Iraq: Kurdish Options Limited in Northern Oil Fields

July 11, 2014 | 1654

Kurdish Options Limited In Northern Oil Fields
A North Oil Company natural gas field near an Islamic State checkpoint southwest of Kirkuk, Iraq. (MARWAN IBRAHIM/AFP/Getty Images)


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.


The peshmerga first exploited the security vacuum in northern Iraq in mid-June by deploying troops to the city of Kirkuk and around major oil fields in the region, including Bai Hassan and Kirkuk. Until this recent move, however, Iraqi federal officials and workers from the North Oil Company had been allowed to remain. There are three major oil formations in Kirkuk: the Avana, Baba and Khurmala domes. The Kurdistan Regional Government has controlled the Khurmala dome since 2008, while North Oil Company maintained control over Avana and Baba along with the separate Bai Hassan field. On July 11, the Kurdish authorities reportedly told Baghdad’s workers to either leave or work for the Kurdistan Regional Government.
The key question now is whether peshmerga troops will be able to hold this position securely enough to continue production and connect the fields to their pipelines running through Kurdish territory. This would give them effective control of northern Iraq’s largest oil fields.

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.

Read more: Iraq: Kurdish Options Limited in Northern Oil Fields | Stratfor