As Kurdistan continues to export oil unilaterally, Baghdad struggles over how to respond.

By: Nicholas Borroz

As of May 22^nd, Kurdistan was preparing to export one million barrels of oil via a tanker from the Turkish port of Ceyhan. This appears to be Kurdistan’s first attempt to export some of the oil that has arrived in Ceyhan via the new pipeline outside of Iraq’s control, which will certainly infuriate Baghdad. It is not yet clear where the tanker will unload its cargo, although it was scheduled to leave Ceyhan last week. This news follows on the heels of recent revelations that Kurdish oil has already made its way to Israel and the United States.

The Kurdish oil already in Israel and the United States does not appear to have passed through the contentious pipeline leading to Ceyhan. What appears more likely is that the oil was trucked into Turkey from Kurdistan and was then transported overland to a Turkish port, likely Dortyol. From there, the oil was loaded onto a tanker and sent abroad. 265,000 barrels of oil were discharged in Houston on May 1^st. Israel has received at least four cargoes of Kurdish oil in 2014, and some of that oil is reportedly already being used by refiners.

It’s important to note that the Kurds have been trucking oil into Turkey since 2012 without significant reproach from Baghdad. Some Kurdish oil and oil products have even made their way to Italy, France, Germany, the Netherlands, and Latin America. However, the quantities of Kurdish exports are becoming larger and are destined for higher profile targets, a strong signal that Kurdistan intends to link itself to international hydrocarbon markets independently of Baghdad.

Awaiting Baghdad’s Response

Iraq has indicated its displeasure with the recent news of Kurdish oil exports, primarily because it believes that such transactions should take place under federal purview. Baghdad is highly sensitive to the potential of Kurdistan’s increasing regional autonomy leading to Iraq’s territorial disintegration. If Baghdad is able to punish parties involved in the export of Kurdish oil, this will put a damper on Kurdistan’s ability to unilaterally develop its hydrocarbon sector. There are three major ways that Iraq can disincentivize investment in Kurdistan’s oil and gas sector:

1) If Iraq successfully pursues legal action against the companies that were involved in the transaction or bans them from Iraq’s oil sector, investors will know that engaging with Kurdistan against Iraq’s wishes could negatively affect their business. Prime targets for legal action would be Powertrans, a Turkish company reportedly acting as a broker for the Kurdish government, and any other companies that have either transported or bought the oil.

2) If Iraq decisively cuts funding to Kurdistan as a form of punishment, this will negatively impact Kurdistan’s economic conditions, thereby worsening the investment climate there. 95 percent of Kurdistan’s annual budget depends on revenues from Baghdad; despite Kurdistan’s rhetoric about seeking independence from Baghdad, angering Baghdad to the point of completely severing federal budget payments would wreak economic havoc on Kurdistan.

3) Iraq could also signal to Turkey that cooperation with Kurdistan will lead to a significant deterioration in what are already troubled Turkish-Iraqi relations. On May 25^th, Iraq’s oil ministry stated that it would request arbitration from the International Chamber of Commerce, in a move to take legal action against Ankara. Turkey is sensitive to its isolation in regional politics and, more importantly, it does not want to risk potentially cutting off its access to Iraq’s rich hydrocarbon reserves.

If Iraq carries out any of the above mentioned actions, it will hinder Kurdistan’s ability to unilaterally export oil. If, however, Iraq is unable or unwilling to punish parties involved in the export of Kurdish oil, this will send a signal that investing in Kurdistan’s hydrocarbon sector is becoming less risky. Already in recent years, several majors, including Chevron and ExxonMobil, have entered Kurdistan’s E&P sector, showing that it is no longer a fringe market. If Iraq does not react decisively, its days of being able to contain Kurdistan seem numbered.

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: Daniel Fogg, Flickr Commons