Commentary

Iraq, Turkey and the New Kurdistan Pipeline Deal

Foreign Reports Bulletin

Nathaniel Kern, Matthew M. Reed

Last month Iraqi crude exports rose to their highest levels since 1990, averaging 2.51 million barrels per day (b/d), according to Iraq’s State Oil Marketing Organization (SOMO). April levels surpassed March exports by 200,000 b/d and SOMO reports that total revenues amounted to $8.8 billion. Newly commissioned export terminals are responsible for the increase; bottlenecks are no longer a problem for southern oil fields thanks to new export terminals. Iraqi exports surged in spite of the loss of Kurdish oil, which was halted by the Kurdistan Regional Government (KRG) on April 1.

Exports Halted by Kurdistan

The KRG accuses Baghdad of refusing to pay for oil exports which have passed through pipelines owned by the central government since May 2011. In keeping with the current revenue-sharing agreement, the KRG is due 17 percent of total oil revenues exported by Iraq and Kurdistan. Iraq’s oil and finance ministries, for their part, claim the payment delay is a result of pending audits and disputed deals made between the KRG and international oil companies.

The central government has cut off sales of domestically refined petroleum products to Kurdistan. Baghdad is also trying to curb investment in Kurdish territories. Foreign contractors operating in the north are now being squeezed by the central government, which refuses to pay them. Most recently, Baghdad inserted new language into exploration and productions contracts that forbids companies from signing deals with Kurdistan.

Speaking at an energy conference in Erbil on May 20, KRG Minister of Natural Resources Ashti Hawrami claimed that every governorate in Iraq has the right to export its own oil and gas without going through SOMO, Iraq’s state-owned oil marketing company. “SOMO is an instrument of the power of Saddam Hussein in the 1980s to get all the money,” Hawrami declared. “SOMO’s role cannot continue it its current form.”

Kurdish Production as of 2012

According to Hawrami, total KRG production capacity is now close to 300,000 b/d, while domestic consumption in Kurdish territories is about 100,000 b/d. The KRG can theoretically exceed the 175,000 b/d average that Iraq’s 2011 export agreement planned for if these estimates are correct. Also in May, officials confirmed plans to renovate and return to service a 46” pipeline connecting Kirkuk to Ceyhan on the Turkish coast.

A 40” pipeline connecting Kirkuk to Ceyhan is already active but the 46” pipeline, which the Kurds want to restore, has been shut down since 1990, when Iraqi crude exports were temporarily halted following Saddam’s invasion of Kuwait. Hawrami insists the KRG still wants to export under SOMO’s direction if revenue-sharing is restarted. The deal was reached without Baghdad’s consent.

The Turkish pipeline deal will allow the Kurds to export up to one million b/d through the renovated pipeline. But it might also make reconciliation between Erbil and Baghdad harder to achieve. A spokesman for Prime Minister Nouri al-Maliki insisted on May 22 that any deal would require Baghdad’s approval. It is unclear how the central government would prevent the pipeline from being renovated or oil from being transported once complete.

Tensions Abound

Prime Minister Maliki acted swiftly after U.S forces departed in December 2011. His relations with various groups inside Iraq have deteriorated accordingly, as his moves have been interpreted by many as politically motivated. In December, Sunni Vice President Tareq al- Hashemi was charged with running death squads. His bodyguards and other associates are already facing trial. Hashemi, now a fugitive in Turkey, refuses to be tried in Baghdad because the judiciary is closely aligned with the prime minister’s office. Also in December, Maliki withdrew confidence from Saleh al-Mutlak, his Sunni deputy.

The prime minister’s treatment of the Independent High Election Commission raised concerns as well. The head of the commission, Faraj Haidari, was arrested on April 13 on trumped up corruption charges. Populist cleric Muqtada al-Sadr and others criticized Maliki for pursuing the case. Members of parliament aligned with Maliki have also called for Parliamentary Speaker Osama Nujayfi to face a no-confidence vote.

Ultimatum Sent to Maliki

Pushback was inevitable. On April 28, Kurdistan Regional President Massoud Barzani brought Kurdish political leaders together with Iyad Allawi of Iraqiya, Speaker Nujayfi, and Moqtada al-Sadr to sign a letter of demands addressed to the prime minister. Included was a threat to begin the process of voting Maliki out of office if he failed to address their concerns. May 13 was set as the deadline for Maliki’s response.

On May 9, Maliki gave a feisty interview to Iraqiya television in which he outlined four options to deal with the current political crisis. The first option was to hold a national reconciliation conference under terms set by Maliki. The second was to call on the parliament to vote for a new President and Speaker, presumably giving the Shi’a majority total control over all top posts. The third option was holding early parliamentary elections. Maliki then admitted his fourth option— suspending the constitution—would be a “disaster.” “This option is not good. It is a disaster,” Maliki said. “However, they are the ones who are leading the country to this disaster.”

The No-Confidence Vote

Any no-confidence vote would require a parliamentary majority. Key elements of the Shi’a National Alliance would have to withdraw their support, thus collapsing Maliki’s ruling coalition. The National Alliance was formed in July 2010 between Ammar Hakim’s Iraqi National Alliance and Maliki’s State of Law party. It constitutes the largest bloc. Without it, Maliki’s party controls only 89 seats out of 325. The titular head of the National Alliance, former Prime Minister Ibrahim Jaafari, is a Maliki rival—but there is no sign of any split between the two parties.

Although Sadr signed the April letter addressed to Maliki, the Sadrist Trend, which controls 40 seats in parliament, is closely aligned with Iran and probably unwilling to abandon a prime minister favored by Tehran. Most recently, Sadr had to deny reports that he had already chosen a candidate from his party to replace Maliki. The recent fracturing of Iraqiya—Iyad Allawi’s party, which won the most seats in 2010 with 91—also makes a no-confidence vote unlikely, perhaps impossible. 19 members of parliament who were part of Allawi’s initial bloc recently signed a declaration of solidarity with Maliki regarding the Kurdish question.

Maliki has systematically alienated his opponents but blocs opposed to the prime minister remain disorganized and unable to reconstitute themselves so as to threaten him.

Erdogan and Maliki Trade Barbs

Maliki’s relationship with Turkish leaders has also suffered in recent weeks. The war of words between Maliki and Prime Minister Recep Tayyip Erdogan of Turkey began in earnest on April 19. After a closed-door meeting with Kurdish President Barzani, Erdogan accused Maliki of monopolizing power. “The developments in Iraq are not good signs, especially the current prime minister’s behavior towards his coalition partners,” Erdogan said, according to Turkish media. “His self-centered ways and his challenges to the structures on Iraq are seriously disturbing Shi’a groups, Mr. Barzani, and al-Iraqiya.”

The next day, Maliki accused Erdogan of “interfering in Iraqi internal affairs.” “Mr. Erdogan is still living the illusion of regional hegemony,” Maliki asserted. On May 19, hundreds of protestors in Basra burned Turkish flags and called for Turks to leave Iraq. Deteriorating relations between Ankara and Baghdad probably accelerated cooperation this year between Kurdistan and Turkey. The new pipeline deal appears to be a natural consequence of this fallout.

Pipeline Politics

KRG President Massoud Barzani visited Turkey in April after all exports of Kurdish crude were halted. He met with Prime Minister Erdogan, Foreign Minister Ahmet Davutoglu, and President Abdullah Gul. Barzani’s nephew, KRG Prime Minister Nechirvan Barzani, visited Ankara a month later and met with all three officials as well as Turkish Energy Minister Taner Yildiz.

On May 20, Yildiz stood side-by-side with Hawrami, Kurdistan’s Minister of Natural Resources, at an energy conference in Erbil. There it was announced that the KRG plans to restore the 46” pipeline and export oil to the Mediterranean port of Ceyhan by mid-2013. Yildiz and Hawrami also announced a new barter arrangement. Kurdish oil will be trucked across the border where it will be refined in Turkey and ultimately returned to Kurdistan. “We are trying to compensate [the ban on refined products] by expanding our refineries,” Hawrami said at the conference. “But if we cannot expand them fast enough, we will send oil outside the country for refining. It is our right. We will not wait for our people to starve.”

Once active the million b/d pipeline will give Turkey direct access to Kurdish oil. The deal should become more lucrative if Kurdish exports increase as expected. If and when the KRG begins exporting large volumes by pipeline to Ceyhan, which could take more than a year, Hawrami promised that the Kurds will deduct 17 percent of its revenue for its own account before passing over the balance to the Iraqi treasury.

Baghdad will not endorse Hawrami’s offer even though it was made in the spirit of the 2011 export agreement. Oil deals remain a key measure of authority in post-war Iraq. As a result, Maliki is unwilling to cede any ground. The only solution would be a new hydrocarbon law. But the deepening political crisis remains a major obstacle to any comprehensive agreement.

 

Foreign Reports is a Washington, D.C.-based consulting firm that writes and distributes timely intelligence reports on political developments in the Middle East relevant to oil markets. Oil companies, governments, and financial institutions rely on Foreign Reports for their insight and analysis on key issues affecting the world generally and the Middle East specifically. The firm was founded in 1956 and the current President is Nathaniel Kern.