Geopolitics and oil in the Battle of Mosul

On June 10, 2014, Daesh surprised the world by advancing into several territories of central and northern Iraq. Most notably, Daesh has taken over Iraq's second biggest city, Mosul. Daesh has also tried to gain control of the oil-rich area of Kirkuk (which is now under the control of Iraqi Kurdish forces). Daesh's offensive has left Iraq in a dire situation, ridden by sectarian and ethnic conflict.

However, Iraqi forces, estimated to be an overwhelming 30,000 with a contribution from Iraqi Kurdish (Peshmerga) forces, are now closing in on Mosul with Western air support.

Mosul will be liberated no matter how much it takes. However, there will be huge geopolitical implications for victory. These implications range from the restoration of Iraqi territorial integrity and the inevitable defeat of Daesh in Syria to the potential independence of Iraqi Kurdistan and the impact on Iraq's northern oil resources, including Kirkuk.

The liberation of Mosul will not lead to a rise in oil prices. If any, it might exert some small downward pressure on oil prices as it will enable both Iraq and Iraqi Kurdistan to access more oil from the Kirkuk oilfield and other much smaller fields still under control of Daesh. This means that after a while, total Iraqi oil production and exports could rise to 5 million barrels a day (mbd) and 4 mbd, respectively, from the current 4.63 mbd and 3.69 mbd.

The Kurdish region is home to Iraq's major northern oilfields, but a quarrel over who benefits from export revenues has become a prolonged, tangled and emotive dispute between the central government in Baghdad and the Kurdistan Regional Government (KRG).

In early 2014, Baghdad slashed funds to the KRG, which then began exporting oil independently via a pipeline to the Turkish port of Ceyhan on the Mediterranean.

In March 2016, Iraq's state-run North Oil Company (NOC) stopped pumping crude through the pipeline from fields it operates in Kirkuk. The move cut Kurdish oil revenues by around a quarter, worsening the budget crisis in Erbil amid low oil prices and the fight against Daesh.

However, under a recent agreement, up to 150,000 barrels per day (b/d) of oil are being exported as a 50/50 split between the KRG and Baghdad.

Moreover, a reconciliation between the KRG and Iraq could attract more foreign investment to northern Iraq which is home to a third of overall Iraqi oil & gas reserves amounting to 47 billion barrels of oil (bb) and 43 trillion cubic feet (tcf), respectively.

The KRG has seized the opportunity to extend their territories to areas that have thus far been subject to contestation between themselves and the central government of Baghdad. After a battle with Daesh, they have taken over Kirkuk, a key area for the energy security of Kurdistan, Iraq, and the wider region. In parallel, Kurds have started to strongly claim more autonomy, moving towards independence.

And to reaffirm its autonomy and also to enhance its oil exports, Iraqi Kurdistan has built a 25-mile oil pipeline from Dohuk inside the territory to Fishkabur in Turkey. The pipeline secures an export route for an initial 150,000 b/d (rising eventually to 300,000 b/d) and is significant because the crude goes via Turkey, rather than using the Iraqi-Turkish Pipeline (ITP) from Kirkuk to Ceyhan.

The Kurdish region could produce up to 1 mbd of oil by 2020, or 825,000 b/d more liquid than in 2011. Yet, like the rest of Iraq, it is constrained by the lack of infrastructure and export capacity. Moreover, without some kind of agreement with the central Iraqi government, many international oil companies have always been cautious about making major investments in the region. All this could technically cut the overall Kurdish production capacity by 2020 from the projected 825,000 b/d to 325,000 b/d by then.

Iraqi Kurds (the Peshmerga) are expected to play a crucial role in the battle of Mosul, which began on October 17 and is being led by Iraqi forces. They hope their reward will finally be independence—or at least greater sovereignty. Unfortunately, for the Kurds, it's not entirely up to them, and it never has been.

Since the American invasion of Iraq in 2003, the country's Kurds have controlled a semiautonomous region in the north. Now, two years after the fall of Mosul to Daesh, Iraq's Kurds hope to leverage a victory as well. If the coalition succeeds in Mosul, it could have significant consequences for them. Masoud Barzani, president of the Iraqi Kurdistan region, has been heavily pushing for independence.

However, an independent Kurdistan would throw the region into greater turmoil. How viable is a landlocked state that is dependent on exporting natural resources through a corridor plagued by a violent conflict?

But oil isn't a panacea for Iraqi Kurds; revenue is currently low due to the collapse in prices, and there are continued budget disputes with the Iraqi government. The result has been a loss in profit that, coupled with the cost of fighting Daesh, has drastically eroded Kurdish finances.

These obstacles will likely delay Kurdish independence. While there is no doubt that the Kurdistan region is heading towards self-determination, Kurdish independence, in the short term, is “unrealistic".

The liberation of Mosul will definitely impact countries from Turkey and Saudi Arabia to Iran and Syria. A victory in Mosul will break the backbone of Daesh and will eventually lead to their demise in Syria with the axis of Russia, Iran and Syria emerging victorious in the civil war which has been raging since 2011. By definition, this could be interpreted as a defeat to Saudi Arabia, Turkey and the United States.

Moreover, a victory in Mosul could have a serious impact on the regional balance of power. It will further give rise to new alliances, as well as new patterns of enmity and amity. Turkey and Israel are already developing good relations with Kurdistan; Iran and the Iraqi government in Baghdad are maintaining even closer ties than before.

Still, Ankara worries that if Iraqi Kurdistan declares independence, Kurdish groups in Syria and Turkey would do the same, threatening Ankara's territorial claims as well as oil transportation routes within the country.

The U.S. government, however, has not officially supported Kurdish independence in Iraq. Part of this is due to fears of greater chaos in the region. The other part has to do with Turkey.

However, the most dangerous conflict that could erupt in the aftermath of a victory in Mosul is one between an emboldened and confident Iraq demanding the return of Kirkuk to the authority of the central government in Baghdad and refusing bluntly any calls to independence by the KRG and Iraqi Kurdistan. Such a conflict could involve Iran, Turkey and Saudi Arabia.

In a nut shell, Iraq may not be out of the crisis even with a victory in Mosul.