In war and in business there is such a thing as a tactical retreat: a strategic pullback in the lull before the storm. And Bagdad’s apparent concession to Kurds in regards to oil exports is exactly that, both in terms of war and business.
The Kurdistan Regional Government wants to extend its control over several regions, namely Nineveh and oil-rich Kirkuk. But a more assertive central government under Prime Minister Nuri al-Maliki has united Shia and Sunni Arabs under the common cause of blocking further concessions to Kurds.
So when Iraq’s oil ministry authorized symbolic exports of up to 100,000 barrels a day out of the semi-autonomous Kurdish region starting June 1, expectations grew that the deadlock would be resolved. In effect, the decision is a significant break from the past that legitimizes, at least partially and temporarily, the more than a dozen oil and gas deals that the KRG has signed with foreign companies.
It also raised hopes that the door to increased investment in Iraq would be flung open. The political standoff has hampered Iraq’s reconstruction as legislation like the vital oil law is often held hostage by sectarian divisions.
Instead of a breakthrough though, Baghdad apparent capitulation appears to be a calculated move to temporarily increase oil revenue, which the KRG partakes in, while winning itself time in the larger standoff.
Indeed, the apparent concession rather than auguring better times could signal more trouble ahead.
The motivation for Baghdad is clearly money. Iraq’s crude exports have recently fallen 250,000 barrels per day, which coupled with low oil prices, is restricting the government’s ability to finance its already curtailed budget that is almost entirely dependent on oil.
But the Oil Ministry will retain control of the commercialization of the crude, thus presumably of collecting the profits. Under that scenario, the KRG will get 17 percent of the money, as is already the case with all of Iraq’s oil revenues.
That is less than the 18 percent to 20 percent that the KRG agreed to pay companies when it signed production sharing agreements with foreign companies. The Oil Ministry still considers those deals illegal.
Still, international oil mammoths hungry for profitable production sharing agreements that the KRG offers, as opposed to the Iraq’s government, can rightly ask themselves whether those deals will be eventually legalized.
Indeed, within days, the KRG said an $8 billion deal signed between European and United Arab Emirate companies without Baghdad’s approval would rake in huge revenues for the region, regardless of what the Oil Ministry said.
The natural gas deal that the KRG has flaunted in Baghdad’s face is unlikely to go ahead, at least how it was conceived, and can only be understood as a provocation. It appears to be more politically designed, especially because it is hardly up to Kurds or even those companies to export gas and oil.
(Incidentally, European officials, who also celebrated the deal, should exercise more restraint and avoid exacerbating sectarian tensions by encouraging Kurdish unilateralism. The Kurdish gas deal competes with another Oil Ministry gas export project to Europe.)
Ultimately it is up to Iraq’s neighbors, all of which share concerns over Kurdish independence aspirations. The semi-autonomous region is landlocked between countries that support Baghdad.
To be sure, both the oil and gas deals need Turkey’s blessing, an unlikely scenario without Iraq’s approval considering Ankara’s own troubles with the PKK.
And now what?
Aside from Iraq getting around $6 million in extra cash daily, expect little else. Some small companies might be fooled to set up shop in Kurdistan, mislead into thinking sectarian divisions are subsiding. But no big companies will. Certainly no oil companies, which will make the lion’s share of any investment in the country.
There are no signs of a political thaw, no sign of an oil law being forthcoming. In fact, there is mostly the opposite. Don’t forget parliamentary elections are this year and U.S. forces will continue to handover military control over Iraq to the central government.
Baghdad’s decision instead signals both sides are gearing up for the worse. And yes, that could mean civil war pitting Iraq’s rejuvenated, well trained and armed military with the Peshmerga, the KRG’s equally formidable militia.
Both forces have already exchanged fire, albeit nothing that could be called a battle. But security sources I’ve talked to recently say that a military escalation has only been prevented by the U.S. military. How long that lasts, considering mutual provocations, is uncertain.
In fact, both sides are convinced they could easily defeat the other and it almost seems as though they want a fight.
Kurds know time is not on their side. Maliki is marching toward reelection. Even if he isn’t, he will inherit a much stronger central government willing to confront its northern region if it insists on territorial claims. Kirkuk is not only the historical and sentimental Kurdish capital. It could also hold as much as 4 percent of the world’s oil, a prize willing to fight for.
And Baghdad also knows that a conflict is unavoidable, unless Kurds give up on their centuries-old independence aspirations, now that it is closer than it has ever been.
Baghdad might have bought itself some time by conceding some oil exports. And it could easily reverse that, as it has with so many other issues. And the KRG knows this.
One would only hope that this standoff can be resolved peacefully. Iraq, all of it, will suffer a crippling blow otherwise. It will be a step back with unthinkable consequences that would threaten the entire Middle East. It is the one issue that could draw in Iraq’s neighbors to war.
The KRG would be unwise to risk a prolonged stalemate. It stands to lose in the long run because it can easily be suffocated by its neighbors. Its future is tied to the rest of Iraq, whether it likes it or not.
Economic growth and investment in the KRG and the rest of Iraq largely depend on this one issue. Baghdad is strong enough to have drawn its red line.
Irbil will have to eventually choose between assuring all those around it that it will not seek independence or fighting a civil war.
Andres Cala - Madrid-based freelance journalist and regular contributor to U.S. publications, including The New York Times, The Christian Science Monitor and Energy Tribune. A political scientist and former Wall Street Journal writer, he regularly covers Middle Eastern and European policy, as well as global energy issues.
