Iraq’s Oil War

A long-simmering controversy over control of Iraq’s massive oil reserves flared into the open Friday as one of the country’s most powerful ministers threatened to take legal action against Iraqi Kurdistan, Turkey and any foreign companies that helped the Kurds export oil without permission from Baghdad.

Iraqi Oil Minister Abdul Kareem Luaibi told reporters that Baghdad considered the Kurds to be trying to sell "smuggled" Iraqi oil and would sue both the Kurdish and Turkish governments if any planned export deals moved forward. Luaibi also threatened to blacklist Turkish companies from doing business in Iraq if they helped the Kurds move the oil out of their semi-autonomous region in northern Iraq.

"If Turkey allows the export of oil from the region, it is meddling in the division of Iraq, and this is a red line," Luaibi told reporters in Baghdad.

The harsh words from Luaibi come as the security environment in Iraq deteriorates, raising questions about the country’s ability to meet its own long-term oil-production goals just as the relatively peaceful north looks more appealing to foreign companies by comparison.

His threats also highlight Baghdad’s growing unease about the Kurds’ ability to finally export oil through their own pipeline to Turkey, cutting the Iraqi central government out of the loop. That could allow Kurdistan to export as much as 400,000 barrels a day of oil to Turkey, rather than relying on smaller amounts of oil shipped across the border by truck.

Officials at oil companies operating in Kurdistan said the new pipeline is a "game changer" because it will allow larger volumes of crude to leave the country, and will make that crude more valuable by easing part of the price discount that truck-borne crude carries.

On January 14, Genel Energy PLC, an Anglo-Turkish oil and gas firm which is the biggest independent operator in Kurdistan, said it expects the pipeline exports to be up to speed by the second quarter of the year, fueled by two big oil fields Genel operates in northern Kurdistan.

"The energy agreement between the Kurdish Regional Government and Turkey and the completion of the KRI independent pipeline infrastructure has paved the way for steadily rising oil export volumes from Taq Taq and Tawke over the course of 2014," Genel chief executive Tony Hayward said in a statement.

Genel also signed a gas-export deal with Turkey that could eventually move large volumes of Kurdish gas north to its gas-hungry neighbor.

The new oil fight capped an acrimonious week. Kurdish politicians earlier protested Baghdad’s draft budget, which would essentially cut the northern region off from billions of dollars in oil-revenue that the central government distributes. Under the constitution, Kurdistan receives about 17% of federal revenues, though in practice that is closer to 12%. The draft budget would have effectively trimmed Kurdish receipts even more.

Some observers see the threats, from the budget dispute to lawsuits, as nothing more than political skirmishing ahead of April elections. But the completion of the Kurdish pipeline, which should be operational by the end of the month, appears to have pushed the oil dispute over the tipping point – and has embroiled Turkey in the spat as well.

"The breach is real," said Steven Cook, a Middle East expert at the Council on Foreign Relations. He said that growing distrust between Ankara and the government of Iraqi Prime Minister Nouri al-Maliki has reinforced Turkey’s decision to seek energy resources from Kurdistan.

The Turkish and Iraqi embassies in Washington did not respond to requests for comment by late Friday afternoon. Neither did the U.S. office of the Kurdistan Regional Government or the State Department.

For years, Iraq has been trying to finalize a national hydrocarbons law that would determine once and for all how to share oil revenues across the different regions and clarify legal issues regarding ownership and exports of natural resources. Baghdad says that under the constitution, the Iraqi central government has the sole right to export oil and distribute revenues. Kurds believe that under the constitution, they have the right to develop their natural resources, too.

As a result, the Kurds have for years been signing attractive contracts with foreign oil companies in the hope that, by tapping their underground riches, they can jumpstart economic development in their semi-state – and, they say, in the rest of the country.

Baghdad’s push back against Kurdistan’s energy-development plans date back years, and has included threats against foreign companies doing business with the regional government. The Kurds offer a different kind of oil contract, which gives foreign firms an equity stake in the resources, rather than paying a flat fee for each barrel produced. But the lingering uncertainty over the constitutionality of oil deals with the Kurdistan government has also slowed development of the region’s oil and gas resources.

ExxonMobil, for instance, had a big stake in a massive oil field in southern Iraq, and was threatened by Baghdad when it inked deals for oil exploration in Kurdistan. Exxon continued in Kurdistan anyway. Chevron, Total, and a host of smaller oil companies have also poured into Kurdistan due to the better security environment, more appealing contracts, and potentially lucrative underground resources.

At the same time, some foreign oil majors, such as BP PLC, have preferred the security of stable, long-term oil contracts in the oil-rich southern part of Iraq, which involve less capital expenditure and a quicker payoff than looking for oil in the north.

Baghdad’s latest counter-offensive, including threats of legal action against Turkey and threats to abrogate contracts with Turkish firms inside Iraq, could well backfire, said CFR’s Cook.

"Threatening the Turks – especially (prime minister Recip Tayyip) Erdogan – usually produces the opposite of the desired result. I’d say that Erdogan was wavering, but now that Maliki is going after Turkey, we might very well see Ankara move forward," he said.