Kurdish oil industry in the balance following referendum

Independence aspirations fueled by territory's energy sector

Iraqi Kurdish President Masoud Barzani casts his vote during Kurds independence referendum last week. Azad Lashkari / Reuters

The old adage that the Kurds have no friends but the mountains was reinforced last Monday, when most regional powers condemned the Kurdistan Region of Iraq’s referendum on independence. The Kurds’ bid for statehood has been underpinned by the oil under their homeland’s mountains. And three major players, seeking that oil, have enabled these aspirations.

Partly in response to the vote - 92 percent in favour of independence with 73 percent turnout - oil prices rose to a two-year high. Turkish president Recep Erdoğan, concerned about his own country's large Kurdish minority, said Turkey might close the oil pipeline from Kurdistan to the Mediterranean port of Ceyhan, the region's only route to export markets.

The federal government in Baghdad has closed Kurdish airspace to international flights and sought to take back control of border posts. Iran also halted flights and closed its border. US secretary of state Rex Tillerson said the vote lacked legitimacy and reiterated the American policy favouring a united Iraq. It is a rare issue today that can unite the US, Iran, Turkey and Baghdad.

But, ironically, it is Mr Tillerson, in his previous role as chief executive of ExxonMobil, who was the first key player enabling this vote. In 2011, frustrated with difficult conditions in the south of Iraq, the US oil company became the first major oil company to enter the Kurdistan region, signing a number of oil exploration contracts, some in disputed territories. This undermined Baghdad's policy of isolating Erbil, and gave an apparent American imprimatur to the region's growing autonomy.

Spurred by this, Ankara, the second key actor in the independence drama, concluded it was better to turn the Kurdistan region into a dependable subordinate rather than allowing it to become a focus for wider nationalist feelings. Turkey concluded a strategic pact with the region in 2013, giving the Kurds a reliable oil export route for the first time. When in 2014 their share of the federal budget was cut off in a dispute over their independent oil exports, Turkey lent large sums to the region, US$3 billion from the state and a further amount from private banks.

Plans for a new state vehicle, the Turkish Energy Company, to enter various exploration blocks in Kurdistan have not panned out as expected. Nevertheless, it is unlikely that Turkey will go ahead with its threat to shut the pipeline. A large energy importer with a wide current account deficit, Turkey suffers from higher oil prices. Meanwhile the budget as well as well-connected Turkish individuals benefit from the trade.

In 2014, Baghdad filed for arbitration against Turkey for allowing Kurdish oil to flow through the pipeline, claiming this was in violation of the governing treaty, which had been renewed in 2010. As Iraq Oil Report editor Ben Van Heuvelen points out, if Turkey were to hand over control of the Ceyhan terminal to Baghdad’s state oil marketer Somo, it would damage its legal case in the arbitration.

The third key player is Russia. Of all the major powers involved, it has given the most equivocal response to the vote, not commenting on whether it would recognise the result.

Before the referendum, the Kurdish Ministry of Natural Resources (MNR) took some important steps to shore up the region's position. The key was a deal with Russia's state oil giant Rosneft, which together with some trading firms lent the region about $3bn. The MNR used the money to settle a long-running arbitration case brought by Sharjah-based Dana Gas, Crescent Petroleum and partners over gas fields they operate in the region. It also restructured its debts to oil companies DNO and Genel Energy, two of the largest investors in Kurdish oil.

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Rosneft will also enter a number of exploration blocks, some in areas disputed with the Baghdad government. After output from Genel’s Taq Taq field collapsed due to geological problems, Kurdistan has become even more reliant on Kirkuk to support its 600,000 barrels per day of production, more than Opec member Ecuador.

And Rosneft will provide more than $1bn in funding for a gas pipeline to Turkey and eventually the European market. Its capacity of 30 billion cubic metres per year will be equal to 70 per cent of Turkey's consumption.

About 57 per cent of Turkey’s gas comes from Russia. Kurdish gas would diversify this over-reliance, but Rosneft’s entry sustains Russian influence. It also boosts Rosneft itself versus its rival back home, gas behemoth Gazprom.

The accord with Rosneft gave the Kurds some confidence in political support from Russia, which has become increasingly influential in the Middle East recently, particularly by shoring up the regime of Bashar Al Assad next door in Syria. From the Russians' point of view, inserting themselves into Kurdish politics gains them access to a traditional US ally, leverage over both Turkey and Iran, and influence in leading Opec member Iraq.

The long-standing US policy for Iraq is unravelling, without much sense of what could replace it, while Turkey’s gambit has backfired, and Russia as usual is playing on multiple sides. The Kurdish oil sector looks in better shape than it has for years, but it has a heavy financial and strategic burden to carry. For now, the aspirant nation of Kurdistan has to wait for its friends’ and opponents’ positions to crystallise.

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