Recent Iraq-Kurdistan dealings have highlighted Kurdistan’s increasing desire for economic independence.

By: Nicholas Borroz

On March 20^th, the Prime Minister of Iraqi Kurdistan, Nechirvan Barzani, announced that Kurdistan will export oil through the federally controlled Kirkuk-Ceyhan pipeline.  The flow will reportedly commence on April 1^st, a development that was described by Barzani as a “gesture of good will.”  Kurdistan’s use of the federal pipeline indicates that Erbil is willing to acquiesce to at least some of Baghdad’s demands that Kurdistan submit to centralized control.

Kurdistan hasn’t exported its oil via the federal pipeline since 2012.  During that year, disagreements between Erbil and Baghdad regarding payment to oil companies reached a crisis, leading the Kurds to stop using the federal pipeline.  Kurdistan had previously lured international oil companies into the region by offering far more attractive deals than Baghdad was prepared to put forth.  The oil companies were to be compensated for their work from government coffers.  Unfortunately, a lasting agreement between Erbil and Baghdad on who would make the payments was never established, with both sides wanting the other to bear a greater burden of those costs.  In April 2012, Kurdistan accused Baghdad of failing to pay the companies, and it subsequently stopped using the pipeline.

Following the decision to stop using the federal pipeline, Kurdistan strove to find alternative export routes that it could control.  Most oil exports since then have passed via truck into Turkey and Iran.  While this has allowed the Kurds an opportunity to sell some of their oil, it has severely limited the quantity that they can sell, thereby constraining oil revenues.

A NEW PIPELINE

In December 2013, Kurdistan and Turkey built an independent pipeline to export oil directly to the Mediterranean.  Since then, Baghdad has steadfastly denied Kurdistan’s right to independently export oil, saying that doing so is a threat to Iraq’s territorial integrity.  Furthermore, Iraq has threatened to take legal action against any entity aiding Kurdistan in its aspirations to independently export oil.  Neither Turkey, the country through which the new pipeline passes, nor international oil companies, who might buy the oil, are willing to risk Baghdad’s wrath.

For these reasons, Kurdistan has thus far been unable to sell its oil abroad.  This lack of access to international markets, plus Baghdad’s decision to withhold federal funding, upon which Kurdistan is extremely reliant, has triggered a financial crisis in this semi-autonomous region.  One fifth of Kurdistan’s population is reportedly on government payroll, and Kurdistan’s income alone is unable to cover government salaries.  The economic hardship has led to intense political debate within Kurdistan, with criticisms focusing on the corruption of the region’s ruling elites. 

Overall, the financial crisis has cast the region’s reputation for stability into doubt.  Until recently, Erbil was called a potential new Dubai in some of the more sensationalist media coverage.  While such descriptions are exaggerated, Kurdistan doubtlessly presents an attractive investment target for foreign businessmen should its oil wealth be taken advantage of. 

For this reason, some investors likely sighed a breath of relief last week; Baghdad’s willingness to allow the Kurds to partially utilize the federal pipeline signals that reconciliation may be on the horizon.  If Erbil and Baghdad can come to an agreement about how to export Kurdistan’s oil in a way that benefits both parties, Kurdistan would experience economic growth.  Savvy investors could invest in Kurdistan at this prime moment to reap the benefits. 

Both Kurdistan and Iraq need reconciliation on this matter.  As has been previously mentioned, Kurdistan will suffer financially in its economic isolation until a deal is reached.  From Iraq’s perspective, parliamentary elections will take place on April 30^th, and Prime Minister Nuri al-Maliki needs the Kurds’ support to maintain his political control.  He cannot risk alienating them over the current impasse. 

RECONCILIATION IMMINENT?

Reconciliation seems imminent, however the crisis has likely highlighted to Kurds the need, now more than ever, to establish economic independence.  Their attempt to pressure Iraq by building the new pipeline with Turkey has exposed just how much leverage Iraq has over Kurdistan.  In the short term, a deal will be reached between Erbil and Baghdad over sharing control of oil export and revenues.  In the long term, this crisis may further entrench the Kurds’ desire for autonomy. 

Nicholas Borroz is an independent analyst of energy geopolitics with a focus on oil and gas transportation infrastructure.  You can reach him on Twitter (@Nborroz) or on his blog (nicholasborroz.wordpress.com).

Photo credit: Flickr Commons, James Gordon