Iraq and the Kurds: The High-Stakes Hydrocarbons Gambit

INTERNATIONAL CRISIS GROUP - NEW REPORT





Iraq and the Kurds: The High-Stakes Hydrocarbons Gambit


Middle East Report N°120

19 Apr 2012





EXECUTIVE SUMMARY AND RECOMMENDATIONS



A simmering conflict over territories and resources in northern Iraq is slowly coming to a boil. In early April 2012, the Kurdistan regional government (KRG) suspended its supply of oil for export through the national Iraqi pipeline, claiming Baghdad had not fully repaid operating costs to producing companies. The federal government responded by threatening to deduct what the oil would have generated in sales from the KRG’s annual budget allocation, potentially halving it. This latest flare-up in perennially tense Erbil-Baghdad relations has highlighted the troubling fact that not only have the two sides failed to resolve their differences but also that, by striking out on unilateral courses, they have deepened them to the point that a solution appears more remote than ever. It is late already, but the best way forward is a deal between Baghdad and Erbil, centred on a federal hydrocarbons law and a compromise on disputed territories. International actors – the UN with its technical expertise, the U.S. given its unique responsibility as well as strategic interest in keeping things on an even keel – should launch a new initiative to bring the two back to the table.



Each side has its narrative, based on history, accumulated grievances and strong sense of entitlement. For now, neither is inclined to settle the conflict peacefully through serious, sustained negotiations, as each believes its fortunes are on the rise, and time is on its side. They are wrong: time is running out, as unilateral, mutually harmful moves are pushing the relationship to the breaking point, with the hydrocarbons-driven stakes and attendant emotions so high that conflict looks more promising to them than accommodation and compromise.



The two unwilling partners in an Iraqi enterprise born of colonial machinations – Arabs and Kurds – have spent 90 years in unhappy cohabitation. Kurds have waited for the moment when they will succeed in removing the shackles of an overbearing, at times highly repressive, central state. They know that when Baghdad is weak, they can take steps to bring their dream of statehood closer to reality, but that when the centre is strong it will use its superior resources to push them back into their place – or worse. This is why the Kurds are so alarmed at attempts by Prime Minister Nouri al-Maliki to amass power at the expense of his rivals and rebuild a strong state, armed with U.S. weaponry, under his unchallenged control.



Ever since arriving in Baghdad on the coattails of the U.S. invasion in 2003, the Kurds understandably have used their new position and the centre’s weakness to develop their own region. They seek to reverse a legacy of discrimination and economic neglect but also to create an escape route should relations with Baghdad sour beyond repair. Yet, in many ways, this approach contains elements of a self-fulfilling prophecy: by pressing their advantage, Kurds inevitably aggravate matters, convincing the federal government that they are aiming for secession – and aiming to take with them a good chunk of disputed territory that Kurds claim as historically part of a notional Kurdistan but that also appears to be immensely rich in oil and gas.



Perhaps most worrying to Baghdad, Kurdish leaders have lured international companies to explore and exploit the region’s suspected hydrocarbons wealth. Nor have they stopped at the Green Line that divides their region from the rest of Iraq; instead, they have signed contracts for acreage located squarely in disputed territories. The latest (and largest) to agree to play this game was ExxonMobil, which arrived on the scene in October 2011, taking six blocks, two of which, along with a corner of a third, lie across the Green Line. It thus placed itself at the heart of the conflict, potentially accelerating the centrifugal forces that are tearing at the Iraqi fabric. While ExxonMobil may have calculated that by doing so it could help bring Baghdad and Erbil to the table and effect progress on a federal hydrocarbons law, the likelier outcome is that both sides will further entrench their positions, thus increasing the chances of violent conflict. From Baghdad’s perspective, the Kurds are making mincemeat of any attempt to have a unified federal oil strategy; increasingly, it views them as untrustworthy partners in government who are seeking to break up the country.



But the Kurds face a problem. While they pursue an independent oil policy and have taken important steps toward that end by drafting their own oil law in 2007 and signing over 40 contracts with foreign oil companies without Baghdad’s input or approval, they lack the means to export their oil without Baghdad’s help and therefore its permission. To date, the federal government has used its control over the national pipeline network, as well as its hold on the treasury and budget, to rein in the Kurds’ ambitions.



Hemmed in by Baghdad and anxious to become economically self-sufficient, Erbil is turning its eyes to another potential outlet for its oil: Turkey. Masoud Barzani, the Kurdish region’s president, reportedly told foreign visitors to his mountain redoubt that if Maliki remains in power beyond the 2014 parliamentary elections, the Kurds would go their own way. Not coincidentally, 2014 is when the Kurdish region expects to complete construction of its own strategic oil pipeline, one that skirts (federal government) Iraqi territory before reaching the border with Turkey. For Kurdish leaders, economic dependency on a democratic neighbour with an attractive window on the West is far preferable to a continued chokehold by a regime displaying authoritarian tendencies – all of which raises the question of what Ankara would do if the Kurds ask it to take their oil without Baghdad’s approval.



Turkey’s main objective in Iraq has been to keep it unified. To this end, it has undertaken economic steps since 2007 that would bind the country’s various parts into an economic union, hoping that politics, especially the relationship between Baghdad and Erbil, would follow suit. It also has encouraged both sides to agree to a federal hydrocarbons law, the added benefit of such legislation being that energy-poor Turkey could import oil and gas from Iraq’s immense southern fields, as well as from the Kurdish region, coming closer to fulfilling its aspiration of becoming a major transit corridor for regional hydrocarbons. The Kurds hope, however, that Turkey’s thirst for oil and gas will align with their own thirst for statehood.



Ankara is unlikely to shift course, frustration with its neighbour’s failure to agree on oil legislation and its eagerness to purchase oil and gas from the Kurdish region notwithstanding. Ideally, it would import Kurdish products without jeopardising its relationship with Baghdad, though that seems beyond reach.



The Kurds have not lost hope. As they see it, a regional crisis – such as war between Iran and the U.S. or the break-up of neighbouring Syria – might constitute a game-changing occurrence, persuading Ankara to risk its relations with Baghdad in exchange for energy security and a stable (Kurdish) buffer against an unpredictable, possibly chaotic, suspiciously pro-Iranian and increasingly authoritarian Arab Iraq. But such scenarios might not unfold and, for a multitude of reasons, one must hope they do not. The answer to the current impasse, in other words, is not to wish for a cataclysmic event with potentially devastating repercussions for all. It is not to bank on the central Iraqi government surrendering resource-rich territories it deems its own and has the means to hold on to by force. And it is not to gamble on a radical move by Turkey toward a separate deal with the KRG when Ankara has its own, deep-seated fears concerning a potentially newly invigorated Kurdish population on its own territory.



For Baghdad and Erbil, reaching a deal will be very difficult. But the alternatives surely would be far worse.



RECOMMENDATIONS



To the Government of Iraq and the Kurdistan Regional Government (KRG):



1. Reduce tensions and improve the environment for resolving differences by:



a) re-committing publicly to a negotiated solution to the status of disputed internal boundaries and the conflict over oil and gas contracts;



b) agreeing to take no further unilateral steps in disputed territories, such as issuing new oil and gas contracts; and



c) refraining from inflammatory rhetoric concerning mutual relations, the status of disputed internal boundaries and the issuance of oil and gas contracts in disputed territories, especially (in the Kurds’ case) in the run-up to provincial elections in the Kurdish region on 27 September 2012.



2. Work, along with other Iraqi parties and alliances, toward the success of a planned but delayed national conference regarding a practicable power-sharing arrangement in Baghdad.



3. Resume negotiations promptly on the status of disputed internal boundaries and a federal hydrocarbons law and agree, as part of such negotiations, to open channels of communication and coordinated action, including:



a) a channel for frequent communication between Prime Minister Nouri al-Maliki and KRG President Masoud Barzani or their designated senior representatives; and



b) the appointment of a non-voting official from each side to, respectively, the Iraqi cabinet and the KRG’s council of ministers to promote early flagging of disputes.



To the Government of Iraq:



4. Speed up payments to producing companies operating in the Kurdish region, as agreed.



5. Refrain from inflammatory rhetoric toward Turkey.



To the Kurdistan Regional Government:



6. Resume export of oil through the Iraqi national pipeline at agreed volumes.



To International Oil Companies:



7. Refrain from signing contracts with either the government of Iraq or the KRG for acreage located in disputed territories; and suspend all operations in disputed territories until the status of internal disputed boundaries has been resolved.



To the Government of Turkey:



8. Refrain from inflammatory rhetoric toward the Maliki government, continue to emphasise Turkey’s interest in the unity of Iraq and engage with the Maliki government and the KRG to assist them to come to an agreement over the status of disputed internal boundaries and a federal hydrocarbons law.



To the UN Assistance Mission for Iraq (UNAMI):



9. Revive the high-level task force, at least to address flare-ups along the trigger line; support negotiations between Iraqi stakeholders on disputed internal boundaries by providing technical expertise and political advice at all levels; and propose specific confidence-building steps in the disputed territories based on its April 2009 report.



10. Should these negotiations reach a dead end on their individual tracks, move Iraqi stakeholders toward a grand bargain combining the issues of power, resources and territories, as proposed in the mission’s April 2009 report.



To the U.S. Government:



11. Support the early start of negotiations between the Iraqi government and the KRG on the status of disputed internal boundaries and a federal hydrocarbons law and provide full financial and diplomatic backing to UNAMI in mediating stakeholder talks.



12. Use military assistance (equipment and training) as leverage to press the Iraqi government and the KRG to refrain from unilateral steps in disputed territories, including by army and Kurdish regional guard units or by issuing oil and gas contracts; and strengthen mechanisms aimed at improving communications and security cooperation to reduce chances of violent conflict.



13. Announce and reaffirm publicly its policy of advising international oil and gas companies not to sign contracts for acreage located in disputed territories, and persuade those that have signed such deals to suspend all operations in disputed territories until the status of internal disputed boundaries has been resolved.



Baghdad/Erbil/Washington/Brussels, 19 April 2012


http://www.crisisgroup.org/en/publication-type/media-releases/2012/mena/iraq-and-the-kurds-the-high-stakes-hydrocarbons-gambit.aspx?utm_source=iraqemail&utm_medium=mr&utm_campaign=mremail