Oil Pipeline Boosts Kurds in Stand-Off With Baghdad

Source: Reuters 10/17/2013, Location: Middle East

A new export pipeline means Iraqi Kurdistan will soon earn more from its own oil than it receives from Baghdad as a share of total Iraqi revenues, a turning point that could strengthen the region's hand in its long search for independence.

Autonomous since 1991, Kurdistan has often chafed against the Iraqi central government and even threatened to secede, but it is nonetheless beholden to Baghdad for a slice of the OPEC producer's $100-billion-plus budget. That may soon change.

By trucking its oil to world markets through Turkey, the Kurds have already earned nearly $1 billion, and once the new export pipeline is operational at the end of the year, the region stands to take in nearly that amount each month.

The pipeline is a sign of the region's increasing single-mindedness and could make it self-sufficient, although that in itself will not be enough to bring the independence of which Kurds dream.

"Oil is going to be an enabler of independence: it's not going to be the cause," said a Kurdistan-based industry source on condition of anonymity. "Independence is going to be because of provocation, regional circumstances, perfect timing".

Independence is an article of faith for Kurds, long subjugated by central governments in the four countries across which they are divided, and who view statehood as their right.

But the reality of the region's landlocked geography in a neighbourhood hostile to Kurdish aspirations has led to pragmatism.

Washington and Baghdad fear the pipeline sets a precedent that will bring about the partition of Iraq. Provincial authorities in Nineveh, which is under central government jurisdiction, recently followed Kurdistan's lead by empowering their governor to sign contracts with oil companies.

The Kurdistan Regional Government (KRG) insists it is committed to a democratic, federal Iraq, and that decentralisation of power is the only way to prevent the country's disintegration.

"Sharing all oil revenues according to the federal constitution, and the economic independence of Kurdistan, are the recipe for the unity of Iraq," said the region's Minister for Natural Resources, Ashti Hawrami, during a visit to Britain this month.

However, no payment mechanism is in place yet for oil sales via the new pipeline. The Kurds say they will take what they are owed and pass the rest on to Baghdad, reversing the current process whereby the central government disburses revenue.

Initially, the Kurds aim to pump 150,000 barrels per day (bpd) through the pipeline, which runs for 281 km (174 miles) through Kurdish territory from the Taq Taq oilfield to an area where the borders of Iraq, Syria and Turkey meet.

As companies increase production and infrastructure is developed, exports should rise towards a target of 1 million bpd by 2015 and 2 million by 2019.

Kurdistan's assertive energy policies have infuriated Baghdad, which is threatening to sever ties with Turkey and slash the Kurds' 17 percent share of the budget if exports via the pipeline go ahead without its consent. The KRG complains it ends up getting closer to 11 percent anyway.

The 2014 Iraqi budget is projected at $150 billion and will increase as oil exports grow, which could change the calculation for the Kurds, who would stand to receive more from Baghdad.

"One of the KRG's calculations is if they're going to start selling oil, they need to generate enough revenue that if Baghdad goes to the extreme and plays the budget card, they can still pay the bills," said Shwan Zulal, head of the London-based Carduchi Consulting.

That would mean producing between 400,000 and 500,000 bpd, based on a calculation involving assumptions about the price of oil, how much goes towards cost recovery and profit sharing.

Most estimates put current production capacity at more than 350,000 bpd, of which 140,000 is refined and consumed locally.

Most comes from three fields operated respectively by Norway's DNO, the Anglo-Turkish Genel, and privately owned KAR Group, based in the Kurdish capital Arbil.

Gulf Keystone, fresh from winning a court battle over ownership of its oil assets in Kurdistan, restarted production last week, soon to add 20,000 bpd, and smaller contributions come from Afren, Hungary's MOL and Austrian group OMV.

Others are due to come on stream within the next 14 months, while Exxon Mobil, Chevron Corp and Total are still in the exploration phase.

"There's no magic number, but output of around 500,000 barrels a day would give them (the Kurds) a lot of leverage," said a senior Western oil executive on condition of anonymity.

"It wouldn't be full independence from Baghdad at that stage, but it would give them a much stronger bargaining position."

Senior Iraqi and Kurdish officials exchanged visits earlier this year and said they were ready to resolve their differences, but negotiations have made little headway.

Kurdish crude used to flow through a Baghdad-controlled pipeline running from Iraq's Kirkuk oilfields to the port of Ceyhan in Turkey, but exports via that network dried up last year in a row over payments for oil companies operating in the region.

"Talks over oil issues are at a stalemate now," said an energy adviser to the Iraqi government, blaming the Kurds for setting preconditions. "It's like running around in a circle."

Their positions appear irreconcilable, but analysts and officials say the time is ripe for a deal.

Facing a reinvigorated Sunni insurgency and divisions within his own Shi'ite coalition, Prime Minister Nouri al-Maliki will find it difficult to win an election next year if he seeks a third term without support from the Kurds.

"The Kurds will cleverly play this card when they sit at the negotiating table to discuss the new oil export pipeline with Baghdad," said Ali Shallal, a legal expert who specialises in drafting oil contracts.

Iraqi officials are banking on Turkey seeking their approval to avoid antagonising Baghdad any further.

Analysts and industry sources say Kurdistan will for now at least opt for the benefits of being a quasi-state entitled to a share of Iraqi oil reserves, which are far greater than their own.

"They have a very advantageous position as they are," said an industry source who declined to be named. "It (independence) doesn't make sense. It's not in anybody's interest".

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