Iraqi Kurdistan's Occupation of Kirkuk Oil Field Will Deeply Affect the Iraqi Oil Sector

 June 30, 2014

BEIRUT, Lebanon — Iraq is in complete turmoil under the current insurgency of the fighters from the Islamic State of Iraq and the Levant (ISIS). In late 2013 violence sparked in al-Anbar Governorate, which is the largest Iraqi governorate and encompasses much of the country's western territory along the border with Syria. From al-Anbar Governorate, ISIS and some other local groups (Naqshbandis, Sunni tribes and ex-Ba'athists) during the last three weeks have occupied the city of Mosul (June 10), which is Iraq's second largest, and other large parts of central Iraq.

On June 12, Peshmerga troops, the troops of the Kurdistan Regional Government (the K.R.G.), occupied the disputed city of Kirkuk, which straddles between the Arab and Kurdish parts of Iraq, and which is home to one of the most important oil field of northern Iraq. In practice, the K.R.G. troops have been able to block a potential northern advance of ISIS. At the time of this writing, ISIS and the Iraqi Army are fighting each other approximately 50 miles north of Baghdad and, after a couple of weeks when the Iraqi Army has been forced to give ground, it seems that now that the army is able to launch a counteroffensive.

It is very difficult to imagine whether Iraq will continue to exist as a single state or there will be three new independent states emerging from the current turmoil (for instance: the K.R.G. in the north, a Sunni state in central and western Iraq and a Shia state in southeastern Iraq including Baghdad). But if, on the one hand, it is problematic to have an idea about the future borders and the future institutional framework of Iraq, which could also continue to exist under the present frontiers, on the other hand, it is quite possible that the current insurgency may produce momentous consequences for Kirkuk Governorate and Kirkuk oil field.

Who Should Control Kirkuk? 

ISIS attack against the Iraqi government and the Iraqi Army could start a process that could permit the K.R.G. to exit from the current stalemate with reference to the three governorates it has been disputing with Baghdad during the last years. In fact, with the arrival of the U.S. Army in 2003, the Kurds started to move south regaining part of that land that intrinsically they consider of theirs. The three governorates, which are Nineveh, Kirkuk and Diyala, are all split into two parts: one controlled by Erbil and one by Baghdad. Of these three governorates the most important is Kirkuk because of the presence of the giant Kirkuk oil field. Last year, British Petroleum (BP) showed a certain interest for this oil field.

Both the K.R.G. and Iraq would like to have full control of the three governorates, but for the moment, there has been no envisaged solution. As a consequence of ISIS threat, Erbil has sent its Peshmerga troops to occupy Kirkuk. This a very important step in light of a possible – although for the moment not easy, given Iraqi prime minister, Nuri Kamal al-Maliki's previous declarations accusing both Sunnis and Kurds of mining the foundations of Iraq – collaboration between Erbil and Baghdad in fighting ISIS insurgents. In other words, in the future, it is quite plausible that Erbil will use its Kirkuk occupation as a bargaining chip in its relations with Baghdad.

In consideration of Kirkuk's northern position, it could make sense from an economic point of view to have this city and its governorate linked to the K.R.G., but the city owns a mixed population, which has experienced dramatic demographic changes during the last hundred years. Kirkuk is claimed at the same time by Kurds, Turkmen and Arabs — and all, to a certain extent, buttress their claims according to different historical accounts. In an attempt to "Arabize" the area of Kirkuk in the 1970s, the regime of President Saddam Hussein forced over 250,000 Kurdish residents to relinquish their homes to Arab people. No one knows today the city's current ethnic breakdown. The most reliable census dates back to 1957 when the city was 40 percent Iraqi-Turkmen, 35 percent Kurdish and less than 25 percent Arab. But after several forced deportations, the Arab percentage should be higher while the Kurdish percentage should be lower, but data are not clear at all. The Constitution of 2005 (Article 140, Second) had required that a census and a referendum be held before December 31, 2007, but they were never held. At this regard, after the arrival of the Peshmerga troops, some within the Arab and Turkmen populations immediately raised concerns at the prospect of the presence of only Peshmerga forces in the area — Arabs and Turkmen would prefer a mixed force. (For more information see: BACCI, A., The Kurdistan Regional Government's O&G Riches Play a Significant Role in the K.R.G.—Iraq Fault Line Conflict, Jan. 2014)   

Kirkuk Oil Field

Kurdish occupation of Kirkuk is very relevant from an economic point of view because it brings under the tutelage of Iraqi Kurdistan the giant Kirkuk oil field, which as of 1998 owned around 10 billion barrels of oil. As recently as last September, BP signed a letter of intent with the Iraqi government with reference to consulting services in order to revive Kirkuk oil field.  BP's consulting services were related to two main goals:

A) Stopping the decline of the field. Kirkuk field produces around 280,000 barrels per day (bbl/d) while in 2001 the production was approximately 900,000 bbl/d. The production has slumped by 70 percent and Baghdad wanted to increase it to 600,000 bbl/d in a five-year time frame. 

B) Obtaining a clear assessment of the field's potential. Some engineers believe that bad reservoir management — like injecting water and dumping unwanted crude and chemicals into the field — since Saddam Hussein's years, could have seriously, if not permanently, damaged the field. In specific, as a consequence of fuel oil reinjection, a big problem is oil viscosity, which complicates extraction and of course increases the costs.

The letter of intent between the Iraqi government and BP was quite rational. In order to revive the Kirkuk oil field, Baghdad wanted to utilize a company that was already working in Iraq proper and not in Iraqi Kurdistan; in specific BP has under contract the development of the super-giant Rumaila oil field, which is in southern Iraq. (For more information see: BACCI, A., BP Continues Investing in Iraq. With T.S.C.s the Devil Is Always in the Detail(s), Oct. 2013)     

The Impossibility of Using the I.T.P. and the Construction of a New Infrastructure between Kirkuk and the K.R.G.

Apart from the activity of reviving the Kirkuk oil field, another relevant problem lies in relation to the field's exports lanes. In fact, its oil has to be exported through the Kirkuk-Ceyhan Pipeline (a.k.a. Iraq-Turkey Pipeline (I.T.P.); capacity of 600,000 bbl/d), which has not been working since last March as a result of the attacks of the insurgents. Also repair teams sent out to fix the damaged pipeline have been the target of attacks. Sources report that only during 2013 the pipeline had been attacked 50 times. Current estimates speak of a period of 6 to 12 months to repair the Kirkuk-Ceyhan Pipeline, of course provided that the area is secured. For this reason, the three domes at Kirkuk and the other adjacent fields are in the process of being linked to the K.R.G. export infrastructure (300,000 bbl/d) at the Khurmala dome, bypassing the territory controlled by the insurgents. As the K.R.G. natural resources minister, Ashti Hawrami has recently affirmed:

We agreed with the North Oil Company [Iraqi Ministry of Oil] and Baghdad to link the three domes at Kirkuk and other adjacent fields to our export pipeline about three months ago, and the construction of the pipeline is already completed. It needs to be tested and commissioned, but it should not take much time.    

The Kurdish export pipeline has a capacity of 300,000 bbl/d, but it could be expanded with some improvements and additional pumping stations. Presently, the  K.R.G. oil exports range between 100,000 and 125,000 bbl/d and at this time the regional government is planning to double them to around 250,000 bbl/d in approximately a month and then to reach 400,000 bbl/d by the end of 2014.    

Iraqi Kurds Pipe Oil to Turkey — Map by Lindsey Burrows
The American Interest (Dec. 2013)

Will ISIS Control Central and Western Iraq?

Already three months ago, it was quite evident that Kirkuk's oil could no longer be exported through the I.T.P. If the Peshmerga forces had not occupied Kirkuk, Kirkuk's oil would probably now serve only the basic needs of ISIS. In fact, it is not clear whether the Iraqi forces will be capable in the next months to pacify Iraq or there will be a fragmentation of Iraq in three states. (For more information see: BACCI, A., Will Oil in the End Divide Iraq? March, 2013). The vast expanse of territory under ISIS control could of course be recaptured by the Iraqi Army, which has more powerful combat means than those of ISIS, especially if Baghdad receives a consistent Iranian and Russian assistance (as well as from the U.S. from next fall according to recent declarations). But, in general, an outcome that it is impossible to rule out by now is a continued and protracted instability within Iraq. Sunni discontent against the Shiite-oriented central government is widespread. A simple consideration stands out: If ISIS had not have received support from other non-fundamentalist components of Sunni society, it would not have been able to win so many cities in central Iraq. All this said, in addition to the gap related to the combat means, it is evident that it will not be easy for ISIS to enter Baghdad and southern Iraq for at least two other "societal" reasons:

A) Demographics. Sunnis are only about 25 percent of the Iraqi population. They are a majority only in some specific areas of the west and the north. Their presence in Baghdad is minuscule with around 12 percent of the city's population.

B) The temporary alliance that brought forward the insurgence. The huge discontent toward Mr. al-Maliki created a commonality of interests between ISIS and other components of Iraq's Sunni galaxy, like for instance Naqshbandis, Sunni tribes and ex-Ba'athists. But this commonality will be only temporary, because the other Sunni components do not wish to restore a medieval-style state under puritanical Islamic laws.   

In view of these two societal points and the gap related to the combat means, ISIS could draw back from the current positions and locate itself in western and central Iraq, mainly in al-Anbar Governorate. From there it could carry out terrorist actions with reference both to the deserts of eastern Syria and western Iraq — there is an uncontrolled frontier between the two countries. Central and western Iraq do not present, at the time being, an "immediate" interest for the energy business. In fact, while it is true that geologists have always known that there are oil formations in Anbar Governorate, these lands have never been explored thoroughly (only some exploratory wells). Only in the last ten years some more specific data, which confirmed the positive expectations, have been added, but the government has always had different priorities linked to both political and economic factors. Now, it would be difficult for ISIS to develop oil and gas resources in al-Anbar Governorate and the other areas under its control. In fact, ISIS does not have the required technology and it may be ruled out the possibility that international oil companies (I.O.C.s) decide to do business with a terrorist group. For an IOC one thing is to deal with a corrupt and/or authoritarian government, other thing is to deal with a terrorist organization. As a further proof of these difficulties, immediately after ISIS incursion, Korea's state-run Kogas delayed the development of a relevant gas field in western al-Anbar Governorate along the border with Syria.   

What Does ISIS Presence in Central and Western Iraq Mean with Reference to Oil Transportation Across Iraq?   

The real problem that ISIS occupation of central and western Iraq will create to the current Iraqi oil business, which is mainly centered on northern Iraq (Kurdish area) and southern Iraq (Shiite area), is in relation to land transportation of oil through Iraq. This problem will affect oil transportation from the Kirkuk oil field and from the southern oil fields to Kirkuk (of course, from southern Iraq oil may also be shipped through the Persian Gulf — actually, this has always been Iraq's preferred export lane). Currently, of the three Iraqi export pipelines, none is able to transport oil. See the slide below for additional information. 

In addition to this, the Strategic Pipeline, which theoretically could be used to transport oil from Iraq's southern fields to Kirkuk (from where oil may enter the I.T.P.), is working on reduced scale and would need several years of rehabilitation.

In other words, had not been for the intervention of the Peshmerga troops, Kirkuk would now have been under ISIS control. Instead, putting aside the legality of Peshmerga troops' occupation, the Kirkuk oil field has now been brought under the sphere of influence of the K.R.G., which is the most stable area in Iraq. (For more information see: BACCI, A., Chevron and Total Continue Investing in the K.R.G. A Brief Analysis of Baghdad's T.S.C.s vs. Erbil's P.S.C.s, June 2013) Moreover, eventually through the newly built pipeline, which will run between Kirkuk and the K.R.G., Kirkuk's oil will have an export channel through a territory secured from insurgents' attacks. The alternative to the K.R.G. occupation would have been to have under ISIS control another important city in addition to Mosul, which has relevant oil fields as well. Instead, the problem of the transportation of Iraq's southern oil to Kirkuk still persists because central Iraq is under the attack of the insurgents.  

   

The K.R.G. Occupation of Kirkuk May Not Be Acceptable on a Legal Basis, but It Is Important from an Economic Point of View 

It is difficult to strike a balance between what is legal and what is illegal. When we think of Iraq we have to understand that there is an ongoing terrorist insurgence, which de facto is controlling a large chunk of Iraqi territory, approximately the size of Indiana. At the same time, Iraq has been witnessing in the last years an ever increasing ethnic tension between the different components of Iraqi society. And the government has not been the government of all Iraqis.

One of the simplest definitions of "law" is a system of rules that are enforced through social institutions. It goes by itself that a terrorist insurgence is absolutely against law. But in Iraq, also the confrontation between Erbil and Baghdad concerning the possibility for the K.R.G. to sign, without prior government authorization, production sharing contracts (P.S.C.s) with I.O.C.s in relation to new Kurdish oil fields and then to export the oil through a newly built oil pipeline to the border with Turkey from where oil enter the Kirkuk-Ceyhan Pipeline, is completely beyond a normal legal dispute.      

In fact, both Erbil and Baghdad have a different legal basis to support their positions. On the one hand, the K.R.G. affirms that Article 112 and Article 115 of the Constitution give regions and the governorates the authority to develop new oil and gas fields, i.e., fields that were not under exploration or development when the Constitution was enacted in 2005. On the other hand, the authority of Baghdad to control oil exports could be rightly based on Article 5 of the Organization of the Oil Ministry Law No. 101 of 1976. This law granted to the Oil Ministry the exclusive right to manage the Iraqi oil sector. In addition to this law, still in 1976, Order No. 1075 of the Iraqi Revolutionary Command Council gave the right to supervise and carry out marketing with the related activities to the vice president and Iraq's State Oil Marketing Organization (SOMO). Without any doubt, it's difficult to support completely the validity of a law and an order of almost forty years ago, especially in a country like Iraq that in the last forty years has undergone a long series of nefarious events like the Iran-Iraq War, the Gulf War, the repressions against Shiites and Kurds, the Iraq War and the current ISIS insurgency.    

Moreover, the plain description of the relations between Erbil and Baghdad since last January may help understand why any legal considerations could be based on shaky assumptions. Only a few months ago, before the attacks that put out of service the I.T.P., it would have been impossible to think about the construction of an oil infrastructure from Kirkuk to the K.R.G. in order to export Iraq's oil. In fact, upon completion of the K.R.G. pipeline to the border with Turkey, last January Erbil started to ship oil to Ceyhan where this was stored in 12 tanks (about 2.3 million barrels of oil are stored in these tanks). Immediately after, Baghdad responded threatening to sue the companies that were lifting oil via the K.R.G. pipeline and initiated legal action against Turkey, taking the case to the International Chamber of Commerce (ICC) in Paris. Besides, according to law, the K.R.G. should receive a 17 percent allocation of the Iraqi federal budget, which is primarily funded by revenues from oil and gas exports. But, Baghdad has since January cut off the Iraqi Kurdistan’s allocation of this year’s Iraqi budget — around 17 billion dollars — as well as froze or delayed the payment of all public sector wages in Iraqi Kurdistan. Only on May 22, the first tanker loaded  with Kurdish oil (1 million barrels) left Ceyhan. Since then two more tankers have already left the harbor and a fourth is being loaded in these days, but because of possible legal actions against buyers only the second tanker delivered its oil around one week ago to the Israeli port of Ashkelon.

In addition to protecting Iraqi Kurdistan from ISIS insurgence, the occupation of Kirkuk makes perfect sense for Erbil also from a business point of view. In fact, an important oil field is now in the hands of the more stable region within Iraq. The risk was that this field ended up under the control of ISIS, a terrorist organization. Surely, I.O.C.s prefer to have Kirkuk under Erbil's tutelage than ISIS'. Many times business actors understand current events faster than politicians, or maybe business actors are free to act according just to pros and cons while politicians are not. Iraqi Kurdistan offers more security and a safer business environment (for instance: a modern and open investment law and a progressive hydrocarbons law for the Kurdistan Region) than those available currently in Iraq and for this reason, in the last three years, U.S. ExxonMobil and Chevron, and France's Total have decided to invest in the K.R.G.