Tensions between the government of Iraq and the semi-autonomous Kurdish region in the aftermath of a Kurdish referendum on independence culminated last week in the capturing of large parts of the oil-rich Kirkuk province by Iraqi forces. The military movements have so far resulted in limited actual violence as Kurdish forces, the Peshmerga, retreated from Kirkuk and other disputed (and oil-laden) districts, with relatively minimal fighting. The dust hasn’t settled yet, and there remains risk of protracted conflict between Erbil and Baghdad, and potentially among the Kurdish parties blaming each other for the setback. The tense situation raises questions about the impact of the reversal of Kurdish fortune on the outlook for the Kurdish region, oil companies working there, and supply from Iraq as a whole.
The immediate impact was the loss of approximately 350,000 bpd of Kurdish oil exports--more than half the average export level. Oil flow through the Kurdish export pipeline connecting to the Turkish section of the Iraq-Turkey Pipeline (ITP) dropped to roughly 250,000 bpd.
Prior to these events, the contested Kirkuk fields of Avana and Bai Hassan,which had come under Kurdish control in 2014, following the collapse of the Iraqi military as ISIL swept across the country’s north, provided some 270,000 bpd of Kurdistan’s exports of nearly 600,000 bpd. Now these fields are once again under the guns of Iraqi troops.
Additionally, the Kurdistan Regional Government (KRG) was receiving half of the roughly 150,000 bpd produced by another set of Kirkuk field (Baba Gurgur, Khabbaz and Jambur). This was a compromise solution between Baghdad and Erbil in 2016 to exploit those fields which were within Kurdish held territory but still operated by the Baghdad-controlled North Oil Co.
Things have changed. On October 10 the federal oil ministry announced a plan to repair its own northern pipelines and on the 18th the Iraqi oil minister called on BP to help develop Kirkuk fields. A week later Baghdad appears to have started its own limited export operations from Kirkuk. If these signals are any indication, KRG exports may not recover from this slump any time soon.
That said, if the two sides avoid further fighting, then while Kurdistan and companies operating there will suffer, the overall supply picture won’t change by much. Let’s look at a few of the more probably ways this crisis could unfold.
Baghdad seems determined to translate its territorial gains into control over the oil exports from the fields it captured last week. Prime Minister Haider al-Abadi first alluded to this in his NY Times piece on 10/18 where he pointed out that Baghdad “intends to redress the inequitable distribution of our national resources to discourage corruption in the Kurdish region, and protect the people there and in the whole of Iraq.”
The path of least resistance would see Baghdad trying to place exports from all the Kirkuk fields it captured (totaling about 420,000 bpd) under the control of its Oil Ministry’s marketing arm, SOMO, but allowing the KRG to continue exports from fields located farther in Kurdistan proper.
Baghdad sought to secure Turkey’s cooperation, since Ankara controls the part of the ITP through its territory and the storage tanks at the Ceyhan terminal. Ankara’s cooperation seems forthcoming.
Indeed, on October 26, Reuters reported that export oil coming from fields in Kurdistan proper is being separated from that originating in the fields now under Baghdad’s control. The report indicates that “90,000 barrels of Kirkuk crude has been dispatched separately from the rest to be sent to tanks owned by Baghdad.”
This arrangement of alternating shipments is clunky, inefficient and therefore may be only temporary. Baghdad will likely start diverting the oil from fields under its control to be exported through its own export pipeline once repairs are complete. The technical part of this process may depend not only on patching up the damaged pipeline, but also on the status of pipelines and pumping stations at Baiji, the former hub of Iraq’s pipeline network, and at the fields themselves.
In this case Baghdad will likely be willing to bankroll the budgets for the provinces of Kirkuk and Sulaymaniyah. This would be a reward for the Patriotic Union of Kurdistan (PUK), whose leadership cooperated with Baghdad allowing it to reclaim Kirkuk’s fields. On the other hand Baghdad will leave the ruling party in Kurdistan (the Kurdistan Democratic Party or KDP) with the responsibility to provide for for KDP-dominated provinces of Duhok and Erbil from the roughly 300,000 bpd from fields still under its control.
Baghdad seeks total control
The new push by pro-government forces toward the Fish-khabur border crossing, where the Kurdish export pipeline enters Turkey, suggests Baghdad may have set its eyes on the whole pie. It is possible that Baghdad will try to bring all northern exports, including from fields located inside Kurdistan proper such as Tawke, Taq Taq and Khurmala under SOMO control. This would entail Baghdad agreeing in return to provide for the financial needs of all Kurdish provinces from federal coffers. If the KRG is forced to acquiesce, they will likely try to restart oil sales via trucks, as was the case prior to the construction of the Kurdish export pipeline in 2013, to maintain a revenue stream independent of Baghdad’s chokehold.
Normalization is possible but very unlikely
In a rather idealistic scenario, Baghdad and Erbil can manage to put the events of the last 2 weeks behind their back and work out an agreement for joint oil marketing either under SOMO, or a new mutually agreed structure. The joint use of the Kurdish pipeline, as the cheaper and readily available route for exports, would bring Erbil and Baghdad closer. Baghdad may also seek to consider this cooperative path if repairing its section of ITP proves unfeasible. As this scenario creates economic codependence and would have to include an agreement on revenue sharing, it would be the most stable, with the least risk to physical disruption compared to Baghdad’s pipeline that runs through Salah-addin and Ninewa provinces, where ISIL could regain some ability to operate. It is, however, the least likely given the poor state of affairs between Baghdad and Erbil, which makes reaching such chronically elusive understandings a near impossibility.
The the ongoing clashes near Fish-khabur suggest that the prospects for war aren’t too slim. Should the situation lead to a protracted conflict between Erbil and Baghdad, markets can expect a tangible loss of supplies. Fighting could bring all piped exports to a halt, causing Baghdad to lose some potential revenue while wreaking havoc on Kurdistan’s exhausted finances.
If the pipeline is damaged, whether accidentally or on purpose, Baghdad’s exports via Turkey would stop until fighting ends, until Baghdad designs a solution to divert the Kirkuk oil to its southern pipeline network, or until a pipeline to Iran is in place--either measure could take years. The fact that the 300,000 bpd Baiji refinery, Iraq’s largest prior to sustaining heavy damage in fighting against ISIL in 2014-2015, remains offline means that Baghdad would be left with limited near-term options to evacuate the crude. It will have to truck whatever amount of crude possible to refineries in the country’s center and south and then reinject what’s left back into the reservoir.
Erbil, meanwhile, would revert to trucking its own oil via Iran and Turkey. The neighbors, while recently expressing great hostility toward Erbil, may decide to allow the trade and enjoy the financial benefits, as they did in the past.
As a result of these measures, even in the case of active hostility, the 600,000 bpd of combined KRG/Kirkuk exports will not entirely vanish. The federal and regional authorities will perhaps send a total of up to 250,000 bpd to be utilized at their respective refineries. The KRG may manage to export another 100,000 bpd by trucks to Iran and Turkey. The remainder, up to 250,000 bpd, will comprise the loss in export volumes, a loss that will be felt the most in Kurdistan and among the oil companies working there.