Half-price Kurd oil threatens Iraq breakup with Turkish help

By Selcan Hacaoglu, Jack Fairweather and Nayla Razzouk
Bloomberg News

A tanker containing a million barrels of crude oil is floating around the Mediterranean, and its cargo is available at half-price. Yet if any country seizes the bargain, it may be pushing Iraq closer to disintegration.

The oil aboard is at the center of a fight over its ownership between the semi-autonomous region of Kurdistan, which pumped and shipped the crude from its territory in northern Iraq, and the central government in Baghdad, which claims the rights to all oil revenue.

Kurdish Peshmerga armed forces seized on the anarchy in northern Iraq, where militant Islamists routed the Baghdad government’s army last week, to occupy the region’s key oil hub, Kirkuk. The oil dispute has raised the possibility of the Kurdish region achieving financial self-sufficiency to go with those expanding territorial ambitions.

“If that tanker docks, Iraq’s Kurdistan Regional Government will take an important step toward independence and hasten the breakup of Iraq,” Nihat Ali Ozcan, an analyst at the Economic Policy Research Foundation in Ankara, said by phone on June 13.

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The potential sale has embroiled Turkey, the conduit for the Kurdish oil, and Iraq in legal arbitration, while the U.S. has sought to dissuade the Kurds from going it alone. Turkey sees Kurdish crude oil exports through its Mediterranean port of Ceyhan as “entirely legitimate” and will continue as long as oil is sold, Turkey’s Energy Minister Taner Yildiz said in an interview in Moscow today. The next shipment is scheduled for June 22, he said at the World Petroleum Congress.

Baghdad approval

“At the moment, 100,000 barrels to 120,000 barrels of oil flow from northern Iraq per day,” Yildiz said. “About 2.3 million barrels of oil are stored in Ceyhan.”

Brett McGurk, the deputy assistant secretary of state for Near East affairs, reiterated U.S. opposition to any oil exports that aren’t approved by Baghdad. The U.S. has “informed all interested parties that any such transactions exposes them to potential legal risks,” and proposed a compromise plan to both sides, he wrote on Twitter on May 23.

The Kurds went ahead with pumping the oil, prompting Baghdad to announce it was suspending the accord under which 17 percent of all oil revenue goes to the Kurdish authorities in their regional capital, Erbil.

‘Failed totally’

“The U.S. failed totally to mediate between Erbil and Baghdad on this issue,” and their standoff has now sparked “growing U.S. fears that Kurdistan is headed for independence,” David Ottaway, senior scholar in the Middle East program at the Wilson Center in Washington, said June 10.

The violence in Iraq since last week has amplified such concerns, and pushed oil prices higher.Brent crude posted the biggest jump in almost a year last week. It closed at $114.26 a barrel in London yesterday, a nine-month high. Brent for August settlement rose as much as 54 cents, or 0.5 percent, to $114.80 a barrel on the London-based ICE Futures Europe exchange today, the highest intraday level since Sept. 9. It traded for $114.63 a barrel at 1:48 p.m. in Istanbul.

Militants of the Islamic State in Iraq and the Levant seized Mosul, the largest northern city, on June 10 and have captured other towns. As Baghdad’s armed forces fled, the Kurds occupied Kirkuk, which they’ve long claimed should be part of their autonomous region. Exxon Mobil Corp. (XOM),BP Plc (BP/) and Turkey’s state oil company TPAO began removing employees from Iraq, OPEC’s second-largest oil producer, as the insurgents attempted to capture a major refinery.

Baghdad’s wrath

Even without Kirkuk, the Kurdish region has crude reserves it estimates at 45 billion barrels, a quarter of Iraq’s total. Since the U.S. invasion of Iraq in 2003, the Kurdistan Regional Government has claimed the right to handle shipments from its territory.

In 2004, a year after the U.S. invasion that toppled Saddam Hussein, the KRG struck an uneasy agreement with the central government in Baghdad to share oil revenue. The deal left key questions unresolved, including the fate of Kirkuk and how to share untapped oil fields.

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Since 2011, KRG has attracted four big oil companies – Chevron Corp. (CVX), Exxon Mobil Corp., Hess Corp. (HES) and Total SA (FP) – as well as 30 or so smaller ones. Tony Hayward, chief executive office of Genel Energy Plc (GENL), the biggest oil and gas operator in Kurdistan, was among those who risked the wrath of the Iraqi government to truck Kurdish oil to Turkey.

Legal action

Since January, trucks have been superseded by a new Kurdish link to the main northern pipeline, which runs from Kirkuk to Turkey’s Mediterranean oil terminal at Ceyhan. Turkey agreed to handle the shipment and store it separately from the main Iraqi crude. It allocated seven of 12 storage tanksat Ceyhan for Kurdish oil.

The Iraqi government initiated legal action against Turkey, taking the case to the International Chamber of Commerce in Paris. Asim Jihad, an Iraqi oil ministry spokesman, said a lawsuit has also been filed domestically against the KRG’s Ministry of Natural Resources.

Denise Natali of the National Defense University in Washington described the arrangement as a “private deal” between Turkish Prime Minister Recep Tayyip Erdogan and the KRG’s PresidentMassoud Barzani, one which benefited both at the expense of Baghdad.

The fees Turkey collects from the Kurds are four times higher than what Baghdad pays, according to an official involved in the transactions, who asked not to be identified because the figures aren’t public.

Passage blocked

On May 22, the first of two tankers filled with the disputed oil left the Ceyhan terminal with 1 million barrels for Europe.

Then it appeared to be bound for the Americas, as a concerted Iraqi government effort to block its passage led to the tanker turning around on May 30 after getting almost 200 miles across the Atlantic Ocean. The tanker moored about 5 miles off Mohammedia port in Morocco on June 3.

As the search for a customer dragged on, the Kurds lowered the price to $56 per barrel as of June 11, according to the same official.

Iraq’s oil ministry and the state oil-marketing company SOMO have been urging potential buyers to shun the cargo, and threatening legal action. SOMO estimates it is losing $1.2 billion a month in revenue from Kurdish shipments.

‘Sooner or later’

The Iraqi government has not been able to send oil to Ceyhan since March 2, when Islamic militants sabotaged the oil pipeline outside Mosul. Last year it managed to export 13 million tons of oil out of a 71 million-ton carrying capacity, said the official involved in the trade.

Under threat of legal action from Iraq the shipping agent Boutros, and cargo inspector Saybolt, which handled the first oil cargo from northern Iraq, were not listed for handling a second tanker. The KRG found a replacement in Palmali Shipping & Agency JSC, owned by Turkish-Azeri tycoon Mubariz Mansimov Gurbanoglu.

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When the second ship left Ceyhan on June 9, the Iraqi government sent another protest note to Turkish officials and blacklisted Palmali, saying it will pursue the matter in court.

“The fact is that with this much oil now flowing onto the international market from Kurdistan, with Turkey’s help, sooner or later it will find buyers,” said Ottaway.

Energy companies operating in the Kurdish region have struggled to get paid as the authority feuds with Iraq’s central government over oil revenue and contract terms. United Arab Emirates-basedDANA Gas PJSC (DANA) was forced to restructure about $900 million of Islamic bonds last year after payment delays in Kurdistan and Egypt, its two main areas of production.

Exports to double

Two more tankers will load Kurdish oil at Ceyhan this week, Ashti Hawrami, the KRG’s natural resources minister, said at a conference in London on June 17. Kurdish exports may double to as much as 250,000 barrels a day next month, he said.

Iraq’s Deputy Prime Minister Hussain al-Shahristani said on Iraqiya television on June 17 that Turkey and the KRG are mistaken if they’re calculating that the current chaos in Iraq will leave the Baghdad government unable to defend its interests.

“The Iraqi people won’t forget those who conspired against them during tough times,” al-Shahristani said. “Turkey should be aware that this is like playing with fire. This is plundering the wealth of Iraq.”