Iraqi oil sector faces prospect of independent Kurdistan

With Islamic militants around Mosul, sectarian tensions elsewhere and the threat of an independent Kurdistan region undermining investment and development of Iraq’s oil sector, the country’s main economic driver is under threat.

al-monitor A view shows the Bai Hassan oilfield northwest of Kirkuk, July 12, 2014.  Photo by REUTERS/Ako Rasheed.

Topics covered

oil & gas, kurds, kurdistan regional government, kurdish oil, kirkuk, iraq, independence

Jul 21, 2014

Iraq has been suffering a continuous series of political crises since the 1980s — the most recent of which include the possible secession of the Kurds to establish an independent state that may (or may not) include Kirkuk, the outbreak of civil war and insurgents’ control over oil fields and facilities. 

These crises affected the Iraqi people, the economy and in particular the oil sector, which became a major target for destruction to weaken Iraq. The political-oil challenges included, notably, the Kurds’ call to vote on self-determination and the possible secession of the Kurdistan region. In a step that further deepened its dispute with the federal government, the Kurdistan Regional Government (KRG) has been separating its oil sector from the state institutions over the past 10 years. Moreover, following the occupation of Mosul, peshmerga forces were sent to Kirkuk with the consent of Baghdad, at first, to defend it against the Islamic State (IS) and other insurgent forces. However, the KRG started attempting to annex Kirkuk for the Kurdish region. Remarkably, days before the attack of IS on Mosul, the KRG announced a plan to connect the Kirkuk oil field to the Kurdish pipeline to allow the export of oil through the Turkish port of Ceyhan without any prior agreement with the Iraqi federal government.

The Iraqi Constitution is clear, stating that the oil- and gas-producing fields are the property of the federal government. It is worth mentioning that the Kirkuk field started production back in 1927. Oil exports from this field via Turkey were halted in March 2014. In the period leading up to this date, the exports of North Oil Co. (NOC), which operates the Kirkuk fields, fell to about 300,000 barrels per day, compared with a previous export rate of about 700,000-800,000 barrels per day.

The main reason for this is the continuous terrorist attacks against the Kirkuk–Ceyhan pipeline as the increasing acts of sabotage finally made it pointless to continue repairing the pipeline. Moreover, the safety of the oil exports from northern Iraq will remain elusive if the independence of the Kurdish state is declared, especially if said state includes parts of southeastern Turkey. However, the problem not only lies in the transit area of ​​the pipeline, but also in the stability [or lack thereof] of the surrounding area, which could lead to the continuation of sabotage of the pipeline on both the Iraqi and the Turkish sides. 

Wars and conflicts have delayed the development of the oil fields. Indeed, a plan from the 1990s to increase production capacity to about 6 million barrels per day was postponed.

It is worth mentioning that the Iraqi Ministry of Oil had planned to raise production capacity to about 12 million barrels per day by the end of the decade. Yet the achievement of this objective is doubtful. The ongoing conflict and its expected continuation forced some oil companies operating in the country to reduce the number employees in Iraq. Moreover, the policy of stopping gas flaring may be delayed due to insurgents' occupation of fields under development: Akkaz in Anbar and Mansuriyah in Diyala.

The regime’s experience since 2003 led to the isolation of sects and minority communities in their regions. The remaining Iraqis were treated as minorities whose rights might rightfully be marginalized. Since each group is trying to sabotage projects that benefit other sects, we expect the project to build an oil pipeline stretching from Basra to Haditha, in Anbar province, then to the Zarqa refinery in Jordan and from there to the Jordanian port of Aqaba for export to international markets, to witness an additional delay or even to be subject to a reconsideration of its feasibility, since it crosses several areas with conflicting sects.

The postponement of the realization of this vital pipeline, which would provide Iraq with an outlet other than Basra and the Gulf and which supplies Jordan with crude oil, puts Iraq in trouble once again, particularly in terms of the confused status of the Kirkuk-Ceyhan pipeline. Experience has shown the need for several export outlets. The crisis is likely to worsen with the troubles that will take place in Turkey.

Oil projects are designed based on the unity of the country and for the mutual benefit of several areas. For example, the Beiji refinery (the largest and most modern refinery in Iraq) has a capacity of about 290,000 barrels per day and a thermal cracking unit with the capacity of 30,000 barrels per day. It includes a grease refinery with a capacity of 250,000 tons per year, in addition to warehouses and tanks for the transportation of derivatives through pipelines to the warehouse of Hamam el Alil, in Mosul, and the warehouse of Almushahada in Baghdad. The Beiji refinery receives crude oil from its closest field (Kirkuk) and distributes derivatives to the provinces of Salahuddin, Kirkuk, Ninevah, Baghdad and Basra. 

So, what will happen to this refinery if the Kirkuk oil field is taken over by the Kurdistan region? Of course, it is possible to agree to a commercial contract to import Kirkuk oil from Kurdistan state, in the event of its declaration of independence or to build pipelines to deliver oil or derivatives from other Iraqi fields, but with every alternative solution comes extravagant expenses.

There are also several oil fields that stretch across provinces and regions. Their geological features have nothing to do with the administrative division. The fact that the field crosses two provinces or more creates legal disputes about ownership, which causes delay in terms of development until a common agreement is reached. Moreover, the KRG awarded contracts for research and exploration to international oil companies outside its borders. For example, six contracts were awarded to Exxon-Mobil. Two of these contracts were concluded over the disputed areas of Alqosh and Pirmam. The disputes are internal so far, but what if the Kurdistan Region is separated?

The weakening of Iraq is an opportunity for others to exploit. The assistant secretary of Iran's oil minister in international affairs and business, Ali Majidi, said, “Iran is ready to quickly compensate for the Iraqi oil if it is no longer available in the international market in the event Baghdad was forced to stop its supplies,” according to IRNA, Iran’s official news agency. Majidi’s statement is surprising in terms of its timing on the one hand and the extent of its credibility on the other, especially given that the entirety of Iraq’s exports come from the south, which maintain a rate of around 3 million barrels per day.

There is no doubt that the Iranian official was aware of the political situation of the south, which makes his statement surprising. It is also strange that Iran [says it] can increase its production to about 4 million barrels per day, despite its average oil production rate during the period 1960-2014 being less than 3 million to 3.6 million barrels per day, and it has been unable to reach a rate of 4 million since the Islamic Revolution.

Iran's statement about rivalry with Iraq, even before a halt of oil exports from the south, is a rude challenge from a sister state and an exaggeration of the figures that does not fool international oil companies.

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More from  Walid Khoudouri