A new contingency

Oct. 2, 2017
Geopolitics reasserted itself in the oil market Sept. 25, when the price of Brent crude reached its highest level since July 2, 2015: $59.42/bbl. Prices jumped not for fundamental market reasons but because Iraqi Kurds held an internationally contested referendum.

Geopolitics reasserted itself in the oil market Sept. 25, when the price of Brent crude reached its highest level since July 2, 2015: $59.42/bbl. Prices jumped not for fundamental market reasons but because Iraqi Kurds held an internationally contested referendum.

Hoping to discourage the vote, Turkey threatened to close its segment of the Iraqi export pipeline to Ceyhan on the Mediterranean. The move would block up to 650,000 b/d of oil shipments crucial to the Kurdistan Region of Iraq and disrupted global supply enough to worry markets. The threat came amid hints about military responses from Tehran, Ankara, and Baghdad as well as opposition to the vote from the US and United Nations. Outside Erbil, the only government supporting the election was Israel's.

Seeking independence

Why the distress? Kurds were voting on long-sought independence. That prospect is anathema to countries with sizeable Kurdish populations, which outside Iraq include Syria, Turkey, and Iran. The latter two countries are especially touchy about Kurdish autonomy. Both have struggled against Kurdish insurgents for years and worry about increased militancy and the loss of territory. The US and UN consider the referendum destabilizing and poorly timed while Islamic State jihadists remain a threat, however diminished.

The referendum proceeded anyway and recorded support for independence by more than 92% of the voters. Turnout was 73%.

Kurdish officials had taken pains to characterize the initiative not as unilateral secession but rather as a signal to start negotiations about full autonomy with the central government and neighboring countries. The Kurds see the war against Islamic State as all but over, thanks disproportionately to their Peshmerga forces. And they harbor legitimate grievances with Baghdad. The constitution adopted after the fall of Saddam Hussein's Baathist regime recognized the Kurdistan Regional Government (KRG) as a semiautonomous entity with benefits that were supposed to include referendums in disputed areas, revenue-sharing, and compensation for Peshmerga warfare. The central government has failed to meet many of its obligations.

Compared with the rest of Iraq, the Kurdish region has fared well. To the irritation of Baghdad, the KRG started entering production-sharing contracts with international oil companies in 2008. Since then, the Kurdish industry has raised oil production to nearly 700,000 b/d and built two links to the pipeline through Turkey, the Iraqi section of which is disabled after repeated attacks. The KRG also has expanded its area of influence to include Kirkuk and the giant oil field of that name in an historically multiethnic region from which Kurds were displaced during Baathist rule.

But crude-price weakness since mid-2014 has treated Iraqi Kurdistan the same as it has every other oil-dependent economy. The small quasicountry is estimated to have accumulated $20 billion in debt. Because fiscal frailty and dependence on the pipeline through Turkey weaken the KRG's bargaining position with Baghdad and Ankara, timing of the referendum raises questions. Some observers think the government is using the event to cover its own shortcomings, protect territorial gains, bolster its negotiating stance opposite the central government, and possibly elicit US support for its constitutional demands.

If those are the motivations, the referendum amounts to a high-stakes wager. Doubts about sustainability of an independent Kurdistan make it all the more so. The two main political parties, President Massoud Barzani's Kurdistan Democratic Party and the Patriotic Union of Kurdistan, which fought a civil war in the 1990s, remain bitterly divided. The Kurdish military, Peshmerga, and security forces are polarized by party allegiances. And the gap between a wealthy, well-connected minority and struggling majority is said to be widening.

Deep fractures

Independence would not automatically unify the Kurdistan Region of Iraq. In fact, its inevitable failure to ease economic pressures, absent an oil-price surge no one expects, would add stress to fractures already deep.

For now, events have demonstrated the ability of Kurdish politics to move oil prices. And the oil industry has yet another geopolitical contingency for which to account in its investment planning.