III.Escalating Conflict
over Oil
As Iraq’s single source of income, oil and gas play an inordinate role in politics, with questions revolving over who owns it, manages it, controls exports and gets what share of revenue.83 Since April 2003, these have become incendiary, as the country has started to decentralise in a situation of ethnic and sectarian violence, widespread corruption and crime (including oil smuggling), and profound mistrust. The emergence of a powerfully autonomous Kurdistan region, in particular, has brought the oil questions to the fore. The Kurds, whose territory was neglected for decades, are eager to develop it but, lacking their own sources of income, wholly depend on the federal budget. Complicating matters, their relations with Baghdad are strained, their annual 17-per-cent budget allocation is contested, and they complain they do not receive the amount to which they are entitled, or do not receive it on a timely basis.
To escape this vice, the KRG has been keen to develop two potential sources of income: oil wealth suspected to exist in the Kurdistan region and, by incorporating disputed territories, the proven oil reserves of Kirkuk and whatever oil and gas may be found in other disputed areas. This has presented new hurdles. The Article 140 process has stalled, and the KRG’s ambition to produce its own oil and gas has been frustrated by the absence of a federal hydrocarbons law and a companion revenue-sharing law that would create the institutions and rules for managing and developing the country’s mineral resources and distributing income from their sale.84 Negotiations over these laws have sputtered on aimlessly since the federal oil ministry and the KRG tabled two competing, incompatible drafts of a hydrocarbons law in early 2007. The KRG then passed its own oil and gas law in August 2007 and unilaterally began signing contracts with foreign companies in order to establish basic infrastructure for exploration and production.
This further aggravated relations with Baghdad (which in 2008 responded by signing its own unilateral contracts for oil and gas fields in the rest of the country), while highlighting the KRG’s next obstacle. Even if it succeeds in pumping oil, it will be unable to sell it unless it secures access to the export pipeline that runs to Turkey’s Mediterranean coast. Given its fears of oil-fuelled Kurdish independence, however, Turkey is loath to permit the KRG to export through its territory without a federal hydrocarbons law that would tie the Kurdistan region more closely to the Iraqi state.
In an earlier report, Crisis Group argued that “a transparent, efficient and equitable framework for the management of oil and gas wealth arguably is the most important building block of a new Iraq”, and that the absence of such a framework discourages international investment in the oil industry and encourages actors such as the KRG to go it alone.85 Negotiations over a hydrocarbons law have stalled over a deep rift concerning the state’s role in the economy, as well as the struggle between Kurdish and Arab nationalism. Kurds want to minimise the federal state’s role in managing the oil sector and claim final say over the development of fields on their territory. This reflects deep mistrust of Baghdad based on both distant and recent historical experience, including use of oil wealth by successive regimes to oppress them and the erratic release of agreed budgetary resources by the current government. Moreover, the Kurds appear to be seeking enhanced economic self-reliance to maximise their autonomy and, perhaps, chances of future secession.
Most other Iraqis, by contrast, including some Shiite political leaders such as Prime Minister al-Maliki, do not view the re-emerging state as a threat. They seek to strengthen it economically and institutionally and to dominate it. They oppose Kurdish nationalism and favour instead so-called resource nationalism, a sentiment that has expressed itself especially in the debate over who owns the oil (and thus in whose territory a given field is located) and whether foreign companies can be paid for their services in oil rather than money (see below).
The struggles over nationalism and the state’s role have created a link between the otherwise separate fights over oil and disputed territories. Not only does the unresolved status of disputed territories claimed by the Kurds that are thought to contain rich oil deposits complicate negotiations over the hydrocarbons law, but the Kurds’ frustrated quest for Article 140’s implementation has pushed them to withhold cooperation on both the oil law and a range of unrelated legislation. Moreover, in its efforts to reverse decades of Arabisation-related neglect and outright discrimination, the KRG has matched de facto control over some of the disputed territories with initial steps to explore and develop whatever oil and gas resources these possess. Disputes over oil and territories are thus intertwined, and the conflict has now become intractable and combustible.
A.Developing Kurdistan’s Oil Wealth
The KRG faces huge challenges in unlocking the region’s untapped wealth. Short on required skills, resources and political support from Baghdad, it has embarked on a journey both lone and long to carve out Kurdish autonomy with a self-reliant economic base.
What the region has is potential.86 Although exact figures are elusive,87 some Kurdish officials are bullish that substantial quantities of oil and gas will be found. Ashti Hawrami, the KRG’s minister of natural resources, said, “I’m not expecting to find another Kirkuk [as much as fifteen billion barrels]. But I think I will find a lot of fields that add up to Kirkuk”.88 Others were less optimistic: “Yes, KRG oil is important to us, but it won’t be an alternative for Kirkuk oil”.89
In 2008, still very little production has taken place, all of it from a single field, Tawke, in Dohuk governorate. Managed by DNO of Norway, it has been pumping a modest 10,000 barrels a day (b/d), reportedly for local consumption, but possibly for illegal export by truck to Iran.90 Oil experts say DNO could quickly ramp up production tenfold if an export channel became available.91 Exports are blocked, however, by the KRG’s conflict with the federal oil ministry and the concomitant failure to agree on a hydrocarbons law. Should that issue be resolved, KRG officials reportedly have predicted that total production of all of the region’s fields could reach one million b/d by 2013. Although independent oil experts use the more conservative figure of half a million b/d by 2013, they are optimistic that the region offers great commercial opportunity.92
Kurdish leaders’ drive to develop this hydrocarbons wealth is propelled by several motives. First, the KRG wants to increase its economic leverage vis-à-vis the federal government, on which it depends for the bulk of its income.93 The federal government allocates 17 per cent of its budget to the Kurdistan region annually, but this amount is reduced significantly by deductions (mostly to cover “sovereign expenditures” relating to the federal government’s operations)94 and has been challenged by political parties that contend the Kurds constitute a smaller percentage of the Iraqi population.95 Even if the KRG shares revenues from its own oil exports with the federal government, as it has said repeatedly it will, it could use this income as collateral against any attempts by the federal government to withhold funds to which the KRG deems itself entitled.96
Becoming less economically reliant on the central government is viewed as all the more critical given the KRG’s urgent need to provide its people with basic utilities, such as power and fuel (and, stemming from this, clean water, sewage disposal and the like). All these have been in short supply, causing popular discontent. The region has no refineries and few significant power stations.97 By selling oil and gas the KRG could generate funds to build such essential infrastructure and then provide the raw materials for it. This would end its debilitating dependence on imports of refined fuel from Turkey and elsewhere, often at prices unaffordable to ordinary citizens.98
Finally, to the extent that Kurdish leaders harbour aspirations for independence, they want a strong economic base, which the region’s hydrocarbons wealth would afford. Although they have declared publicly that they wish to remain within Iraq, they have made sufficient threats – relating to non-implementation of Article 140 and other aspects of the constitution – to persuade many Iraqis that the Kurds merely are waiting for the opportunity to bolt.99 Under this perspective, what matters most to the KRG is not a fair share of revenues (which they still need today but would be irrelevant upon independence), but ownership and control of oil fields.
In pursuit of these objectives, the KRG has carried out an aggressive strategy to attract foreign investment, spearheaded by Ashti Hawrami, its minister of natural resources, who was appointed in May 2006. When talks over a federal hydrocarbons law broke down in 2007, the Kurdistan national assembly passed its own oil and gas law, based on the KRG’s interpretation of the federal constitution;100 the law, and the model contract it includes, has been touted (by industry representatives) as among the best in the industry.101
Thus equipped, the KRG proceeded to renegotiate a handful of contracts it had concluded earlier102 and sign fresh contracts with companies willing to take the plunge. By September 2008, it had sealed more than twenty contracts.103 Given the risks involved (the uncertain presence of commercially recoverable oil and gas, the absence of infrastructure, the lack of a financial system and the inability to export in the absence of a federal hydrocarbons law),104 the first takers tended to be small companies lacking requisite resources or capabilities to single-handedly set up an industry. Though they were able to start exploration through test drills and, in at least one case, pump oil, their signatures had a primarily symbolic and political, rather than economic, significance.105 The KRG pointed to these contracts as evidence that the region was worth foreign investment and to instil a competitive spirit based on the presumption that if the pickings promised to be rich, no medium-sized oil company would dare stay away.
The KRG used the announcements of initial discoveries to lure larger companies, including through shared contracts of previously allocated blocks and by allotting new ones.106 If some of the initial investors were muscled aside by bigger competitors,107 this only increased the KRG’s leverage. Its ultimate aim was to bring in major oil firms. As an oil expert put it, “Ashti Hawrami does not want small companies in the Kurdish region right now. He wants more experienced companies. He wants to create facts on the ground”.108 The majors have been reluctant, however, given the uncertain investment climate in the Kurdistan region and, more importantly, the federal government’s threat that any company signing with the KRG would be barred from bidding for contracts with the federal ministry of oil, which controls the much larger oil fields of southern Iraq (see below).
The KRG covets contracts with larger companies for their greater resources but also, perhaps more importantly, for their political clout.109 The KRG president’s Article 140 envoy, Qader Aziz, said, referring to Kurdish leaders, “they believe that if big companies come to Kurdistan, they will protect the region, because they are supported by big countries”.110 The Wall Street Journal summed it up:
Kurdish officials look at the flurry of oil contracts they’re signing as a two-pronged insurance policy. By cutting deals with companies from countries as diverse as Australia, Britain, France, India, Russia, South Korea, Turkey and the U.S., the Kurds say they hope to win international political support in case things go awry with Baghdad. And in case Iraq were to break up, the Kurds would have their own abundant revenue stream. “Has this been deliberate? It certainly has”, says a beaming Mr Hawrami, the Kurdish natural-resources minister.111
While arguably this strategy makes sense, it runs up against the stark fact that the Kurdistan region is landlocked and realistically can hope to export its oil and gas only via Turkey. Doing so requires permission from the federal government to pump Kurdish crude through the Kirkuk-Baiji-Ceyhan pipeline. In the current stalemate, however, the KRG cannot expect Baghdad’s cooperation. Even if the KRG were to circumvent that obstacle by building its own strategic pipeline through the Kurdistan region to the Turkish border, it would still need Turkish permission for transit to the Mediterranean.112 Some KRG officials appear to be banking on Ankara’s eventual agreement given its own pressing energy needs.113 An energy expert said:
If the KRG is right about its projections of one million b/d in five years, then economics may dictate that Turkey circumvent the Iraqi government and deal directly with the KRG. Turkey requires 800,000 b/d of crude. It produces only 43,000 b/d itself, and this is both poor quality and relatively expensive oil. If the KRG could produce enough to satisfy Turkey’s needs, it would be very tempting to Turkey.114
Ankara officials have ruled this out. They see the federal hydrocarbons law as an essential building block of a unified Iraq that would include the Kurdistan region and say they will oppose exports of Kurdish crude until that law is in place.115 For all practical purposes, therefore, Kurdish oil largely remains bottled up pending resolution of the hydrocarbons law tangle, just at a time when many of the contracting companies are primed to start production.
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