The escalating rift between Iraqi Kurdistan and the central government over oil rights could spark renewed violence and threaten regional stability, experts have warned.
In April, the Kurdistan Regional Government (KRG) sold its oil cargo on international markets via Turkey for an estimated $22 million.
Pumped from Kurdistan’s Taq Taq oilfield, owned by Anglo-Turkish firm Genel Energy, the 30,000 tonne cargo was trucked over Iraq’s northern border with Turkey.
It was the first time that Northern Iraq’s crude has been sold on the international market without Baghdad’s involvement.
The Federal Iraqi government argues that only the State Oil Marketing Organisation has the right to sell oil internationally, while Iraq’s deputy prime minister for energy affairs Hussein al-Shahristani has accused KRG of “smuggling.”
The Kurds on the other hand say their right to oil exports is enshrined in Iraq’s federal constitution.
Controlling the oil sector lies at the heart of Iraqi Prime Minister Nouri al-Maliki’s plans to stabilise the economy and fund a major spending outlay in 2013.
The US supports al-Maliki and blames Kurdistan’s future pipeline plans for creating conditions for economic unrest in Iraq. Others argue the central government’s fiscal mismanagement has a large part to play.
Kenneth Pollack, a senior fellow in the Saban Center for Middle East Policy at the Brookings Institution, said: “It is certainly a stark challenge to PM Maliki’s conception of federalism and to his efforts to consolidate power. And it represents yet another step down the road of political crisis; a road that has proven hard for Iraqis to exit and the end of which may be renewed conflict.”
The administration in Erbil, Kurdistan’s capital, has been trucking small volumes of oil to neighbouring Turkey in exchange for petroleum products, such as gasoline to meet local consumption needs.
April’s cargo represented about a quarter of the volume Kurdistan exported via the federal Iraq-controlled Kirkuk-Ceyhan pipeline last year before they were halted after a payment dispute with Baghdad.
Raad Alkadiri, partner and head of markets and country strategies at PFC Energy, said: “It has little to do with boosting GDP or financial issues – Baghdad cannot spend the money it already gets. This is about precedent and what it means for what is and has been the most divisive political dispute in Iraq since 2003, namely the question of decentralization.”
Meanwhile, Siddik Bakir, energy analyst for the Middle East and South Asia at IHS Energy in London, said: “While Kurdish oil exports still represent comparatively small volumes, the KRG is making a point: no matter what, its oil will be sold to the market.
The KRG has publicly agreed to share its revenues with Baghdad as per the constitution. “But if nobody is willing to sit down at the negotiation table with the Kurds to sort out the oil payment dispute (let alone grander issues such as the lack of national oil law, the budget allocation of the Kirkuk question),” said Bakir, “then the federal Iraqi government will eventually fail to benefit from Kurdistan’s independently progressing oil and gas production and export capacity.”
The standoff between Erbil and Baghdad is also causing concerns for wider regional tensions as Turkey seeks greater energy independence away from what it views as costly oil and gas imports from Iran, Russia and Azerbaijan.
Turkey hopes that its energy-links with the KRG may shift the regional power dynamics in its favour.
Tamsin Carlisle, senior editor at energy intelligence firm Platts in Dubai, said: “Russia and Iran have been gouging Turkey over gas supplies, which is seriously hurting the Turkish economy. At the same time, Ankara needs to resolve its long-standing political conflict with Turkey’s large ethnic Kurd minority.”
Carlisle added that increasingly, Sunni- dominated regions of northern and western Iraq are looking enviously at the relative security and economic prosperity of the Kurdistan region, which that makes the country ever harder to govern without grass-roots political change.
Genel Energy expects to export oil by pipeline from its fields in Iraqi Kurdistan by the summer of 2013, and has so far said it will continue despite the political impasse between Baghdad and the semi- autonomous region.