The Kurdish Referendum Could Reshape Oil Markets

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By Gregory Brew, Oilprice.com

Iraq, the second-largest OPEC producer, may be facing a significant disruption to its oil exports this month. On September 25, citizens of the northern region of Kurdistan, a semi-autonomous area of Iraq, will vote in a referendum for national independence.

If the referendum passes, as it is expected to, Kurdistan could begin proceedings to proclaim formal independence from Iraq, splitting the country in two. On Monday, the Iraqi prime minister Haider Al-Abadi called on the vote to be suspended until after the war against the Islamic State (IS) is concluded.

Oil is at the center of it all. Kurdistan itself is rich in oil, possessing reserves equal to 45 billion barrels, and could potentially become a larger producer than Nigeria. According to figures from the KRG, Kurdistan currently exports about 600,000 barrels a day, though that number is difficult to account for. Other reports indicated it exports something closer to 430,000 or around ten percent of Iraq’s total oil exports.

Most Kurdish oil is moved through a pipeline to the Turkish port of Ceyhan. Since 2014 the KRG has attracted investment from ExxonMobil, Chevron and Total SA.

Production has suffered since the collapse in oil prices in 2014, and managing the country’s oil industry has been a challenge since the Islamic State (IS) seized about a third of Iraq, including the city of Mosul near the Iraqi-Kurdish border. The KRG has been plagued by high costs, rising debts and falling production from some of its developed fields.

Yet the most persistent oil problem for the KRG has been its relationship with Baghdad. According to the Iraqi constitution, revenues from oil exports are to be shared between Baghdad and the KRG, based in the Kurdish city of Erbil. But the Kurds have long felt this relationship to be unfair and have sought ways to develop oil resources independently from Baghdad.

The KRG first began offering oil contracts to foreign companies in 2007, against the wishes of the central government in Baghdad. In 2014 the Iraqi government threatened to sue any company that bought Kurdish oil without first going through the authorities in Baghdad.

While the war against IS brought challenges to the KRG, it also provided them with opportunities. As the Iraqi military was routed by IS forces, Kurdish troops became instrumental in retaking lost territory. The city of Kirkuk, near the border of the KRG’s territory, has been occupied by Kurdish troops since 2014. Massive oil fields located just to the West of the city have also been occupied, and the Kurdish troops have yet to withdraw. With the Kurds ensconced in Kirkuk, the Iraqi central government currently controls less than half of the country’s oil reserves.

A key aspect of the referendum is cementing the Kurdish claim to Kirkuk and its adjacent oil fields.

There are significant barriers to an independent Kurdistan. The referendum has very little international support, and the United States, the EU and others have come out against it. It faces vigorous opposition in Baghdad, where the prime minister of Iraq Haider al-Abadi calls it “unconstitutional and illegitimate.”

Turkey, Iran and the Assad regime in Syria are all staunchly against the referendum: with significant Kurdish minorities within their own borders, they worry what an independent Kurdish state could do to regional stability.

While Iran enjoys political influence inside Iraq, the country with the most influence over the KRG is Turkey. The country has a large Kurdish minority and has a vested interest in preventing an independent Kurdistan from becoming a reality. It is also the chief transit nation for Kurdish oil to escape the land-locked KRG area. Should the Turks choose to shut down the Ceyhan pipeline, the KRG would have no export capacity. It therefore seems unlikely that the Kurds will do anything that might overly upset the Turks.

There is also evidence to suggest that the vote is chiefly a political ploy by the Kurdish Regional Government (KRG) and its governing party the Kurdistan Democratic Party (KDP), designed to put pressure on the Iraqi government and bring about new negotiations regarding Kirkuk, oil revenue sharing and the broader parameters of Kurdish independence.

Domestic Kurdish politics is also a factor. Kurdish president Massoud Barzani has exceeded his term in office and will be stepping down before elections in November. But before he does, Barzani wishes to begin the process of bringing full Kurdish independence.

The referendum may not be intended to lead to an independent Kurdistan right now, despite Kurdish rhetoric to that effect, but rather show Kurdish conviction and strengthen their demand to be taken seriously by Baghdad. As they control half the country’s reserves, it’s possible the Kurds may maneuver to collect half the receipts from Iraqi exports.

This interpretation makes sense, given the world oil situation. With prices still hovering at or below $50 and the Kurdish economy weakened by years of war, the KRG has been unable to pay off its debts to the major oil companies. It has little leverage to sway the Turks, who will shut down all Kurdish exports if the referendum movement goes too far.

The United States, which has been closely allied with the Kurds in the fight against IS, is against the referendum but will likely want to continue developing a relationship with Kurdish groups in Iraq and Syria, as a counter to the rising influence of Iran and Russia. This gives the Kurds some leverage over Iraq, though not enough to pull off full independence.

However, the referendum could have some major ramifications on the geopolitics of the Middle East, as well as the price of oil. Should the dispute between Erbil and Baghdad turn nastier after the vote, it’s possible that either Kurdish or Iraqi oil exports could be disrupted. If the country itself splits in two, it could potentially take hundreds of thousands of barrels-per-day offline and throw Iraq back into chaos.

Yet if the Kurds are able to successfully leverage the vote into better terms from the Iraqis, it could presage the arrival of a new major oil producer onto the world scene. As Bloomberg points out, if the KRG were to become an independent nation, it would probably immediately qualify for OPEC membership, and become a major oil producer almost immediately.

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