Global Economics

Iraqi Kurds Closer to Petro State of Their Own


Kurdish Peshmerga forces and Iraqi special forces deploy outside Kirkuk on June 12

Photograph by Feriq Ferec/Anadolu Agency/Getty Images

Kurdish Peshmerga forces and Iraqi special forces deploy outside Kirkuk on June 12

A force of a few thousand jihadist fighters stunned the world with their June 9 capture of Mosul, the biggest city in Iraq after Baghdad. Flush with looted cash, helicopters, and Humvees, the Islamic State of Iraq and the Levant (ISIL) soon turned to another target: the oil-rich city of Kirkuk about 100 miles away. As in Mosul, Iraqi government forces stationed in and around the city deserted en masse as the first militants approached. This time, though, the jihadists were sent into retreat as well, repelled by thousands of Peshmerga, or Kurdish troops, who streamed into the area on the heels of the fleeing Iraqi forces. The Kurds of Iraq have always disputed control of multi-ethnic Kirkuk by rulers based in Baghdad. On June 12 they finally took the city and surrounding province for themselves—taking an enormous step toward independence and the long-foretold breakup of Iraq.

For more than two decades, the Kurds have built an autonomous enclave in the north that, with its prosperity and stability, stood in stark contrast to the violence and turmoil of the rest of Iraq. They’ve been on the verge of separating from Iraq for years, held back only by the opposition of neighbors such as Turkey, Syria, and Iran, all with sizable and restive Kurdish populations, and by fear that a Kurdish state might not be economically viable.

The capture of Kirkuk and its subterranean lake of oil, capable of yielding as much as 600,000 barrels a day, may have changed the equation entirely. The Kurdish Regional Government appears to have no intention of relinquishing control of the province, which it sees as historically Kurdish. The new facts on the ground, says Falah Mustafa Bakir, head of the KRG’s foreign relations department, are “a natural outcome.” And while still not using the word “independence,” the KRG’s spokesman, Safeen Dizayee, says, “When it comes to the issue of self-determination, it’s our right, not something that needs to be negotiated. I can assure you, ours is not a Catholic marriage where you cannot have a divorce.”

The Kurds already produce about 200,000 barrels of oil a day, up from pretty much nothing two years ago, says Pavel Molchanov, an energy analyst at Raymond James, a financial-services holding company. Denise Natali, a senior fellow at the National Defense University in Washington, says about half that oil is exported to Turkey, either by trucks or through a pipeline finished by the Kurds earlier this year, which is connected to the Iraqi-Turkish pipeline. The central problem for a Kurdish state, however, is selling enough of the oil on the international market—and getting paid directly for it—to finance their government.

For all the dreams of independence, money has always been tight in Kurdistan. A contentious revenue-sharing agreement requires all oil income to go through the government in Baghdad, which disburses funds to the rest of the country. The pact allots 17 percent of the oil revenue to Kurdistan. Roughly 70 percent of that money—Kurdistan’s budget—goes to salaries for its civil servants, says Natali. The regional government then has to pay for steep fuel subsidies and health care, plus cope with debts to a handful of small foreign oil companies in the region. “The KRG is chronically on the verge of liquidity problems,” says David Pollock, senior fellow at the Washington Institute for Near East Policy and a former senior official at the U.S. Department of State. “They’re still completely dependent on Baghdad for revenues.”

Furthermore, since January, Baghdad began withholding funds to protest Kurdish oil exports to Turkey. “The KRG is basically broke,” says Natali. “Worse than that, they’re borrowing money. They don’t have a penny saved in a sovereign wealth fund. When you say you want an independent state and you can’t pay the salaries of your government employees, that’s what I’d call a problem.” On June 17 a Kurdish official said his government has had to borrow $3 billion.

In a bold move to fund the regional government, Kurdish officials announced in May that they would begin direct oil sales to international customers—apart from small amounts already trucked out and intended for the black market. On May 22 a tanker filled with 1 million barrels of Kurdish crude left the Turkish port of Ceyhan. A second tanker loaded with another 1 million barrels of Kurdish crude left Turkey on June 9. KRG officials have said they intend to load a third tanker, though they wouldn’t comment on prospective buyers. So far there are few takers, because Baghdad has filed litigation protesting the sale of Kurdish crude from Turkey with the International Chamber of Commerce in Paris. It has blacklisted one shipping company involved, according to documents seen by Bloomberg News. The U.S. backs Baghdad’s position. “Buyers are not willing to take Kurdish crude if it involves any sort of legal risk, not just now but in the future,” says Ayham Kamel, Middle East and North Africa director at Eurasia Group. And as long as the government of Iraqi Prime Minister Nouri al-Maliki hangs on, the Kurds aren’t going to be able to drum up new oil business easily. “I doubt that a lot of buyers will be interested in it right now without being offered steep discounts,” says Kamel.

Even if the tankers’ contents are sold, says Richard Mallinson, an analyst at Energy Aspects in London, “that doesn’t automatically translate into regular shipments that are widely accepted in the world market.” Unable to pay salaries for months, the Kurdish government must contend with the grumbling of its employees, including the Peshmerga fighters. Grabbing Kirkuk was a symbolic victory and may pay off in a big way down the road, but the Kurds now have to hold and defend it from potential attacks from jihadist and Baghdad forces. “Taking more territory is a huge financial burden for them,” says Natali. “That takes resources, and right now they haven’t got any.”

The bottom line: Iraqi Kurds may control more oil than ever, but they have to find regular buyers before they can afford independence.

Zalewski is a Bloomberg Businessweek contributor.
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Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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