for now, and Turkey has its eye on the Kirkuk field. However, if Turkey expanded its small military presence in Kurdish territory and extended military protection to Kirkuk it would fundamentally reshape the power politics of the region and invite a strong response from Baghdad, Tehran and Washington, not to mention the resistance Turkey would face from the Kurds themselves at home and in northern Iraq.
July 21, 2014 | 0509
Iraqi Kurdish protesters wave flags during a demonstration outside the Kurdistan Regional Government parliament building in Arbil, northern Iraq, July 3.
The Kurdistan Regional Government’s recent stream of announcements make it appear that Iraqi Kurdistan, now endowed with the prize of Kirkuk oil, is on the verge of political and economic independence. But behind the Kurdish hubris is a government in an increasingly desperate financial situation, with only its old adversary Turkey to rely on for its survival. This situation will create deeper divisions among Iraq’s Kurdish factions, providing neighboring Iran with an opportunity to counter Turkey’s moves in Iraqi Kurdistan.
Now that the Kurds have established control over the Kirkuk oil fields, the Kurdistan Regional Government is working rapidly to connect the fields to its own energy infrastructure. Multiple sources have confirmed that the Avana Dome has been connected to the Kurdish-controlled Khurmala Dome. The next step will be to connect the Baba Dome and nearby Bai Hassan field to the Avana Dome, which altogether would add (in theory) some 415,000 barrels to Kurdish production capacity, though these fields currently produce around 160,000 barrels per day of sour light crude. Kirkuk crude can be blended with light Taq Taq crude to channel more oil for export, but that would irritate potential buyers, who are looking for consistency in output and would be reluctant to buy crude from a disputed territory. More likely, Kirkuk crude will be diverted to local refineries for domestic Kurdish consumption.
Still, the Kurdish acquisition of Kirkuk does little at the moment to alleviate the Kurdistan Regional Government’s deepening financial crisis. For the past six months, it has gone without a roughly $1.2 billion monthly budget allocation from Baghdad, since the Iraqi government sought to punish Kurdish attempts to attain energy and political independence. That is about the same amount the Kurdistan Regional Government spends monthly for public sector employee salaries, operational expenses and investment projects. Critically, 60 percent of the Kurdistan Regional Government’s monthly expenditures go toward the salaries of a bloated 700,000-strong bureaucracy, including 200,000 peshmerga soldiers.
The government has had to delay paying some public sector employees, especially teachers. With security threats rising, paying peshmerga forces seems to be a priority, even if those salaries are not paid in time. After its financial obligations to its employees, the Kurdistan Regional Government also has to answer to more than 50 international oil companies and contractors operating in Iraqi Kurdistan that also face repeated delays in payments. The government tried to extract fees from these firms to alleviate its current financial problems, demanding immediate payments for the services of its oil protection units. But the patience of international oil companies wears thin with such demands the longer they go without pay. The Kurdistan Regional Government’s total debts to international oil companies and contractors are estimated to be roughly $5 billion and counting.
Without reserves to draw from, the Kurdistan Regional Government in Arbil has had to borrow from a limited menu of lenders. Several of Iraqi Kurdistan’s business tycoons, including the heads of KAR Group and Asiacell, have been called on to issue loans and maintain liquidity in public banks. Most foreign banks are reluctant to lend to the Kurdistan Regional Government, but Arbil appears to have secured around $1 billion total in regional loans from Turkey’s Asya Bank and VakifBank, in addition to funds from Lebanese banks IBL, Byblos and BBAC. After securing a $2 billion to $3 billion loan from Turkey in March, the Kurdistan Regional Government has requested additional loans from Ankara, but the terms and exact amount remain unclear.
With a growing deficit of more than $6 billion and no resolution with Baghdad in sight, the Kurdistan Regional Government is desperate to generate enough revenue on its own from oil sales to cover basic expenses. But that is easier said than done. The Kurdish government has already been trying to convince the market that any oil exported out of Iraqi Kurdistan constitutes a legal sale, even as Baghdad has threatened to fine and sue any company that bypasses the central government in such commercial transactions. The legality of Kurdish crude exports has only been compounded by the Kurds’ seizure of fields in disputed territory.
Arbil has assumed that all it has to do is establish precedence in selling its oil to drown out Baghdad’s threat. Unfortunately, only one of four tankers — carrying roughly 100,000 barrels of Kurdish crude — has been sold so far to a buyer out of Israel, while traders such as Glencore, Vitol and Trafigura have kept their distance. Turkey meanwhile announced July 18 that it is halting the flow of Kurdish oil through its pipeline to the port of Ceyhan because its storage tanks are already full with unsold Kurdish crude.
Kurdish officials have lobbied firms throughout Europe in the hope of selling the remaining oil, but the Kurdistan Regional Government would then face the challenge of securing the funds from those sales. Fearing that firms would buy the oil but deposit the funds with Baghdad to avoid a legal morass, the Kurdistan Regional Government has put out messages threatening legal action against its own potential buyers since Baghdad will withhold those funds and deny the Kurdistan Regional Government its revenue. The key to Arbil’s funds lies in Turkey’s hands. Some $93 million from the first Kurdistan Regional Government crude sale by tanker is sitting in a Turkish Halkbank account. Arbil recently sent a delegation to try to secure those funds, but Ankara can be expected to proceed cautiously in releasing these funds as it tries to avoid incurring further wrath from Baghdad and Washington.
Turkey understands the enormous financial leverage it holds over the Kurdistan Regional Government as Arbil struggles to make its monthly payments. Turkey will selectively — and stringently — provide enough aid to allow Arbil to scrape by but will also demand that Kurdistan Regional Government President Massoud Barzani and his Kurdistan Democratic Party lay off their calls for independence. A nearly bankrupt Kurdistan Regional Government will have no choice but to heed these demands, but it is also not comfortable with its deep dependence on Turkey.
This sentiment appears to be growing within Jalal Talabani’s Patriotic Union of Kurdistan. Factions of the party have already vocalized their unease with the policies of Barzani’s party that have led Iraqi Kurdistan into a tight dependence with Turkey and an increasingly hostile relationship with Baghdad, Washington and Tehran. This intra-Kurdish tension grew deeper following the Kurdish Democratic Party’s ousting of National Oil Co. officials from the Kirkuk fields. The Kurdish Democratic Party made it a point to use its own peshmerga forces and oil protection units to take control of Kirkuk’s oil fields, largely edging the Patriotic Union of Kurdistan out. Also, local Arab and Turkomen resistance to Kurdish control over Kirkuk province is rising and will further complicate the regional government’s hold over Kirkuk in the long term.
Informal networks and Turkish aid will enable the Kurdistan Regional Government to avoid financial collapse, but growing economic tensions will only exacerbate frictions among Iraq’s Kurdish factions as the Patriotic Union of Kurdistan sees its own interests compromised by Kurdistan Democratic Party policy. The longer Arbil holds out on a deal with Baghdad, the more financially dependent the Kurdistan Regional Government will be on Turkey and the more difficulty Kurdish parties will have in maintaining their patronage networks while under financial duress.
This provides Iran with an opportunity to further its already strong ties with the Patriotic Union of Kurdistan and Gorran to counterbalance Turkey’s sponsorship of Barzani’s Kurdistan Democratic Party. Iran has already threatened to close its border with Iraqi Kurdistan to trade should Barzani proceed with his calls for independence, a move that would have significant economic repercussions for the regional government as a whole, but the Patriotic Union of Kurdistan in particular. Through a carrot-and-stick approach, Iran will try to sow divisions among Kurdish parties, potentially offering financial and military assistance to the Patriotic Union of Kurdistan while using its influence among the Iraqi Shia to grant political concessions and positions to cooperative Kurds in forming a new government. This may well be the subject of conversation when a Patriotic Union of Kurdistan delegation visits Iran in the coming days.
Read more: Iraqi Kurdistan’s Financial Trap | Stratfor
July 14, 2014 | 2228 GMT
Once again, internal Kurdish rivalries, spurred by the influence of regional competitors, threaten to undermine Iraqi Kurdistan’s aspirations of greater autonomy. On July 11, security forces loyal to Kurdish President Massoud Barzani and his Kurdistan Democratic Party seized the Kirkuk and Bai Hassan oil fields in Iraq, but those units may have done so without permission. Indeed, leaders from a rival party, the Patriotic Union of Kurdistan, claim that the Kurdistan Regional Government was not consulted. Kirkuk Gov. Najmadin Karim, an ethnic Kurd aligned with the Patriotic Union of Kurdistan, even alleged that the occupation bypassed authority in Baghdad, violating federal standards on operations within Iraq’s disputed territories.
Barzani’s newfound control over the oil fields directly challenges the interests of his historical Kurdish rivals in eastern Iraq. Kirkuk province has long been directly influenced by outgoing Iraqi President Jalal Talabani’s Patriotic Union of Kurdistan, which has expanded its political and security presence throughout Kirkuk for years.
Leaders in Arbil continue to promote the formal integration of disputed regions into Iraqi Kurdistan. Aside from autonomous crude oil export options, the Patriotic Union of Kurdistan increasingly finds itself at odds with Barzani’s party, which Turkey supports. Arbil continues to flirt with the prospect of Kurdish independence, and the Patriotic Union of Kurdistan’s influence in oil-rich Kirkuk province gives the party key leverage over Barzani. The deployment of unauthorized oil protection units may have been an attempt by Barzani to prevent future challenges from his newly emboldened rivals.
For the moment, Patriotic Union of Kurdistan leaders seem hesitant to escalate the dispute. Both parties have larger issues to manage in the short term, such as confronting Sunni Arab militancy on their southern borders and making sure that another Kurd succeeds Talabani in Baghdad. The short-term value in consolidating a unified Kurdish front is to draw important energy and budgetary concessions from the Iraqi government.
The question of who controls Kirkuk’s hydrocarbon infrastructure may be the most incendiary factor that threatens to reignite the historical dispute between Iraqi Kurdistan’s political factions. Baghdad and its Shiite allies in Tehran want to limit Kurdish autonomy and expansionism. Internal Kurdish disputes give them an opportunity to divide the ruling elite in Arbil. Given the Patriotic Union of Kurdistan’s history of close ties with Tehran (and Baghdad to a lesser extent), these two Shiite powers will likely attempt to manipulate growing Kurdish divisions and challenge Barzani’s ambitions.