September 17, 2014

Isn't It Time to Unite-4?

Part 4. Kurdistan's Oil, Gas and Blood

At the end of 2012 in Iraq there was a wave of large-scale anti-government protests, which seriously aggravated the military-political situation in the country and once again raised the issue of the Kurdish national autonomy. This time it was about the disputed areas in the north of the country — Kirkuk, Nineveh, Diala.

Baghdad is fundamentally opposed to extending the boundaries of the Kurdish autonomy, while the Kurds, in turn, insist on the inclusion of the disputed Kirkuk into their autonomy and its full subordination to authorities of Erbil. Along with this, in the center of the dispute is the issue of redistribution of income from the sale of crude oil produced in  Kurdistan, as Kirkuk's oil fields, open in 1907, are considered to be one of the largest in Iraq, and, according to preliminary data, contain about 45 billion barrels of oil. It is no coincidence that lately there have been terrorist attacks on ethnic grounds here. Not by accident, groups of militants of the radical terrorist organization “Islamic state” so eagerly have rushed to oil-bearing areas. The Federal Government of Iraq has repeatedly tried to place its troops in these areas, but each time they were met with fierce resistance on the part of the Kurdish Guard — Peshmerga militias controlling disputed territories.

Kirkuk-Baniyas oil pipeline
Kirkuk-Baniyas oil pipeline

It should be reminded that the Iraqi Kurdistan has its own Constitution, public authorities, armed forces, and more than 30 foreign diplomatic missions are accredited in the region. Under the existing rules, the Kurdish government has the opportunity to receive its share of the export of oil produced at the territory under its control. But all dealings for getting the rights to develop oil fields should only be undertaken through the central government in Baghdad, and a large part of the revenue, respectively, remains in the latter's budget.

Immediately after the fall of Saddam Hussein's regime, the government of Kurdistan began to enter into contracts, bypassing the central government, having declared itself an independent political force, able to lead independent both, domestic and foreign policies.

In 2011, the largest player at the global oil market - Exxon Mobil - decided to make an agreement with Kurdistan having bought the right to develop oil fields. It was followed by Chevron, which won the right to participate in two projects near the city of Irbil. Baghdad responded immediately, denying these companies contracts to develop oil fields in the rest of Iraq. But such actions of the central government did not stop the process of development of oil fields in Kurdistan by foreign companies. In 2012, the French Total S.A. announced about its buying a share in Kurdish projects.

Foreign oil companies were willing to lose contracts in southern and central regions of Iraq in order to preserve their positions in Kurdistan. The matter is that the Kurdish autonomy has created a favorable investment and tax regime, introduced legislation on natural resources and there are relatively safe living conditions for foreigners there. Today, more than 50 foreign companies are actually working to ensure the increasing independence of the Iraqi Kurdistan, which fact seriously complicates relations with Baghdad.



The ship United Leadership carried out the first delivery of oil from the Iraqi Kurdistan to the port of destination
The ship United Leadership carried out the first delivery of oil from the Iraqi Kurdistan to the port of destination

According to the Reuters news agency, the court in the American state of Texas Monday, August 25, 2014, cancelled the earlier ruling of the arrest of a large batch of oil, which arrived at the coast of the state by the tanker from the Iraqi Kurdistan. About a month ago the tanker United Kalavryta, sent by the government of the Iraqi autonomy, arrived in the Gulf of Mexico with the amount of oil, worth about 100 million US dollars. The Iraqi authorities, who believe that Kurdistan has no right to sell raw materials to other countries, demanded to ban imports of oil. As a result, the court issued a warrant allowing the United States’ marshals to seize the cargo and moor it to the shore. However, a few days later the court decided that it had no authority for seizure of the tanker as the ship is anchored in almost one hundred kilometers from the coast, where the jurisdiction of the court is not efficacious. In this regard, the government of the Iraqi Kurdistan has filed a lawsuit to annul the judgment. “Kurdistan's request for annulment has been satisfied,” – reads Judge Gray Miller's ruling. So, the right of the Iraqi autonomy to oil exports to the United States has been confirmed. American petrochemical company LyondellBasell has already expressed its willingness to purchase Kurdish oil. This is just one example confirming the willingness of countries to purchase Kurdish oil even against all sorts of prohibitions and restrictions.


Spring 2012 a row erupted — the authorities of the autonomy claimed that the central government owed them more than 500 million dollars for oil exports. Iraq's leaders recognized the debt, but explained it by technical reasons.

Today Iraqi Kurdistan exports only oil, but now there is a large-scale preparation for production and export of gas there. Deposits of natural gas of Kurdistan are estimated at 2.83 trillion cubic meters of gas, which is about 90 % of Iraq's reserves. Due to the growth in gas production and exports from the region of the Iraqi Kurdistan, according to economists, it is expected that the global market for natural gas will be considerably replenished.

Firstly, due to the considerable reserves of fuel.

Secondly, because of the proximity to major markets.

Thirdly, due to the extremely low cost.

Baghdad, trying in some way to reduce dependence on Kurdistan's direction of oil exports, is looking for other directions, one of which is Jordan. Designing of the pipeline worth 18 billion US dollars, began in Iraq nearly a year ago. In the first phase through the 1680-kilometer oil pipeline from Basra to the Jordanian port of Aqaba it is planned to export 1 million barrels of oil per day. It is appropriate to mention that all in all near Basra are produced about 2.3 million barrels of oil per day, accounting for 70 % of the total volume of oil production in the country.

1 million barrels of oil per day are planned to be exported through the 1680-kilometer pipeline from Basra to the Jordanian port of Aqaba
1 million barrels of oil per day are planned to be exported through the 1680-kilometer pipeline from Basra to the Jordanian port of Aqaba

Against the background of the struggle for oil revenues, has begun the struggle for including Kirkuk, with its fields of energy carriers into the autonomy, which was enshrined in the new regional Constitution in June 2009. President of the Iraqi Kurdistan Massoud Barzani sharply criticized the central government, and said that “the joy of declaration of independence of Kurdistan is not far off, but it will be done at the right time for the Kurds”.  Activity of the Iraqi Kurds, aimed at consolidating all ethnic groups in the region, first of all in Turkey and Syria, has increased significantly after the Americans refused to support the autonomy's efforts, aimed at creating an independent state.


Against Kirkuk's becoming part of the Iraqi Kurdistan are Arabs, Turkmens, as well as Turkey, positioning itself as a regional power and leading the fight against all manifestations of Kurdish nationalism. It is obvious that Kirkuk's joining the autonomy will mean greater economic independence and territorial self-sufficiency of Kurdistan.

At the same time, Turkey continues developing relationships with both the central government of Iraq, and with the autonomous Kurdish region, and Turkish companies and investors have begun to explore the area quite actively. Ankara has gained the support of the Iraqi Kurds and has achieved recognition of the fact that the rights of the Turkish Kurds will be exercised exclusively within the unified Turkey.

Despite all the talks about Kurdish nationalism, the Iraqi Kurdistan is, above all, a source of cheap oil, so much needed by Turkey's economy. Moreover, Turkey is practically the only channel for transporting Kurdish oil and gas, and also thanks to this circumstance it ensures intensive work of its ports, oil and gas pipelines. Thanks to Kurdistan it not only earns billions of dollars and provides its fledgling industry with cheap energy resources, but also partially solves the problem of unemployment in the Turkish Kurdistan. It's no secret that in many ways unemployment and lack of adequate infrastructure, along with other more pressing problems, were sources of tension and destabilization of the situation in the Turkish Kurdistan.

Today, we must note the fact that the Turkish Kurds, represented by their legal political parties, have actually moved away from the idea of ​​independence and secession from Turkey, and the official authorities, in turn — from total suppression of fundamental rights of the Kurds. It is a sort of compromise that suits all today.

Kurds may influence the political situation in the Middle East
Kurds may influence the political situation in the Middle East

Very important is the role of the Iraqi Kurdistan and President Massoud Barzani himself in the peace process in Turkey. After all, with the mediation of Barzani, Turkey has at last managed to stop hostilities in the Turkish Kurdistan. Military elite of the Republic of Turkey for many years had been frightening Turkish people with the threat from “Kurdistan Workers' Party” (PKK), and the cessation of hostilities between the PKK and the army in a certain way, has not just weakened their positions, depriving of the former influence, but also allowed to save a lot of money, and to improve the economic and investment climate in the region in general.

Also, we should remember that the Kurdish economy is almost completely integrated into the Turkish one, and this has its pros and cons. For example, if the government of Kurdistan does not take appropriate preventive measures, its (Kurdish economy's) being absorbed by Turkey will become quite real. Although at the present stage there is no such danger, and political and economic relations are mutually beneficial for both Turkish and Kurdish sides.

Capture of Kirkuk has allowed Ankara and Erbil to significantly expand cooperation in the oil sector. Soon after the Kurdish formations had established their control over the city, the Turkish authorities signed an agreement with the authorities of the autonomy on exports of Kurdish oil from the North of Iraq through the port of Ceyhan. This way the historical enemy in the face of Turkey suddenly turned into an ally.

Actively developing relations with the Iraqi Kurdistan, Erdogan pursues one of his main foreign policy goals — transformation of Turkey into a reliable bridge between Europe and the Middle East. The more routes of transportation of hydrocarbons will pass through the Turkish territory, the stronger will be Ankara's positions in the negotiations with the EU and its neighbors. In this strategy perfectly fit many gas projects, such as Gazprom's Blue Stream and South Stream, started up in 2006 the Baku-Erzurum gas pipe, TAP and TANAP going from the Caspian Sea to Europe, as well as a possible Iranian branch of Nabucco. Oil pipelines Baku-Ceyhan and Kirkuk-Ceyhan won't be without work either, even if the latter are only partially uploaded. The second pipeline will be designed primarily for the supply of heavy oil from northern fields.

Turkey takes a keen interest in the rich gas reserves in Iraq. Construction of a gas pipeline may begin as early as next year, with the first deliveries scheduled for 2017. Delivery of natural gas to European markets is possible if a pipeline is connected to the Trans-Anatolian gas pipeline (TANAP).

In this regard, the main opposition force in Turkey – Republican People's Party – has strongly demanded a parliamentary investigation, since, in its view, Turkey's connection with Kurdish oil will threaten with destabilization of the region, and may also harm Ankara's relations with Baghdad and other members of the international community.

Iraq is unhappy with the autonomy's attempts to lead independent life. A compromise in the oil deal was an agreement between Ankara, Baghdad and Erbil on the establishment of a tripartite committee on the export of Iraqi oil. As part of the started by the Ankara a few months ago program of reconciliation with the Kurds, they agreed to the withdrawal of PKK’s units from Turkey into the northern Iraq. The advantage is the former Prime Minister (now the current President of Turkey) Recep Tayyip Erdogan’s getting Kurds’ support.

And the last very important argument. What can Turkey counter-pose to the independence of Kurdistan?

Can it bring its troops, close the border and re-ignite on its territory or at its borders a conflagration, put out by an unbelievable effort? Won't it be better if, instead of the unstable and war-torn Iraq, Turkey’s neighbor becomes a stable Kurdistan with its oil and gas?

Another friend of the Kurds — Israel. Tel Aviv has been assisting the Kurdish autonomy in recent years, trying to strengthen the Kurdish movement to create in the region another center of power and impeding consolidation of the Arabs. Besides, in circumstances where Arab countries do not supply oil to Israel because of the question of Palestine, the Kurdish cheap oil may be a good way to strengthen Israel's energy security.

Israel has been helping the Kurdish autonomy in recent years
Israel has been helping the Kurdish autonomy in recent years

According to some reports, Israeli instructors trained Kurdish rebels in Iraq. In return, the Kurds helped Tel Aviv with information about what was happening in Iraq at the time of Saddam Hussein's regime, as well as about the internal affairs of Iran.

It is interesting that Israeli Prime Minister Benjamin Netanyahu indirectly supported Barzani, calling for the establishment of an independent Kurdish state to counter the Sunni militants of IS. We can assume that Israel is planning to do this favour to Kurdistan in exchange for oil deliveries. According to several sources, Kurdistan is already selling oil to Israel, but it does so without fanfare. Thus, in mid-June of this year, in the Israeli port of Ashkelon moored tanker “Altai”, carrying 1 million barrels of Kurdish oil from the Turkish port of Ceyhan. According to Bloomberg, the raw materials were sold to Israel at half price.

Establishing of an Islamic caliphate and strict actions of the radical terrorist organization “Islamic State” will help to develop the necessary atmosphere in the international arena. Western analysts believe that positioning the Kurds as victims of Islamists from the IS, allows to accuse Baghdad of failing to protect the Kurds. Therefore, Kurdistan, controlling Kirkuk and significantly increasing its territory and natural resources, will only benefit from IS' actions.

President of the Iraqi Kurdistan has called for independence
President of the Iraqi Kurdistan has called for independence

According to statements made by the media, the President of the still Iraqi Kurdistan Massoud Barzani has announced about readiness to hold a referendum on independence of the region. Actually, Barzani shows that Baghdad is not able to guarantee peace, despite the Kurds' desire to participate in the peaceful settlement of the Iraqi crisis. “People's right to independence is natural and inalienable” — says Barzani.

The press also reports that in Parliaments of the EU member-states and in the European Parliament are heard loud voices for an immediate military and technical support to the army of the Kurdish autonomous region. According to the parliamentarians, now here is the only in Iraq capable government and the legitimate supreme authority headed by President Barzani.

Russia is also trying not to stand aside, and intends to grab a piece of the Kurdish oil cake. She responded to the North American and European sanctions by imposing restrictive measures on imports of agricultural products, raw materials, goods and food products from the EU countries, Norway, Australia, Canada and the United States. So, the confrontation with the West has moved to a new level, where the tool of mutual economic sanctions is included. Suffice it to recall the recent statement by the European Commissioner for Trade Karel De Gucht, who urged Washington to start export of oil and gas “due to the geopolitical situation” in Europe. Export will be carried out within the framework of creation of a transatlantic free trade area. Western experts believe that the abolition of the 40-year ban on oil and gas exports from the United States can exert serious pressure on Russia. A full-scale trade war does not appear in the plans of opponents, but the tendency to sharpening the situation is obviously present.

Russia has begun to supply arms to Iraq, including anti-aircraft missile and gun system “Панцирь-С1” (“Armour-S1”)
Russia has begun to supply arms to Iraq, including anti-aircraft missile and gun system “Панцирь-С1” (“Armour-S1”)

Iraqi Prime Minister's official visit to Moscow in the autumn of 2012 indicates gradual strengthening of bilateral economic relations. A major breakthrough was the signed contract on supply to Iraq of Russian arms and technologies worth more than four billion dollars (30 attack helicopters Mи-28Н, 42 anti-aircraft missile and gun systems “Панцирь-C1” (“Armour”). Besides, negotiations began to acquire MиГ-29M, heavy armored vehicles, radar and other equipment. This is the first formal contract in this sphere since the overthrow of Saddam Hussein's regime, for which the Soviet Union was considered the main supplier of arms. The contact marked a serious turning point in the foreign policy of Iraq, as it outlined Iraq's priorities in this important strategic sphere where Russia traditionally competes with the United States.

With regard to cooperation in the oil sector, Russian companies are gradually entering the Iraqi market of hydrocarbons, although faced with a serious competition on the part of major European and American companies vying for the right to develop new fields. Despite the fact that in 2008, Russia wrote off more than 90 % of Iraq's  state debt, the company Lukoil has never received promised to it preferences for the development of the project “West Qurna-2.”

Russia's Foreign Minister Sergei Lavrov is meeting Massoud Barzani in Moscow

Russia's Foreign Minister Sergei Lavrov is meeting Massoud Barzani in Moscow

Immediately after the Iraqi Prime Minister's visit to Moscow, an official invitation to visit the Russian capital received President of Kurdistan Massoud Barzani. His official visit — the first in the history of relations with Kurdistan — took place February 19-32, 2013. At the meeting the two sides discussed the potential of interaction between “Gazprom” and Kurdistan's oil and gas companies in the development and exploitation of hydrocarbon deposits. It is known that “Gazprom Neft” OAO has already signed contracts with Irbil. And soon after the visit, the first Deputy General Director of “Gazprom Neft” Vadim Yakovlyev said that the company participates in a new project under the terms of a production sharing agreement in the Kurdish autonomy with a share of 80 %. This, most likely, means that the “green light” has been done to other Russian oil producers for their choice in favor of Kurdistan. The issue is complex: getting some dividends in the north of Iraq, they risk losing not only the 15 signed contracts for development of hydrocarbons in other parts of Iraq, but also the restored with much difficulty confidence in the central government in Moscow. For the Russian Federation are now very important positive dynamics of relations with Baghdad in the sphere of military-technical cooperation, and similar approaches to the Syrian conflict. Moreover, full decentralization of Iraq is not in Russia's interest, since its results can unpredictably affect the situation in the Caucasus.

Nevertheless, the first visit of the President of Iraqi Kurdistan to Moscow suggests that the Russian government intends to significantly expand the field for its political and economic maneuvering and is getting engaged in a complex game where promotion of foreign policy interests often does not coincide with laws of business and national policy to a large extent contradicts the directions of development of regional relations, threatening to aggravate or destroy them. Therefore, this visit can be interpreted as an attempt to push Turkey away from the Kurdish “oil field” and, in particular, to withdraw the north of Iraq from under the Turkish influence, which coincides with the interests of the federal government.

“Gazprom Neft” has started drilling the first exploration well on the block «Shakal» in the Iraqi Kurdistan
“Gazprom Neft” has started drilling the first exploration well on the block «Shakal» in the Iraqi Kurdistan

But back to the question of oil. This year the company “Gazprom Neft” has started drilling the first exploration well on the block “Shakal” in Iraqi Kurdistan, having promised soon to begin similar work at a second drill site.

Certainly, geopolitical risks to the represented in the region foreign corporations are quite high. But the best and cheap oil of Kurdistan, proposed by the government in Erbil favorable conditions of mining attract big business here, making it seek ways to continue cooperation under Western sanctions against Russia.

The matter is that the Russian company chose as a contractor for the drilling of the first well on the block “Shakal” the Canadian “Grey Wolf”, having, as it is said in the press release of “Gazprom Neft”, a lot of experience in the region. According to the production sharing agreement, “Gazprom Neft” assumes 100 % of the costs in the development of the block, getting 80 % of the extracted material. Experts predict that the commercial operation of the block will begin in 2015 with coming out onto the level of annual production of 2 million tons of oil by 2020.

Between the Russian and Canadian businesses in the Iraqi Kurdistan begins to take shape another point of promising cooperation. Apart from the block “Shakal”, “Gazprom Neft” has its share in the block “Garmian”, the operating company of which is also a Canadian “Western  Zagros”. On the block “Garmian” oil reserves are much higher than physical indexes of the unit “Shakal”, where the leading operator is “Gazprom Neft”. According to the data as of August this year, the ratio of geological and recoverable reserves at the block “Shakal” is respectively 257 and 51 million tons, while at the “Garmian” — 453 and 122 million tons.

Ratio of geological and recoverable oil reserves of the Iraqi Kurdistan's «Shakal» and «Garmian» oil fields
Ratio of geological and recoverable oil reserves of the Iraqi Kurdistan's «Shakal» and «Garmian» oil fields

In accordance with the contract, “Gazprom Neft” assumes 50 % of material costs and will replace the company “WesternZagros” as an operator after the start of operation of wells, which should happen in 2015. The potential level of production of oil at the block “Garmian” is between 30 to 50 thousand barrels per day. The share of the Russian company in the production will make 40 %.

For comparison, not so long ago from the area of ​​fighting of IS' Islamist militants with Iraqi troops and Kurds it was reported about militants' capturing of two wells with the daily production of 30 thousand barrels. This is quite a considerable amount of production, allowing to reach the level of high profitability of extraction of liquid hydrocarbon.

Analysts believe that the terms of the Production Sharing Agreement of the Canadian “WesternZagros” in Kurdistan are relatively more profitable than any other project operators’ in the region, and “Gazprom oil’s” buying the company's share in the block “Garmian” would be a logical step.

The Russian company estimates its own investment in oil extraction projects in Kurdistan as not less than 1 billion US dollars until 2015. This is big money, raising the question of security of the investment from geopolitical risks, as well as from possible changes in the conjuncture of Western sanctions against Russia. In the very cooperation with Canadian companies in the Iraqi Kurdistan is also laid a certain risk.

But Kurdish oil and benefits from its export smooth all rough edges in the Russian-Canadian relations.

Another ally of the Kurdish state could be the Shiite Iran. In the current situation, the friendship between Tehran and the Kurds can limit the spread of the radical Sunni terrorist organization “Islamic State”. Besides, Tehran owns a certain segment of the economy of Kurdistan, although its replacement with the Turkish and Azerbaijani ones (in particular, petrol and diesel fuel are now being delivered from Azerbaijan to Kurdistan) is quite possible in terms of economy, but is undesirable from the point of view of geopolitics.

Despite the fact that some Iranian analysts predict Kurdistan's serious financial losses in case of breaking of relations with Iran, but this is not true. Moreover, there is no doubt that after the proclamation of independence by the Kurds, Tehran will make every effort to increase both economic and political cooperation with Kurdistan. In the meantime, Iran has leading positions, relying on the alliance with the United States to form a strategic axis between Washington and Tehran, discussing the issues of deterrence of the onset of IS and prevention of capturing of Baghdad by Sunni fanatics. Tehran, playing the Kurdish card, today against the background of  the United States and its allies' using force, seems to be more productive.

So, Kurdistan's big oil itself has become an important regional factor in the overall sequence of events in the Middle East and beyond. In order to attract to its market foreign companies and to create a favorable background for its own progress on the way to the state independence, Erbil is ready to provide interested companies with preferential treatment. Kurds even do not mind significant price costs in order to sell their oil bypassing the central government in Baghdad, just to attract the sympathy of influential world powers.

Success of the Iraqi Kurdistan gave grounds to Kurds from other countries to speak about both the need of their own autonomy, and about the establishment in the longer term of a single Kurdish state, for which they need to take away a part of territory of Syria, Turkey and Iran.

In geopolitical terms, the now Iraqi Kurdistan will be in the heart of the region, where it is conveniently to control all directions — from the Caucasus in the north to the Persian Gulf in the south, creating a corridor for the access to the sea. Apart from the military-strategic component is obvious the connection with natural resources — oil and gas.

For the Iraqi Kurdistan creation of this corridor is a vital event — the landlocked current autonomy will feel squeezed between the Shiite Iran and Arab Iraq.