The Kurds Are Being Allowed to Begin Oil Exports

The Wall Street Journal had a story yesterday that doesn’t seem to have gotten much play…though I’ll admit I didn’t look real hard for other coverage:

The Iraqi federal oil ministry said Sunday it will allow the autonomous Kurdish government in northern Iraq to start exporting crude oil in June to world markets after blocking such shipments for the past two years.

The Kurds and the central government, which grants all oil-export licenses, have been at odds since 2007 over Iraq’s draft hydrocarbons law and oil contracts that the Kurds signed with foreign companies.

Despite those issues being still unresolved, Baghdad -- under increased financial strain because of weak oil prices and falling revenue -- will allow the Kurds to begin exporting 60,000 barrels a day from June 1, oil ministry spokesman Assem Jihad said. “We are agreeing to the exports,” he said.The Kurds said Friday they would start exports regardless of the ministry’s approval. [my emphasis - D ]

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This has been a bitter issue for the Kurds. They signed leases with various international companies a few years ago, and if memory serves, some of those companies spent a lot of money upgrading the equipment necessary to begin getting the oil flowing again.

Mr. Jihad didn’t say why Baghdad had reversed itself, but it is likely that the central government’s need for more revenue played a part in its decision. The government has slashed its 2009 budget three times because of falling oil prices.

I also don’t know how much our aid to Iraq has dropped since the advent of Obama and the world-wide economic downturn, but this is surely a factor in the “need for more revenue”.

Baghdad’s acquiescence is also welcome news for the small foreign oil companies, including Norway’s DNO International ASA, that have plowed hundreds of millions of dollars into finding and producing oil in Kurdish Iraq but haven’t been able to export a single barrel.

I’d love to know the background story here. We all have our guesses as to Baghdad’s foot-dragging. Mine is that it doesn’t want to grant more power or income to the Kurds than they already have. Eventually, there is going to be a push by all the Kurds, not just those in Iraq, for a Kurdish state. When that shoe drops, the “nation” of Iraq will split. At that point, expect a huge push-back from Iran.

It is unclear whether the start-up of Kurdish crude exports could help soften hard bargaining positions that Baghdad and Erbil, home to the Kurdish government, have adopted on the draft oil law and the Kurdish contracts. Iraqi Oil Minister Hussain al-Shahristani has said in recent days that Baghdad still won’t recognize the roughly 25 contracts the Kurdish government has signed with foreign oil companies. In those deals, the Kurds allow companies to book some level of crude reserves they discover as their assets, a concession Baghdad hates and thinks is against the national interest.

“Against the national interest”? How, precisely? It would strengthen the national economy certainly. Does Baghdad think that oil companies operate for free? It’s not as though Iraq had a functioning oil supply when Saddam was finished off.

The Kurdish government on Sunday welcomed Baghdad’s decision.

I’ll bet they did. It saved the Kurds having to marshal their Peshmerga forces to get things going.

Mr. Jihad said the oil ministry’s State Oil Marketing Organization will handle the sale and marketing of Kurdish exports, which will be shipped via a major pipeline that snakes to a big export terminal in Ceyhan, Turkey.

That’s another possible flash point when or if the Turkish Kurds make an alliance with the Iraqi and Iran Kurds. Turkey will most likely align with Baghdad and Tehran to keep that from happening. Right now, though, we have this baby step that (a) may be the harbinger of bigger steps in the future, and (b) the Iraq economy gets a much-needed boost.

One other problem that the Kurds face with the opening of the oil port is attacks from the remnants of AQI. It did a lot of damage to the infrastructure throughout Iraq and could well focus on Tikrit in a final shove to prevent Iraq’s stability and prosperity.

This is definitely a developing story.