Iraqi Kurds’ ambitions tied to ability to keep energy sector on track

Planned referendum on Kurdish independence will influence the energy sector

This month a new version of Finding Neverland emerged. 
The star of this instalment was not Johnny Depp or Kate Winslet, but an Italian-registered crude oil tanker. The Neverland, carrying oil from the Kurdish region of Iraq, disappeared off Canada on June 30 after the Iraq oil ministry initiated legal action, and reappeared empty, near Malta, on July 21.
The timing is interesting: just after the declaration of victory over ISIL in Mosul and ahead of the planned referendum on Kurdish independence. Whether the Kurdish region stays within Iraq in some form or becomes independent, oil is both its lifeblood and a dangerous drug.
The region's inhabitants, have, of course, the right to determine their future. The referendum has attracted a flurry of op-eds in the western press, some claiming it would be a "failed state" and comparing it to another oil-rich secession, South Sudan, now mired in civil war. Others support the Kurdish region for various reasons, among them its prominent military role in the anti-ISIL campaign.
Victory over ISIL in Mosul was declared on July 10 (even though fighting continues). The referendum is scheduled for September 25, with a "Yes" vote backed by all the major parties and expected to be overwhelmingly affirmed.
A declaration of independence will not necessarily follow a yes, with the Kurdish Democratic Party saying it would strengthen their hand in negotiations with the federal government in Baghdad. External parties, though, remain unconvinced: Iran, Turkey and the Assad regime in Syria, all with Kurdish minorities of their own, are opposed to independence; Russia is non-committal; and the UK and US recognise the Kurds' aspirations but say that now is not the time. 
Petroleum is persistently a key part of the region's strategy: underpinning its economy; buying domestic political support through patronage; and acting as a bargaining chip for external allies. 
But it has been a tough few years for the Kurdish oil sector. The government was already struggling with the collapse of oil prices, war costs and accumulated debts of some US$22 billion by early this year. It was unable to pay oil companies operating in the region regularly, and they could not invest to boost output.
This was compounded by geological disappointments from what had seemed one of the great oil frontiers, with production at Genel Energy's flagship Taq Taq field collapsing from 14,000 barrels per day in 2015 to just 1,000 bpd in May. Genel's Miran and Bina Bawi gasfields, intended to supply Turkey, have at best been inching forward. At other fields there have been sharp reserves downgrades, and ExxonMobil has withdrawn from several of its blocks.
Kurdish exports have been quite stable at around 600,000 barrels per day since September. Abu Dhabi's Taqa started production from its Atrush field this month, with planned output of 30,000 bpd. Some other small fields are contributing, but a lack of capital and investor confidence is holding up full-scale output from finds such as Gulf Keystone's giant Shaikan, near Atrush.
Instead, exports have been supported by a deal with Baghdad to supply crude from the Kirkuk field to Kurdish refineries, and by the continuing strong output at various fields around Kirkuk claimed both by Baghdad and Erbil. Some were occupied by the Kurdish peshmerga to avoid ISIL overrunning them.
The Kurds have long awarded oil blocks to push forward their territorial aspirations. Of 20 new (or repackaged) blocks announced late last year, several are in disputed areas. The big Bai Hassan field near Kirkuk, the Ain Zalah field north-west of Mosul, and the Sinjar block near the Syrian border, have been discussed with Russia's state-owned Rosneft, in parallel with an oil export deal.
Conversely, Baghdad's recent oil exploration offers include blocks in the Diyala province to the south of the Kurdish region, which the federal government reinforced in mid-2014 to prevent Kurdish forces entering.
The referendum question refers also to Kurdish areas outside the official Kurdish region, which also contain Arab, Turkmen, Assyrian and other populations. Whatever happens in Kurdish region will affect the aspirations of the largely Sunni Arab parts of Iraq, after the expulsion of ISIL.
For economic and political sustainability, an independent Kurdish region would need to maximise oil and gas exports to sustain its budget. It needs to polish its tarnished image with energy investors. Conflict and dispute with Baghdad would severely hamper that.
Oil exports will continue to be almost entirely dependent on the Turkish route, at least until the contours of a post-war Syria become clearer. But at least large-scale gas sales to Turkey would give it a measure of leverage, with Ankara trying to diminish dependence on Moscow and Tehran. The Turkish market is stagnant or shrinking, so after years of delay, the Kurds need to move fast to cement a stake.
The Kurdish region would also need to reconcile its squabbling political factions, diversify the economy, cut down on pervasive corruption and slim a patronage-based, overstuffed public sector.
These moves would bear fruit whether the region becomes independent soon, later, or whether it stays in Iraq under a new arrangement. The Kurds can be successful, but they should not underestimate the difficulties. If an independent Kurdish region is to be more than a Neverland, its energy sector needs to go full steam ahead.

Robin Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis