Opinion: Will an Independent Kurdistan Cause a Rift in Oil Markets?

Published September 21st, 2017 - 12:13 GMT
The upcoming referendum on Kurdish independence has the potential to roil both geopolitical alliances and oil markets. (AFP/ File)
The upcoming referendum on Kurdish independence has the potential to roil both geopolitical alliances and oil markets. (AFP/ File)

The Kurdistan Regional Government (KRG) announced that on September 25, 2017, the government would hold a referendum on Kurdish independence. Currently, the KRG has autonomy in the northern areas of Iraq where the population of Iraqi Kurds is greatest, even though that area is technically part of Iraq.

The referendum has the potential to roil both geopolitical alliances and oil markets. The area designated by the KRG for a future, independent Kurdistan includes territory that is not officially part of the Kurdish autonomous region but is currently controlled by Kurdish Peshmerga forces. These extra areas include a significant amount of the oil resources located in northern Iraq. The KRG is only supposed to control 6% of Iraq’s oil resources but actually controls about 20%.

If the KRG votes for independence and is able to militarily maintain that independence, there is the potential for an independent Kurdistan to control approximately 28.5 billion barrels of crude oil reserves. This would put the new country among the top oil producers in the world, just above Nigeria.

From a purely oil market perspective, the referendum might notimpact oil markets in the short or long term, because the KRG will likely seek to continue producing oil at the same or similar levels as it currently does. On the other hand, the referendum introduces a variety of regional issues that could move oil prices depending on how they play out.

If the KRG declares independence, where will its oil go?

Kurdish oil is currently brought to market through the Ceyhan pipeline which brings it to two ports in Turkey. Turkey has traditionally been vehemently opposed to an independent Kurdistan. The Turkish government considers the Kurdistan Workers Party (PKK) in Turkey a terrorist group. Turkey could shut off the Ceyhan Pipeline or an independent Kurdistan might be fearful of distributing through an antagonistic neighbor’s territory. Alternatively, the Kurds could try to placate Turkey by renewing their offer to sell a stake in KRG oil fields to Turkey.

Will an independent Kurdistan cause a rift in OPEC?

If 20% of Iraq’s current oil resources are determined to be under the control of a new, independent Kurdish state, other OPEC members may seek to bring the KRG into OPEC in order to keep this oil under the cartel’s agreements. If powerful OPEC members like Saudi Arabia, the UAE and Kuwait reach out to the KRG in a way that provides international recognition of Kurdish independence, they could cause a serious rift with Iraq and Iran. One sign that this might be coming is if OPEC invites a representative from the KRG to its next meeting in Vienna in November.

If OPEC fails to bring the 20% of Iraqi oil controlled by the KRG into the cartel, it could cause a rift with key non-OPEC participants in the production cut deal. Russia and Kazakhstan have already expressed displeasure with OPEC’s failure to curb oil production in member countries Libya and Nigeria. An uncontrollable producer in an independent Kurdistan would further worry the non-OPEC participants in the current production cut agreement. To maintain the production cut agreement, it may be important to keep Kurdish oil within the cartel.

The Kurdish independence referendum represents a significant unknown to oil markets. No one knows how the process will unfold and how geopolitical and oil alliances will be redrawn.

Often, big events fizzle with little result, but sometimes they lead to unforeseen regional change and rebalancing of economic and geopolitical power. A Kurdish declaration of independence will introduce a new, non-Arab country into the heart of the Middle East and no one can quite predict what will result.

By Ellen R. Wald

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