Thursday, October 26, 2017

Scenarios for Kirkuk and KRG Oil Exports

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.

Passive hostility/disengagement
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.

Active hostility
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.

Wednesday, October 25, 2017

An Iranian Land Bridge Is Not the End of the World

Originally posted on Fikra Forum, October 16, 2017

Fear that Iran is working to build a bridge to the Mediterranean as a path to regional hegemony is hanging over U.S. military thinking and actions in Iraq and Syria. Allowing this suspicion to drive strategy could drag America into an unpredictable conflict that may continue long after the Islamic State is gone.
The speculation started after Iran-backed Iraqi Shia militias created a role for themselves in the campaign against the Islamic State in Mosul, pursuing control of small towns in the desert south and west of the city. They made gains since October of last year: they surrounded the Islamic State-held town of Tal Afar and captured its airport, took a number of other small towns and villages around the town of Sinjar, cut Islamic State lines west of Mosul, and advanced south along the Iraq-Syria border.

The Iranian-backed militias’ advance toward Kurdish frontlines in northern Iraq at that time alarmed Iraqi Kurdish leaders. The Kurdish Regional Government (KRG) is concerned mostly with defending their adjacent territory. These concerns grew more intense in the aftermath of the Kurdish region’s controversial independence referendum on September 25. Kurdish anxiety spiked this week with reports of Iraqi government forces and pro-Iranian militias concentrating around the disputed oil-rich city of Kirkuk. Kurdish leaders now think confrontation is imminent. To outside actors, the advance to the Iraq-Syria border from one side by the Iraqi Shia militias, and from the other side by pro-Assad forces, raised warnings of an Iranian project to connect with the Mediterranean shore.

Despite the fact that nobody has articulated how exactly this Iranian scheme would work, the administration seems to assume that Iran has a secret plan at work. The Washington Post reported on June 21, that senior White House officials now believe Iran to be “focused on making that link-up with Iran-friendly forces on the other side of the [Iraqi-Syrian] border…to block us from doing what our commanders and planners have judged all along is necessary to complete the [Islamic State] campaign.”

The two sides have been trying to assert their military presence in Eastern Syria. This has precipitated serious incidents, including, in May and June, the U.S. bombing of Syrian military convoys, shooting down Syrian aircraft and Iranian drones, and brazen, if ineffective, Iranian ballistic missile launches.

The military tit for tat suggested, at least for a while, that the administration’s yet-to-be finalized strategy for Syria’s future involves keeping pro-Assad forces out of eastern Syria, but denying Damascus access to the border would be easier said than implemented.

Taken to its logical conclusion, this approach and mission creep could lead to U.S. troops permanently stationed in eastern Syria, or even to state-building to create a Sunni statelet in Iran’s path. Obsessing over this vague land corridor notion can put the United States on a perilous path to another Middle East entanglement.

The lack of hostilities between the United States and Iran in eastern Syria in the last three months is hopefully a sign that cooler heads prevailed, but the unpredictability of the Trump White House could produce another escalation so long as wary policy circles continue to stoke the fears.

Before letting this theory drive U.S. policy, we must consider whether such a path to the sea is a top Iranian priority. There are three primary reasons to think not.

First, Iran already sends fighters and supplies to Syria and Hezbollah on a significant scale. Improving Iran’s transportation logistics through Syria to Lebanon is not, in itself, a convincing motive.

Second, a land corridor from Iran to the Mediterranean--the Baghdad-Damascus highway-- existed from 2003 until almost 2013, until the Islamic State cut the link. It was not a game-changer then. What would make it so now?

Third, a new corridor would pass hundreds of miles through Iraq under the watch of the U.S. military, Sunni tribes, Islamic State sleeper cells, and former insurgents. It is unlikely to be safer or more convenient than current air or sea alternatives.
There are five more likely explanations for the movements by Iran’s affiliates.

In northern Iraq, Shia militias have been working to establish a strong presence that keeps Islamic State remnants from regrouping. That area south of Mosul was a staging ground for the group before Mosul’s fall in June 2014. So much so, it earned the nickname “Tora Bora” by dispirited Iraqi crews struggling to defend nearby strategic oil pipelines. Baghdad’s announcement this week of plans to repair the export pipeline to Turkey makes securing this area a priority.

Further, Iran may consider it advantageous to establish a base west of Mosul close to KRG areas, in order to apply further pressure on the KRG and prevent them from incorporating these territories into a future independent Kurdistan. Following the Kurdish independence referendum, which Iran strongly condemned, this element will likely receive more emphasis as Iran seeks to deter the KRG from taking further steps toward secession from Iraq.

There may have been two counter-Turkish objectives in the minds of Iranian and militia planners. An outpost west of Mosul can enable Iran to support the nearby Kurdistan Worker’s Party (PKK)-affiliated Syrian Kurds who are under threat from Iran’s rival Turkey. Ironically, these are the same Syrian Kurds the United States considers allies. Moreover, an Iranian outpost there would counterbalance Turkish military presence in Bashiqa to the north of Mosul. It would allow Iran to have a say in Mosul’s future, perhaps to deter a push for autonomy by Sunni politicians backed by Turkey and Gulf Arab states.

These two considerations may become, at least temporarily, less important as Iran and Turkey explore joint action to punish the KRG and prevent its secession from Iraq. Their strategic value, however, cannot be overlooked.

Finally, if Iran can claim some credit for helping Iraq and Syria defeat the Islamic State and reclaim control over their borders, it could improve Iran’s - and its proxies’-image in the region.

The United States could be concerned that Iran’s actions are shoring up Tehran’s allies and working against the interests of U.S. regional allies. But, Washington needs to remember that even if a land bridge from Iran to Syria is Iran’s goal, such a bridge existed before today. It would be a manageable geographic nuisance the United States could learn to mitigate, preferably by working with Iraqis on their side of the border.

Monday, July 3, 2017

Qatar blockade fallout? Plans to convene divided Sunnis in Baghdad hit by boycott

Internal divisions among Iraq’s Sunni Arabs continue unabated as Iraq gears up for elections next year. Sunni Gulf States all have their respective allies among Iraqi Sunnis and the Saudi-led blockade of Qatar may have contributed to further deepening those divisions.

A string of conferences to foster cohesive Sunni position failed over the last few years. Efforts to hold two more conferences, this time inside Iraq, appear to have already faltered, creating recrimination instead of cohesion.

One of the events was planned to be held in Erbil. Baghdad, in a remarkable reversal of traditional government opposition, was to host the other. Both are being boycotted by influential Sunni politician and financier Khamis al-Khanjar. Others boycotting include Jamal al-Dhari, the young and ambitious nephew of the late chief of the Association of Muslim Scholars.

Both Khanjar and Dhari are thought to be closely associated with Qatar. This may be the reason that chameleon Sunni politician Mishan Jubouri (currently a friend of Iran) last week praised their decision to boycott the meetings and condemned the organizers as trying to use sectarianism to consolidate political gains. Mishan recently said he was ready to recruit thousands to fight to defend Qatar against Saudi aggression.

On the one hand, there is a sign of a promising opening in relations between the mainstream Sunnis in parliament and the government of PM Haider al-Abadi. Reportedly the government not only agreed to host the conference, but also instructed courts to review the cases of wanted Sunni leaders Tariq Hashimi and Rafi Issawi to allow them to attend the meetings.

But on the other hand this boycott promises more infighting that’s bound to get uglier as Iraq gets closer to elections.