Tanker ruling comes at critical time for Kurdistan under siege by militants

A federal judge’s ruling that technically clears the way for a contested tanker of crude to be offloaded in the United States comes at a critical time for Kurdistan, which urgently needs a large infusion of cash to defend itself against Islamic State militants.

Oil revenue is even more essential for the Kurds now than it was nearly a month ago, when a tanker arrived off the coast of Galveston carrying nearly 1 million barrels of oil pumped from the Kurdish areas of Iraq. Baghdad alleges it was smuggled out of the country.

In recent weeks, the semi-autonomous region has fallen victim to Islamic State attacks that have overwhelmed Kurdish forces called peshmerga and created a refugee crisis in the region. Oil is Kurdistan’s only source of revenue to handle a growing refugee population and to arm its soldiers.

“The Kurds are desperate,” said Charlie Ebinger, director of the energy security initiative at the Brookings Institution. “They are very financially strapped for cash and they want to sell any oil they can to whoever will buy it.”

The crude aboard the United Kalavryta off Galveston’s coast is worth more than $100 million at international prices. But given the specter of litigation — Iraq has threatened to sue any company that touches the cargo it says was smuggled out of the country — Kurdistan probably will have to sell the oil at a deep discount.

There were some indications Wednesday that the tanker may be moving, but it hasn’t reported its position and officials weren’t able to confirm its status.

Despite U.S. District Judge Gray Miller’s decision on Monday to remove legal barriers preventing Kurdistan from offloading the crude in the United States, it seems unlikely Kurdistan will sell its oil here. Iraq’s legal threats and the ensuing media attention may dissuade U.S. companies from handling the cargo, and Miller left the matter open for further litigation, allowing Iraq’s lawyers 10 days to file an amended complaint. Nothing had been filed by Wednesday morning.

“It’s still a huge legal threat,” said Ed Hirs, who teaches energy economics at the University of Houston. “Anybody who would agree to acquire faces the risk of impoundment, loss of cargo and the loss of the proceeds … and that’s a very serious threat for a buyer and a very valid one, too.”

Larger companies also may be reluctant to buy the cargo because they don’t want to antagonize the Baghdad government, which has maintained that the state oil company has the right to broker all deals for Iraqi crude, Ebinger said.

The tanker’s lingering presence in the Gulf likely indicates Kurdistan was waiting to see what the U.S. federal courts would decide, Ebinger said. If Kurdistan is unable to find a U.S. buyer even after the favorable court ruling, the United Kalavryta soon may sail elsewhere to unload its disputed cargo.

“Eventually the cost of keeping it at sea will exceed the value of the cargo,” Hirs said. “That’s a lot of cargo, but eventually you get to that threshold.”

The average rate for a crude oil tanker the size of the United Kalavryta ranges from $20,000 to $27,000 per day, according to data from Clarksons, a London-based shipping services provider.

The ship has not communicated its position since 7:30 p.m. Monday when ship tracking software showed it still anchored about 60 miles southeast of Galveston’s coast.

Coast Guard spokesman Andy Kendrick said Tuesday afternoon he received reports the ship had left the lightering area where ships too large to travel through the Houston Ship Channel offload cargo onto smaller vessels that bring it shore, but he declined to provide more information.

The tanker arrived off Galveston’s coast in late July, carrying  crude Iraq says was smuggled through a pipeline to the Turkish port of Ceyhan along the Mediterranean Sea.

After Iraq sued to stop the cargo from being offloaded in the United States, a U.S. magistrate ordered marshals to seize any crude offloaded and brought near shore within the court’s jurisdiction.

Kurdistan’s attorneys later intervened, arguing the court lacked jurisdiction in the case and Miller on Monday sided with Kurdistan, tossing out the seizure order.

The U.S. government, which backs a unified, central government in Iraq, discourages companies from buying crude from the Kurdistan Regional Government, warning such deals pose significant legal threats.

David Phillips, director of the peace building and human rights center at Columbia University and former senior adviser to the State Department, said that policy has played a big role in the recent crisis in Kurdistan.

By actively lobbying against Kurdish oil sales, the United States undermined Kurdistan’s stability and made the region vulnerable to Islamic State attacks, he said. While the U.S. has stepped in to bolster Kurdistan’s defense, conducting airstrikes over the northern regions of Iraq and arming the peshmerga, the region would have been in a better position to protect itself had Kurdistan been able to freely sell its oil, Phillips said.

“To me, this is not really about oil, it’s about politics,” he said. “This is an insidious effort to prevent Iraqi Kurdistan to have the resources to function like a state…Had it been able to do normal energy business, it could’ve used its proceeds to buy weapons and put itself in a better position.”