How Turkey's ironic oil ties with Iraqi Kurdistan will affect the rest of the region

Published October 3rd, 2013 - 09:26 GMT

Turkey imports $50 billion in oil and gas, has fought and won a civil war with the secessionist Kurdish PKK in its eastern Anatolian provinces and dominates the foreign trade, construction and energy transport routes of the landlocked Kurdish enclave in Iraq created in the aftermath of Desert Storm in 1991.

The Kurdish Regional Government (KRG) in Erbil is, ironically, Ankara’s closest ally in the Middle East at a time when relations with Egypt’s military rulers, with the Baathist regime in Syria, Iran’s Ayatollahs and the Baghdad government have never been worse. Apart from $12 billion in bilateral trade with the KRG, a lifeline of construction projects for Turkish contractors who lost lucrative markets in Libya and Egypt after 2011.

PM Erdogan wants to promote Istanbul as an energy trading hub and Ceyhan, the terminus of the Iraqi northern pipeline for Kirkuk crude, as a leading oil export terminal for the Mediterranean.

This is unthinkable without close relations with the KRG and a historic diplomatic rapprochement with its own Anatolian Kurdish secessionists in the PKK, led by Abdullah Ocalan.

The oil wealth of the Iraqi Kurdistan enclave makes it one of the most vulnerable political entities in the Middle East. Oil revenue sharing is at the core of the political and financial dispute between Erbil and the Iraqi government in Baghdad. The spillover of Syria’s brutal civil war into Iraq, Lebanon and Jordan has created a violent, unstable, even Darwinian Levant. Turkish energy relations with Iraqi Kurdistan will impact the future of Middle East geopolitics.

A century ago, the collapse of the Ottoman Empire enabled Britain and France to create a constellation of Arab states subordinate to their own imperial and oil interests, as the 1916 Sykes–Picot pact demonstrated.

Thus the British created Iraq and Trans-Jordan as consolation prizes for two Hashemite princes who had fought with Colonel T.E Lawrence in the Arab revolt in the Hijaz. The French ousted Emir Faisal (later king of Iraq) from Damascus, ruthlessly suppressed a series of revolts, recruited Alawite officers in their colonial army, established Lebanon as a separate state and even gifted Syrian Alexandretta (Iskrandrun) to Ataturk’s Turkish Republic.

Baathist dictators, Saddam Hussein and Hafiz Al Assad, defined Arab politics for four decades until the old order crumbled after Washington’s invasion of Iraq in 2003 and the Syrian civil war since 2011. The regional balance of power in the Arab world has never been so fragile or unstable as the power of sovereign states in Damascus and Baghdad crumbles. Syrian oil and gas output in Deir Al Zar has fallen from 300,000 barrels a day to nothing.

In Iraq, Baghdad and the KRG are unable to agree on a Petroleum Law while terrorists routinely bomb the northern Kirkuk-Ceyhan pipeline and the energy infrastructure in Basra.

Turkey has emerged as the largest investor and closest diplomatic patron of the KRG in Erbil. Recip Erdogan has defied Baghdad, Tehran and Washington to sign a historic deal with the KRG that enables Turkish state-owned energy companies to take stakes in the oil and gas fields of Iraqi Kurdistan, its own post- Ottoman “sphere of influence”.

For the KRG, the energy deals with Turkey are a hedge against future attacks by the Baghdad government, revolutionary Iran or even the Assad regime in Syria, whose own Kurdish minorities now position for the post Baathist era.

Nouri Al Malaki argues that Turkish energy stakes in KRG oil and gas fields violates the Iraqi Constitution and increases the risk of an independent Kurdish state with its capital in Erbil and pipeline networks to Turkish oil ports on the Mediterranean like Ceyhan, the hub for one per cent of the world’s oil production even now.

Washington is so alarmed by the Turkish energy deal that Secretary Kerry asked the KRG not to sign the agreement with Ankara. Washington is afraid that the emergence of the KRG — Ankara energy axis will force Baghdad to align its interests even closer with Ayatollah Khamenei‘s Iran.

The sectarian wars in the Arab world then escalate in a new regional proxy war between Turkey and Iran, the heirs to the Ottoman and Safavid imperial rivalries for strategic dominance in the Middle East for two centuries.

Putin’s Kremlin will not allow Russian oil and gas to be diverted from its Black Sea port of Novorrisk to Turkish terminals. So the “Erbil” connection with the KRG is strategic or Turkish business, finance, energy and even national security.

In this context, the rapprochement between Iran and the US and the Russian brokered chemical weapon deal in Syria and Hassan Rohani’s election have led to a lower geopolitical risk premium in crude.

So even though the US dollar index fell to 80 after the Bernanke Fed did not “taper” its bond purchases at the September FOMC, Brent is lower at $108 and West Texas at $102. But winter is only six weeks away in Europe.  Asian demand will rise when refineries complete maintenance Libyan output is only 500,000mbd.

Iraqi production is nowhere near  target, thanks to terrorism and sabotage. Sudan, Nigeria, Yemen and the North Sea are short at least another 600,000 barrels in output. The supply side wolf in Brent is all too real.

By: Sarie Khaled


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