The Middle East is a complex tapestry of religious and ethnic groups, and few places in the region exemplify this more than the diverse, regional autonomies in Iraq. While there are cultural positives to this heterogeneity, in the case of Kurdistan, it also creates increased complexity for global oil markets, and for OPEC strategy and planning in particular.
Kurdish autonomy heightens oil market exposure to long-standing ethnic grudges, puts oil infrastructure in the crosshairs of militant attacks, and perpetually undercuts general stability in the region. However, the important change appears to be on the way. The cash-starved Kurdish regional government (KRG) based in Erbil, has begun to negotiate and discuss closer cooperation, coordination, and potentially, federal/KRG partnerships on oil field development in Kurdistan.
Before we discuss the status of KRG/Baghdad negotiations in more detail, it is important to provide context on who the Kurdish people are and why their unique government structure exists in the first place. The Kurdish people, or Kurds, are an ancient people who have lived largely in the isolated, mountainous region bordering Iran, Iraq, Syria, and Turkey. Erbil, the KRG capital of Iraqi Kurdistan, has been inhabited continuously for over 6,000 years.
Due to this regional overlap, various Kurdish groups share similar customs. Yet as a larger group they remain remarkably diverse, both culturally and politically. Kurds are majority Sunni Islam, but a significant Shia minority exists, along with several small but meaningful numbers of Yazidis and Alevism. The balance of the Kurdish peoples are a mixed group of various other smaller regional sects.
The Kurdish inclusion in the modern Iraqi state goes back more than a century, to the end of WWI. The initial borders of Iraq were created in the controversial
Sykes-Picot agreement between France and the UK that combined three Ottoman provinces to create Iraq. The three provinces were composed of, one which was majority Sunni, the second a majority Shia, and the third a majority Kurdish province.
Decades of mistreatment and violent repression at the hands of the Saddam Hussein’s Baathist regime, including unprecedented chemical weapon attacks on Kurdish civilians in the 1980s, has driven the push for Kurdish autonomy and/or complete independence from Iraq alongside a long simmering distrust of central power in Baghdad. However, an independent Kurdistan makes Turkey strategically uncomfortable. As a result, Turkey, and other countries with large Kurdish populations, continue to push back against any form of Kurdish independence.
Economic issues have plagued Iraq, and the Kurds, for decades. Unsurprisingly these economic challenges correlate well with the general geopolitical instability of Iraq since the end of the Iran-Iraq War of the late 1980s. The economic problems have only exacerbated efforts to rebuild Kurdistan in the aftermath of the more recent ISIS defeat in the region. Iraq, and especially the Kurds, paid a high price to topple the caliphate. Erbil was only 50 miles from the frontlines of the Islamic state and the former ISIS stronghold in the city of Mosul.
The struggle to recover, and rebuild, from this “battle” is what has inspired the need for capital and growing dialog between Erbil and Baghdad on oil. These negotiations focus on a wide range of issues including disputed territories, the role of “foreign” Kurdish militias in the country, general regional security, help in returning displaced groups such as the Yazidis, and most relevant to this article, the future development path of the Iraqi Kurdish oil fields.
Currently the KRG has agreed to adhere to an OPEC quota of 430,000 bpd (including 25,000 bpd allocated domestically for internal demand) and are willing to honor the agreement to pay the Iraqi government the revenue on the sales of 250,000 bpd. Kurdish oil reserves represent about one third of total Iraqi reserves. The KRG seeks to bear less of the brunt from OPEC cuts going forward and shift a greater portion of the burden to the central government in Baghdad. Simply put, the Kurds want to have greater control of their oil production/sales, and increase their capacity to produce more oil for export. Likewise, the KRG wants “cheaper” oil to flow domestically to close holes in the KRG budget and stimulate a struggling economy.
For their part, central government in Baghdad seeks greater integration of the Kurdish oil industry. They view the split as inefficient and more susceptible to corruption. Baghdad feels the Kurdish producers are undercutting Iraqi producers on price, while the Kurds claim increased production costs due to the maturity of their aging fields.
Baghdad also seeks greater authority over Kurdish production (i.e., revenue) to close massive budget holes of their own, as well as a desire to exert tighter controls on the country’s oil production. Negotiations have recently hit a snag as the Iraqi government requested a total hand over of the entire Kurdish oil portfolio to the state oil company of Iraq (SOMO). Iraq also seeks to integrate the Kurdish government to further isolate them from foreign Kurdish militias, the largest being the Partîya Karkerên Kurdistanê (Kurdistan workers party) or P.K.K. The P.K.K. is a controversial armed Kurdish group fighting broadly for a United Kurdistan. This historically Turkish based group is considered a terrorist organization by Turkey, but many governments consider them freedom fighters and reliable anti-extremist group in the greater Middle East.
These negotiations will likely be long-running but have the power to dramatically reshape the region. If greater integration is achieved, this will give the Iraqi government greater control to raise or lower the nation’s oil production within the context of their role in OPEC. This power would give Baghdad more incentive to follow OPEC quotas.
More production, plus Kurd/Baghdad cohesion, would also give Iraq a more influential spot at the OPEC negotiating table. This outcome would also help to stabilize Iraqi production, increase efficiency, and lower costs. On the other hand, weakening the Kurds would likely push Baghdad into closer alignment with the Turkish government, as the Turkish government is the historic enemy of all Kurdish people. Longer-term, weakening the Iraqi Kurds would raise the risk of increasing tension and pushing the Erbil government closer to foreign Kurdish groups. Kurds would also likely increase their alliance with the PKK militia, which could threaten to reopen a spiral of oil infrastructure attacks.
A more realistic alternative may be a reworked version of the current revenue sharing agreement. The exact details of this are unknowable, but better terms would likely to lead to expanded Kurdish volumes. Any deal involving a greater Kurdish allocation of barrels incentivizes Iraqi OPEC quota cheating, as this solution would be unlikely to bring the same revenue boost that a more aggressive, long term Baghdad-Kurdish integration would bring.
Infighting between the various groups remains a future production risk, and economic challenges are unlikely to go away in either situation anytime soon. Baghdad versus Erbil is expected to remain a wild card for some time. The latest dispute and negotiation are adding chapters to a more than 100-year-old Iraqi/Kurdish rivalry. There are likely no quick fixes to these long-running issues despite the recent increase in the dialog. That said, any peaceful negotiations by the two sides are an important first step. It will be critical to monitor these developments in the weeks and months ahead. Iraqi/Kurdish OPEC production levels will become even more important a few months down the road when OPEC is expected to increase production. The issue of individual country quotas is once again front and center.
Alexander Saucer
Alexander is a physical operations analyst supporting physical crude oil operations for producers. He has a BA in economics from Furman University.