ISIS, Iraq, Kurdistan And The Control Of Oil

by: Euan Mearns

Editor's note: Originally published on 27, June 2014

News broke on U.K. terrestrial television on Tuesday 24th of June that Kurdistan forces (The Peshmerga) had captured Kirkuk, a city in northern Iraq that sits on top of the supergiant Kirkuk oil field. This news broke on the WSJ days before.

John Kerry was in Kurdistan trying to persuade The Kurds to lead the way in cementing the new Iraq apparently oblivious to the fact that the Kurds have been working flat out to leave Iraq since the semi-autonomuous Kurdistan Regional Government (KRG) was formed.

Persecuted and gassed by Saddam, Kurdistan gained semi-independence in the wake of GWI in 1992. Since then, the whole region has been licensed for oil and gas exploration to foreign oil companies. Several billions of barrels of oil have been found, a pipeline built through Turkey to the Mediterranean Port of Ceyhan and oil exports have newly begun. None of this has the approval of the Iraqi government that looks set to fall in the weeks ahead.

In the same time frame, Iraq has endured GWII, Saddam was captured and hung and western companies have struggled to redevelop the giant oil fields in the South of the country.

Figure 1 Kurdistan in green and Kurdish areas in grey. The pipeline exporting oil from the supergiant Kirkuk oil field crosses into Turkey at a very narrow border crossing that most likely will already be in Kurdish hands. Map from Genel Energy, pdf alert.

Genel Energy (OTCPK:GEGYY), headed by former BP chief Tony Hayward and backed by Nat Rothschild is one of many western companies operating in Kurdistan. At first, oil majors were shy of joining in the bounty of exploring this blue chip acreage that forms the northern extension of the Zagros fold belt, a prolific oil province in Iran. That was because the legality of all this activity was questionable in the eyes of the central Iraqi government. But in recent years both Total (NYSE:TOT) and Exxon Mobil (NYSE:XOM) have joined the party whilst at risk of losing service contracts to develop fields in southern Iraq itself.

The map taken from a May 2014 Genel presentation surprised me since borders seem in the process of being redrawn. The semi-autonomous region is the green area surrounding Erbil. The grey area is Kurdish territory that until recently was part of Iraq. The recent capture of Kirkuk by the Peshmerga gives a clear sign of Kurdish intentions. The area is of immense regional importance, not just for its oil reserves and production but for its pipelines that cross into Turkey at a very narrow point of mutual Iraq - Turkey border. If the Kurds expand into the grey area, that is after all populated by Kurds that will welcome the Peshmerga with open arms, then Kurdistan will shortly control most of the oil and all of the export infrastructure of northern Iraq. The country will neither have the need nor desire to continue to be a part of its war torn neighbour to the south.

If Kurdistan is able to expand and stabilise its borders with the new Islamic State of Iraq and Levant being formed to its south, then it could find itself exporting 2 million barrels of oil per day within the next couple of years and will become enormously wealthy. At some point John Kerry will realise that 2 million barrels per day is of immense value to western interests. A lingering question that will inevitably rear its head is unification of the whole of Kurdistan including Turkish and Iranian areas. Here, Turkey with control of oil export routes, has a Royal Flush.

As for failed U.S. policy in the region, much of the oil lies to the South (Figure 2) in Shia dominated areas. The Sunni areas of Iraq are in fact poor in oil reserves. It is too early to say how the conflict will play out through the rest of the country but it is not too early to recognise the failure of U.S. policy. Jim Kunstler has a damming summary:

It all happened pretty quickly last week, but in case you haven't noticed, Humpty Dumpty fell off the wall over there. The bonehead American news media affects to be too stunned to even ask the pertinent questions, starting with: is that all it took to undo eight years and - what? - maybe two trillion dollars in US-sponsored nation-building? Oh, plus 4,000 US dead and 50,000 wounded. So, my question would be: when do the political recriminations kick in? Pretty soon, I reckon, and when they do, expect them to be fiercely perverse. The theme of who lost Iraq? may cost more than who lost Vietnam?

Figure 2 The oil fields of Iraq. Oil in the North lies mainly in Kurdish areas that may soon be controlled by a new independent state of Kurdistan. The oil in the South lies in Shia dominated areas. The Sunnis don't have that much oil and the key question is would they like to have their fair share as was the case under Saddam? Map from Energypedia.

The stability of southern Iraq and the oil rich regions to the South hang by a thread. Is the Arab Spring headed for Saudi Arabia?