Kurdistan Oil Export: A Game Changer

By J. Millard Burr*
Saturday, June 7th, 2014 @ 8:49PM

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Late December 2013:  Baghdad and Erbil agree on Kurdistan’s oil revenue payments. Reportedly, funds are to be deposited with New York-based JPMorgan in an account previously opened in the name of the Development Fund of Iraq (DFI). Iraqi Prime Minister Nuri al-Maliki and Kurdistan Regional Government Prime Minister Nechirvan Barzani were reported to have resolved their differences and agreed to export Kurdistan oil through the Iraq State Organization for the Marketing of Oil (SOMO). — “Turkey begins exporting Kurdistan oil.”

In late May 2014 Turkish officials announced that oil from Iraqi Kurdistan had just been exported to international markets.  It seems that Baghdad had not realized the importance of a late December 2013 announcement by Turkish Energy Minister Taner Yildiz when he announced that “test flows” of Kurdistan oil to the Turkish Mediterranean port at Ceyhan had been completed and that Kurdish oil would soon be stored there. Yildiz had then predicted that Kurdish oil would soon move through a pipeline that the Kurdistan Regional Government (KRG) had nearly completed and which would connect with Turkey’s infrastructure.

The May 2014 announcement that a million barrels of Kurdish oil had been exported to Europe through Ceyhan seems to have caught everyone by surprise.  It was made less than a month after Iraq Deputy Prime Minister for Energy Hussein al-Shahristani announced that the long established Kirkuk/Iraq to Cehhan/Turkey pipeline had been inoperable for more than two months due to insurgent activity in the Iraq-Syria border region. The situation was, he lamented, an “obstacle” that prevented Iraq from increasing its oil exports.

In contrast, it was announced that the Kurdish oil flowed through a Kurdish Regional Government (KRG) pipeline that had been only recently constructed.  The pipeline itself was subject to a KRG-Turkey agreement for the establishment of a separate 300,000-barrel capacity pipeline. In effect, Kurdistan’s oil would bypass the ollder Kirkuk-Ceyhan pipeline route — although it too would eventually join with the existing Turkish pipeline that fed Ceyhan.

Aware of the feverish petroleum activity in Kurdistan, much of which the KRG was financing, Baghdad opposed both its oil contracts with foreign oil companies (e.g., Exxon Mobil), and its pipeline deal with Turkey. However, lacking a way to impose its will on the region, there is was little Baghdad could do to halt the Kurdistan-Turkey arrangement.  A committee created to resolve the Kurdistan oil issue has yet to meet.

OIL REVENUES

The sale of Kurdistan oil ostensibly requires that revenues derived be deposited in a Development Fund of Iraq (DFI) account. At U.S. insistence, the DFI account had been created in 2003 and would be managed by JPMorgan Chase in New York.

In late December 2013 Iraqi Prime Minister Nuri al-Maliki and Kurdistan Regional Government Prime Minister Nechirvan Barzani seemed to agree that Kurdistan oil would be exported through Iraq’s State Organization for Marketing of Oil (SOMO).  Likewise, it was thought there was agreement to deposit funds received from the export of Kurdish oil in the Development Fund of Iraq (DFi) account managed by the JPMorgan Chase bank in New York since 2003.

Presently, it is still unclear what role either SOMO or the DFI will play in the sale of Kurdistan oil. Indeed, if the DFI is involved, it is unclear whether funds received through sale of Kurdish oil will be placed in a separate account at JPMorgan Chase or commingled with funds received from the sale of oil from Iraq’s other regions.

Whether JPMorgan Chase will be used at all is yet another question. In talks held at Ankara in late November 2013 KRG Prime Minister Barzani learned that Turkey sought to eliminate the DFI. Instead, it proposed to use its state-owned Halkbank as the intermediary in the disposition of funds derived from the sale of Kurdistan oil. The KRG was not necessarily opposed to such a move, bit unfortunately for Turkey, within weeks KRG interest in Halkbank flagged after an international investigation accused it of breaching international sanctions on Iran. In December 2013 a score of individuals, including the sons of three Turkish ministers and the head of Halkbank, were accused by Turkish police of corrupt practices.

Today, whether Halkbank is still under consideration, or DFI is in the driver’s seat, has not been clarified. Still, there is one indication: Following the announcement that oil from Kurdistan was transiting Turkey, Turkish Member of Parliament Hasan Özmen told the Turkish Anadolu [news] Agency that the revenue from Kurdish oil would be deposited in the DFI account. There is, however, no present indication that such is the case.

A GAME-CHANGER

It is often difficult to discern when a single economic event is of such signal importance that it scatters the meticulously programmed pieces on a geopolitical chessboard. Such a game-changing episode occurred in May when a shipment of oil generated by Iraqi Kurdistan, and which had been transported through the Turkish pipeline to its Mediterranean export terminal at Cehyan, was shipped to Europe.

Precisely who the winners and losers are in this deal needs to be sorted out.

The action undertaken by Iraq’s Kurdistan authorities was seen by both Iraqi oil czar Hussein Shahristani and Washington’s Foggy Bottom as a direct challenge to the nation’s tenuous status quo. Both the Iraqi oil ministry and Washington have argued that Baghdad should have the final say in the approval of all Iraqi oil sales. Shahristani, a man often viewed as an equal-opportunity hater, has little love for America, Turkey, and though a Shiite, he has maintained an arm’s-length relationship with Iran. Arrested and tortured during the Saddam regime, the noted scientist lived in exile for many years. Today, following the 30 April elections that returned Shiite Prime Minister Nuri al-Malaki to power, the determined Shahristani is seen in Irbil as just another one of Maliki’s men in Baghdad.

The Kurds themselves have long felt that Shahristani not only opposes Kurdish autonomy but any Kurdish effort to take control of its own regional resource. They argue that Shahristani has done almost nothing to make more transparent the production and sale of Iraqi oil. They claim that unconscionable amounts of Iraqi oil from which Kurdistan has received no benefit have been siphoned off to fill the pockets of Baghdad’s politicians. Kurdish authorities believe that the nation’s “books are cooked” and the 17 percent of the national revenue that should go to benefit the Kurdistan region has been undervalued year after year.

Just how this and future oil sales will impact the economic ties that exist between Baghdad and Irbil is now anyone’s guess.  Nevertheless, the movement of Kurdistan oil can be seen as a major step to enhance the region’s economic viability.  But if the funds received for the sale of Kurdistan’s oil are lost to the central government, that event would be seen as a serious blow to the aspirations of both Iraqi Prime Minister Nuri al-Malaki and Shahristani.

THE BANKERS AND THE OIL COMPANIES

Following the close of the war in Iraq and the American occupation, the proceeds from the sales of Iraq’s international oil contracts was supervised by the Central Bank of Iraq’s Development Fund for Iraq (DFI). The DFI was an American creation supported both by the UN and by Western banks. In 2004 the government of Iraq in effect mortgaged its national oil revenues, allowing New York’s JP Morgan Chase to have the final say in the the commercialization of Iraqi oil and the administration of DFI funds.  And after a DFI account was created at the U.S. Federal Reserve Bank of New York, JPMorgan Chase in effect began to serve as the Federal Reserve to the Central Bank of Iraq.

With the DFI, the nexus was created to administer Iraq’s petroleum reserves — then considered the world’s second largest.  Iraq was able to borrow billions of dollars ($2.4 billion to begin with) through letters of credit issued by the Trade Bank of Iraq (TBI). The TBI itself was also the creation of a private sector banking consortium led by JP Morgan Chase and replaced the notorious UN oil-for-food program that ended in late 2003.  At the urging of Western banks, the TBI was created to better manage the flow of international claims and to serve as a conduit for all Government of Iraq international transactions. In reality, the TBI arrangement was concretized by the United States to ensure that it alone would approve the bona fides of any international entity that submitted a claim for damages, or for demands for payment owed by the defunct regime of Saddam Hussein.  (Pursuant to that arrangement, Kuwait received first claim on dollars expended in repayment of war damages suffered during the Iraq occupation of Kuwait.)

The TBI, followed by the creation of the DFI, instituted the coordination needed to tie the financial system of Iraq to foreign banks (which had not operated in Iraq since the nationalizations of the 1950s and 1960s).

Precisely what role foreign oil companies operating in Kurdistan play in the movement of oil into and through the Kurdistan pipeline is not at all clear. It is known that the Turkish state-run oil entity has signed an agreement with Exxon Mobil that will allow that corporation and the KRG “to develop projects in northern Iraq.” It is also reported that Exxon Mobil has been in talks with a Russian oil company that would allow the latter entree to the Kurdistan oil fields. Other companies active in Kurdistan — including the drilling/extraction activity of a reportedly successful Canadian corporation — are reticent to provide any information on oil developments in Kurdistan itself. Every announcement seems “fraught with political risks” in what has become an energy-rich region.

OPPOSING VIEWPOINTS: WASHINGTON AND ANKARA

What appears almost certain is that the movement of Kurdish oil through Turkey bypassed the TBI and DFI arrangements that had existed for years.  Thus, it is not surprising that, in underscoring its regional independence, the KRG has managed to anger simultaneously the central government in Baghdad, Foggy Bottom, and the United Nations bureaucracy.

The report that a tanker loaded with one million barrels of Kurdistan crude oil had just departed Ceyhan for Europe was met by very strong opposition in Foggy Bottom. Since the the U.S.-led invasion of Iraq in 2003. Washington has opposed any KRG efforts to enhance its semi-autonomous status.

In effect, Washington continues to support an unstable Iraqi polity. Not surprisingly, a State Department spokeswoman recently declared, “Our position has long been that we don’t support exports without the appropriate approval of the federal Iraqi government, and certainly we do have concerns about the impact of those continuing.”  In Kurdistan that declaration was met more by sorrow than anger. There still exists a Kurdish love affair with America.

The Kurds have not forgotten that Operation Desert Storm secured the survival of Kurdistan and its people by imposing a “no-fly” zone that secured the region from Saddam Hussein.

While Iraq’s energy minister fulminated that, “It’s Iraq that makes sales and possesses the oil and it’s Iraq that will govern the future sales,” in reality it seemed more likely Turkey Prime Minister Erdogan could govern the future of Kurdish oil. His direct involvement with the KRG has occurred despite the fact that Erdogan has for years opposed a rapprochement with the Kurds of Turkey, Iraq and Syria. Incredibly, Erdogan has begun to use “Kurdistan” to designate those lands occupied by the Kurdish people. It is a testament to the importance energy plays in resource-poor Turkey’s foreign and domestic policy.

CONCLUSION

The KRG oil export came in defiance of Baghdad which asserts its oil ministry must approve all sales. Clearly, Baghdad is unable to impose its will on the regions. Its foreign policy is a shambles, and the Iraqi military, which for a half-century dominated the political scene, is now a shell of what it was. Each region — Shia south, Sunni Triangle and Kurdistan northeast — is enlarging its own militia. The center cannot hold, but if Kurdistan can escape the anarchy to come, it could become a wealthy, viable state, and an ally of the United States.

It is clear that the recent shipment of Kurdistan oil is but the first of many sales to come. However, many questions regarding its financing remain unanswered. Mete Goknel, a former director of BOTAS, the Turkish state-owned crude oil and natural gas pipeline company, has noted the long-standing mistrust that exists between Iraq’s regions. In doing so, he raised the quintessential question which is yet to be resolved:  “Both Baghdad and Washington are concerned [in] which account the revenue from the oil sales will be deposited, [and] how it will be shared and be controlled.”

Perhaps we will know soon.  But I wouldn’t count on it.

* J. Millard Burr is a Senior Fellow with the American Center for Democracy.

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