Superpower Struggle Puts Iraqi Kurdistan's Oil Autonomy at Risk
It has been over two years since the Baghdad-based Federal Government of Iraq (FGI) placed an embargo on independent oil exports from the Erbil-based Kurdistan Region of Iraq (KRI). The legal basis for the halting of these essential flows to the finances of the semi-autonomous region of Kurdistan was the International Chamber of Commerce's (ICC) order that they would not be resumed until Turkey paid the FGI the US$1.5 billion in damages for these allegedly unauthorised oil exports over many previous years. That said, the real reason why the FGI moved to stop the KRI's independent oil sales is simply that it wants to remove any independent status from the region and roll it into the rest of Iraq as just another province like any other. Baghdad has correctly identified the best way of doing this as cutting off the KRI's key source of revenue through which it finances its semi-autonomous status – revenues from independent oil sales. Early in his new office, Iraq's Prime Minister Mohammed Al-Sudani carefully laid out this as being Baghdad's plan when he introduced the new Unified Oil Law being drafted at the time. He said that it would be run in every respect out of Baghdad, that it will govern all oil and gas production and investments in both Iraq and its semi-autonomous Kurdistan region, and that it will constitute 'a strong factor for Iraq's unity'.Unsurprisingly, the great global powers have their own views on whether the KRI should lose its semi-independent status and be subsumed into a greater Iraq. To begin with, both the U.S. and its allies, and China and its allies, know that Iraq as a whole is full of oil (and associated gas). The FGI side officially holds a very conservatively-estimated 145 billion barrels of proved crude oil reserves (nearly 18% of the Middle East's total, and the fifth biggest on the planet), according to the Energy Information Administration. Unofficially, it is extremely likely that it holds much more oil than this. In October 2010, Iraq's Oil Ministry increased its own official figure for the country's proven reserves but at the same time stated that Iraq's undiscovered resources amounted to around 215 billion barrels, as analysed in full in my latest book on the new global oil market order. This was also a figure that had been arrived at in a 1997 detailed study by the respected independent oil and gas firm Petrolog. However, even this did not include the KRI's actual and potential oil reserves. As the International Energy Agency highlighted at the time, before the relatively recent rise of exploration activity in the semi-autonomous region, more than half of the exploratory wells had been drilled prior to 1962 -- a time when technical limits and a low oil price gave a much tighter definition of a commercially successful well than would be the case today. Based on the previous limited exploration and development of oil fields in the KRI area, the proven oil reserves figure was first put at around 4 billion barrels. This was subsequently upgraded by the KRG to around 45 billion barrels but, again, this may well be a very conservative estimate of the oil resources there.
Additionally important to both sets of superpowers is Iraq's geographical and geopolitical importance, located as it is in the heart of the world's greatest hydrocarbons region. In the former's case it is a key link in the land bridge from the Asia-Pacific region into Europe and in the case of the latter it is a core part of the Shia Crescent of Power dominated by Iran as a counterpoint to the Sunni style of Islam championed by Saudi Arabia. Given these factors, the stakes for both the West and the East in winning the most influence in the country – north, south or combined – are exceptionally high. To put it plainly: the U.S. and its key allies want the KRI to terminate all links with Chinese, Russian and Iranian companies connected to the Islamic Revolutionary Guards Corps over the long term, a senior source who works closely with the European Union's (E.U.) energy security complex exclusively told OilPrice.com recently. 'This could then be used as a bridgehead to reassert the West's influence in the rest of Iraq through big investment deals firstly, and then related infrastructure developments,' he added. The most notable such deal in the south of Iraq so far is TotalEnergies' US$27 billion four-pronged deal, including the cornerstone Common Seawater Supply Project, analysed fully in my latest book. In the north, BP's US$25 billion deal across five major oil fields is similarly strategically vital for the West's future plans. The U.S. and Israel also have a further strategic interest in utilising the Kurdistan Region as a base for ongoing monitoring operations against Iran, according to the E.U. source. On the other side of the equation, China and Russia have long been behind the idea of subsuming the KRI into the wider Iraq. As a senior political source in Moscow exclusively told OilPrice.com many months ago: 'Iraq will be one unified country and by keeping the West out of energy deals there, the end of Western hegemony in the Middle East will become the decisive chapter in the West's final demise.'
Legally speaking, Iraq's 2005 Constitution cannot settle the matter of whether the KRI or FGI has the predominant rights over revenues from oil drilled in the KRI's area. According to the KRG, it has authority under Articles 112 and 115 to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 -- the year that the Constitution was adopted by referendum. In addition, the KRG maintains that Article 115 states: 'All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organised in a region.' As such, the KRG maintains that, as relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive revenue from its oil and gas exports. Additionally, it argues the Constitution provides that, should a dispute arise, priority shall be given to the law of the regions and governorates. However, the FGI maintains that under Article 111, oil and gas are under the ownership of all the people of Iraq in all the regions and governorates, which means they should be controlled by the FGI via the State Organization for Marketing of Oil.
Consequently, given the lack of legal clarity on the issue, the KRI's future looks set to be determined by a straight superpower brawl. China would seem currently to have the advantage in terms of land and resources held. More than a third of all Iraq's proven oil and gas reserves and over two-thirds of its current production are managed by Chinese companies, according to industry figures. In hard numbers, Chinese companies combined have direct shares in around 24 billion barrels of reserves and are responsible for production of around 3.0 million barrels per day (bpd). Additionally, it has developed a spider's web of influence through multiple infrastructure projects that run adjunct to its oil and gas developments, as also detailed fully in my latest book. That said, the U.S. and its allies appear to be picking up the pace on building out their presence across Iraq, too, in line with the aforementioned plan to do so. In addition to the potentially game-changing projects of TotalEnergies and BP, May 19 saw two deals signed by U.S. firms HKN Energy, and WesternZagros, to develop two fields – the Miran gas field and the Topkhana oil and gas field -- in the KRI area. U.S. Energy Secretary Chris Wright was also very clear about the deeper intention behind these deals, saying that they align with the administration's broader strategy of striking commercial deals with allies to counter Iran's influence. By extension, given the extremely strong links between Tehran and Beijing and Moscow, this also means countering China's and Russia's influence across Iraq as well.
By Simon Watkins for Oilprice.com
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