Date: 3/15/2021
Author: Kent Moors, Ph.D.
Over several years as an advisor to the Kurdish Ministry of Natural Resources on matters such as the Kurdish Oil Law and Production Sharing Agreement legislation (discussed below), combined with working with Western oil companies bidding on projects in Kurdistan, I came to have considerable respect for the long-term view incumbent in Kurdish diplomacy.
However, events are indicating the time frame is changing. The matter of Kurdistan’s status is yet another powder keg in an already incendiary region. Ankara is opposing Kurdish rebels in eastern Turkey in an ongoing offensive that has spilled into neighboring war-torn Syria. Meanwhile, Tehran is cautiously eying Kurdish ethnics surrounding Tabriz in northwestern Iran.
For its part, the central Iraqi government in Baghdad several years ago placed an economic embargo against the semi-autonomous region following an overwhelming Kurdish referendum approving a declaration of independence.
The independence drive is hardly new. It has been a stated Kurdish goal for generations. The crude oil and natural gas reserves in the region have fueled the economic base for the independence drive.
But that very source of what the Kurdistan Regional Government (KRG) in Irbil considers its revenue windfall is also the substance of a potentially explosive disagreement with Baghdad.
Over the past several months Moscow has decided to step up its own oil initiatives in Kurdistan, putting it at loggerheads with Iraq. As relations between Russia and the Iraqi central government waiver, Russian oil companies are continuing to move into the semi-independent enclave of Kurdistan in the north. The “big three” of Russian production – state oil leader Rosneft, LUKoil, and Gazprom (both as the world’s largest natural gas producer and as parent of oil company Gazprom Neft) – have been expanding activities in the region.
Those moves, however, are as much to buttress Russian geopolitical interests as they are to improve Russian oil export bottom lines.
Kurdistan is officially still part of Iraq, although the KRG has declared it has overwhelming local support for a formal declaration of independence should they decide to move in that direction.
That option is actively resisted by both the Iraqi central authorities and Washington (both during the Trump years and these days with the new Biden administration). With independence a galvanizing objective for a broad cross-border Kurdish population stretching across four bordering countries (Iraq, Turkey, Iran, and Syria), the fate of the Kurds remains one of the most short-fused flashpoints in a very delicate multi-state caldron.
The Kurds remain the world’s largest indigenous ethnic population without its own state. But any move in that direction is certain to result in concerted responses from Baghdad, Damascus, Ankara, Teheran…and even Washington.
For the past several years, the KRG has been particularly adept at attracting international energy companies into Kurdish projects in defiance of ultimatums laid down by the central Iraqi authorities.
Baghdad forbids exports of Kurdish oil and gas without the expressed approval of the national government. Irbil, for its part, has responded with moves to establish separate export pipeline venues bypassing the major Iraqi-government controlled line from Kirkuk to the southeastern Turkish oil mega port at Ceyhan.
It seems ironic that much of Kurdistan’s prospects for its own control over exports rests in the hands of the Turks. Ankara has a protracted opposition to the radical Kurdistan Workers’ Party (PKK), long a source of terrorism in eastern Turkey, and the Syrian Kurdish militia called the People’s Protection Units (YPG) just across the border.
Nonetheless, there is one objective that does bind together the KRG and the Turkish government together – continuing opposition to the Shiite-fueled administration in Baghdad. That has not been improved much by the compromise selection of Mustafa Al-Kadhimi last May as the new prime minister.
Kadhimi is not a politician but a UK-trained journalist (who also obtained British citizenship). He gets along well with the various Iraqi domestic political factions. However, my sources in Irbil and Ankara regard him as a caretaker at best and certainly not a leader who can prevent an intensifying of the religiously inspired connection between Baghdad and Tehran.
The rising popular protests in Baghdad and other major Iraqi cities illustrate the difficulties confronting a political novice in navigating a complicated sectoral terrain.
In addition, there is also the confluence of interests bringing together the Kurdish desire to control its own oil/gas export revenues and Turkey’s ongoing interest in becoming the energy lynchpin connecting East and West.
The Kurds have been particularly successful in providing much better terms to foreign companies than those offered by Iraq. While Baghdad continues to offer what amounts to embellished service contracts (fee per barrel above a contracted level), the KRG has provided arrangements that approach genuine Production Sharing Agreements (PSAs) governed by a central Oil Law. Iraq still does not have anything that resembles a PSA and has been negotiating a central oil law for more than a decade with regional and sectoral groups.
Contacts at the Iraqi Ministry of Oil (which whom I also had a consulting arrangement at one time) have acknowledged that the primary leverage the ministry thought they had in negotiating with international majors turned out to be no leverage at all.
Baghdad has offered (via the less than desirable service contracts) access to huge existing (and producing) oil fields. But in return the government has also stated companies would not be eligible to work in Iraq proper if they also entered contracts with the KRG. The central authorities had concluded majors would not want to forego such work for smaller Kurdish fields.
They were wrong. Beginning with huge players like ExxonMobil and Total, the big boys opted for the better terms in Kurdistan. Baghdad responded by refusing to pay for work already completed in both Iraq and Kurdistan under contracts previously negotiated by Iraqi authorities.
It is against this backdrop that the largest Russian companies signed agreements with the KRG. These began some five years ago and have recently entered a new phase. While both Rosneft, the largest Russian state oil company, and the Kurdish Ministry of Natural Resources have referred to the ongoing negotiations as involving additional field development agreements, the Russians are quickly moving into another area.
Sources in Minenergo (the Russian Ministry of Energy) have acknowledged that the new Rosneft initiatives involve control over a portion of Kurdish future oil and natural gas export consignments from fields other than those included in the new projects under consideration.
Further, international market contracts have confirmed that Rosneft has contacted international trading major Glencore to coordinate an ongoing series of contract swaps intended to fold Kurdish exports into volume effectively under the control of Rosneft.
In addition to the known connections between Glencore and the Kremlin (on which I have provided some detailed commentary previously in Classified Intelligence Brief, see “Trading Scandals I and II,” September 14 and 16, 2020)) this arrangement allows two advantages to Rosneft moving forward.
First, in a practice that both Rosneft and Russian state pipeline transport monopoly Transneft have utilized in the past with pass through volume from Kazakhstan and Azerbaijan, this allows for mark ups and exchanges of lower-cost domestic production. Both tend to augment bottom line profits.
Second, a curious development has unfolded in the renewal of the OPEC-Russia (OPEC+) production cap accord. Despite concerns that Iraq might demur from the production cuts, Baghdad has complied. In fact, for much of the time, Iraqi cuts have actually exceeded the nation’s quota.
Quietly, however, much of the Kurdish production expectations have been dropped from the overall Iraqi totals.
I first heard rumors that this was in the works during meetings held last year in Paris. It appears to have been pushed through, meaning that the Rosneft/Glencore/Kurdistan contract swaps underway allow greater revenue flow for Moscow while Russia continues to provide public posturing that the agreement with OPEC remains in force. Russia books pass through volume as Kurdish but pockets additional revenue without declaring additional sales.
Contacts in the Saudi Ministry of Energy, Industry and Mineral Resources have consistently refrained from admitting that this “accounting legerdemain” was the price Riyadh had to pay to keep Russia in the latest renewal of OPEC+ production cuts.
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
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