KRG's oil exports via Turkey may be halted due to vote

Iraqi Kurdish Regional Government's (KRG) economic power, propelled by oil exports via Turkey, is potentially at risk if the KRG's capital and seat of power Erbil insists on independence considering Ankara's objection to the referendum, Volkan Ozdemir, head of the Institute for Energy Markets and Policies (EPPEN) told Anadolu Agency (AA).

The non-binding referendum is expected to see residents in provinces controlled by the Iraqi regional government vote on independence from Baghdad on Sept. 25.

Baghdad rejects the planned poll, saying it will adversely affect the fight against the Daesh terrorist group, which still maintains a significant presence in northern Iraq.

Turkey, too, rejects it, stating the region’s stability depends on the unity of Iraq and the maintenance of its territorial integrity.

Speaking exclusively to AA, Ozdemir said the oil revenue sharing deal between Baghdad and Erbil has already lost its validity. He explained that in the last three and a half years, Erbil has exported its oil to international markets through Turkey, independently from Baghdad's central government.

Ozdemir highlighted that the status of Kirkuk's oil fields has great potential to inflame conflict between the sides.

"KRG's efforts to join Kirkuk in the Kurdish region's vote on independence through declaring a fait accompli created tension between Baghdad and Erbil. Therefore, we can say that these efforts have caused a very serious conflict potential," he said.

Discord between Baghdad and northern Iraq’s Kurdish Regional Government has long been the subject of dispute in the oil-rich Kirkuk province that is home to Turkmen, Kurds and Arabs.

Ozdemir highlighted the determining role of neighboring countries like Turkey and Iran along with countries further afield that have expressed their opposition to the vote, namely the U.S., the U.K., and on the other hand to Israel, the only country that has given its overt support to the vote in this critical process. Russia, for its part has also a key role to play, as the KRG's major partner in bilateral energy projects in the region, and because of this, the KRG is attempting to gain its support for the yes vote for independence.

"Turkey holds important power in its hands: the oil trade that is conducted through its territories. At a time when oil prices are getting close to $60 per barrel, Erbil gained economic independence from Baghdad with the help of this trade. If Turkey is against this independence, it can stop oil transfers, but this won't be easy. If stopped, the KRG will not have this economic power," he explained.

Recent reports on a potential gas infrastructure project agreement between the KRG and Russian state-run oil company Rosneft holds great importance for the region, Ozdemir explained.

He noted that the KRG is trying to garner Russia's support. "If we take it from a more general perspective, along with all the biggest energy companies like Genel Energy, Exxon, DNO and Turkish Energy Company, Rosneft is starting to gain a foothold in the KRG's energy sector."

Rosneft on Sept. 18 announced that it completed due diligence on the infrastructure of an export oil pipeline in the KRG and will shortly finalize the legally binding documents for the project under an investment agreement signed at St. Petersburg International Economic Forum in June 2017.

"In June, Rosneft gained access to some of the oil fields, oil trade and pipelines in the KRG. Russia, through Rosneft, is starting to become a player in the region, while the Barzani administration is trying to get the support of Russia in order to realize the referendum," he explained.

"Despite the misleading reports from the KRG side on the gas infrastructure agreement, Rosneft's statement that the agreement has not been reached yet shows its intention to create a new acceptable balance between Erbil, Baghdad and Ankara," he noted.

The referendum could be delayed for this reason and the future of the region could remain uncertain for a while, according to Ozdemir.

"While each actor makes its own calculations, Turkey, who holds energy power in its hands, is the most important player in these calculations. If it wants, it can stop oil transfer and if that happens, the KRG's independence plans could be shelved," he concluded.

Oguzhan Akyener, president of Turkey Energy Strategies Politics Research Center (TESPAM), said Iraq's central government has not transferred the KRG's 17 percent share of oil revenues since 2014.

In response, the KRG has held onto all the oil revenue the region generated while refusing to share it with the central government, Akyener noted. He added that this shows the great conflict between the sides, which promises to long continue unless conformity and stability are secured.

"Formally what has been agreed is that the KRG should not sell its oil without permission of the Iraqi central government. All the oil trade administered with the permission of the central government should be included in the central government's budget out of which 17 percent should be transferred to the KRG. But this process seems to be non-operational," he asserted.

"There is also the problem of the Kirkuk oil fields, which have 26 billion cubic meters of proven reserves. The KRG is trying to include the Kirkuk province in the independence vote. However, should the referendum go ahead, the pre-existing oil production dispute from those fields could turn into further conflict," Akyener explained.

The aim of the KRG is to expand its regional dominance through Kirkuk if it can obtain the support of the international community, Akyener declared.

"In the end, energy is the reason behind efforts to involve Kirkuk in the independence vote. However, it should be noted that if the KRG cannot have the support of its neighbors Iran, the Iraqi central government or Turkey, its daily oil exports of 550 to 600 thousand barrels will be reset," he added.

Akyener concluded that the outcome would not hold critical importance for global oil markets with market conditions showing more supply than demand.