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Iraq's Kurdistan is emerging as an important oil producer

Despite trouble on its borders, Iraq's Kurdistan plans to export 1 million barrels a day by next year

In a little under five years, Iraqi Kurdistan has gone from an oil minnow to an emerging force. Until 2009, the area under the Kurdistan Regional Governments (KRG) control hadn't exported a barrel of crude. By the end of next year, Iraq's Kurds say they will be exporting 1 million barrels a day (b/d) - an impressive feat achieved in very difficult circumstances.

Just 10 years ago, this did not seem possible. Much credit must go to KRG natural resources minister Ashti Hawrami. In the face of fierce objections from Baghdad and the US, his ministry nurtured the KRG's exploration boom. But recent events, not least the rise of the Islamic State (IS) elsewhere in Iraq, have also spurred Kurdish oil ambitions.

Hawrami and the foreign oil companies active in Kurdistan are planning to boost volumes of crude flowing to the Turkish port of Ceyhan. In January 2014, the KRG's oil exports consisted of around 40,000 b/d of trucked crude from the Taq Taq field and 14,000 b/d of condensate from the Khor Mor gasfield. Now two 1 million barrel Suezmax tankers a week are loading from Ceyhan, filled with crude transported via the KRG's autonomous export pipeline system. As volumes increase, they will either give the KRG leverage to secure post-hoc approval from Baghdad in 2015 budget talks, or provide the KRG with the means to make good on promises of economic, perhaps political, independence. 

Kurdistan's oil production capacity reached 450,000 b/d in early November. More production is expected by the end of 2014, as international oil companies (IOCs) resume operations following the eviction of IS combatants from the disputed territories.

Autonomous KRG pipeline exports now average 250,000 b/d, rising to 300,000 b/d in November. The surge came with the freeing up of Khurmala Dome oil for export, itself the result of the Kurds' seizure of Kirkuk in July and subsequent connection of the Avana Dome to regional infrastructure. The KRG is working to bring the Bai Hassan field into its export system, raising the prospect of a new Iraqi export blend from KRG fields and those formerly controlled by the federal North Oil Company (NOC).  

New production is due on stream next year. Taq Taq should expand from 110,000 b/d to 170,000 b/d in the first quarter, and Tawke will almost double to 200,000 b/d. A new central processing facility at Khurmala Dome will boost capacity to over 240,000 b/d. All this new production will be available for export. 

This is partly a result of Hawrami's investment strategy. He lured independents, and later majors, to what was initially a marginal play by offering enticing production-sharing contracts (PSCs) rather than restrictive fee-based service contracts as offered by the federal government for southern fields. PSCs sweetened the risk companies were taking, both on geology and the chance that the KRG-Baghdad oil dispute would be resolved, allowing the KRG to pay investors for production.The KRG has also worked hard to ensure infrastructure is in place to handle production increases. 

Newer entrants are bringing on more crude in 2015 that will feed incremental barrels into the KRG export pipeline. Oryx Petroleum's Demir Dagh facility will expand to 40,000 b/d next year, with much of that ready to flow through its existing connection to the export system.

A new processing facility at Taqa's Atrush field will pump 30,000 b/d into the line. It plans to ramp up output to 60,000 b/d. Mol's Akri-Bijeel field will produce 40,000 b/d next year, rising to 100,000 b/d by 2017. Gulf Keystone Petroleum's Shaikan field will produce 25,000 b/d by the end of the year, increasing to 40,000 b/d in January.

This is happening despite the turmoil and savage violence just across Kurdistan's border with the rest of Iraq. The impact of IS on Kurdish oil developments is mixed. While many foreign companies withdrew staff as the Islamists moved close to Erbil in August, this did not have a decisive impact on production. Indeed, the insurgency may have spurred KRG efforts to expand its hydrocarbons sector.

Initially, IS' rout of Iraqi armed forces around Mosul proved a boon for Kurdish oil ambitions as Peshmerga, the region's army, swiftly took over the disputed province of Kirkuk, long claimed as part of the Kurdish homeland. This handed the Kurds control of NOC's fields.

The integration of these assets is as important as expanded production to KRG oil export ambitions. Avana output is now fully integrated into the KRG pipeline system, with volumes averaging 100,000 b/d. Bai Hassan will be integrated by the end of the year, though Kurdish politics have complicated this. Both Bai Hassan and Avana are under the security control of KRG president Massoud Barzani's Kurdistan Democratic Party (KDP). The Baba Dome, which could be quickly integrated into the pipeline system, is being kept separate by forces loyal to the KDP's rival, the Patriotic Union of Kurdistan. This is controversial anyway, given the federal government's opposition to the KRG's autonomous oil policy.

Another complicating factor is the destruction of the Iraqi section of the Iraq-Turkey Pipeline, which crosses IS-controlled territory. The KRG has been explicit about its plans to use the line's sabotage by IS, together with their expropriation and management of the ex-NOC fields, as a means to force Baghdad to agree a revenue-sharing agreement.  

Baghdad has deemed illegal the KRG's signing of PSCs with foreign companies and its attempts to sell crude independently of the State Oil Marketing Organisation network. This summer's events have strengthened the Kurds' hand, even if legal questions over Kurdish sales have yet to be resolved.

KRG officials appear undeterred too by Turkish disquiet over their ambitions. The Turks - hitherto close allies of Erbil - have warned they will not countenance the addition of crude from former NOC-controlled fields to the KRG export blend. The KRG claims that Avana and Bai Hassan are in Makhmour district, and are therefore outside Kirkuk in rightful KRG territory.

Kurdish pipeline flows will increase to 400,000 b/d by the end of the year once Bai Hassan is connected, at which point the KRG will be exporting some NOC oil, considered by the federal government to belong to Kirkuk province and, by extension, the federal export and marketing system.

There is logic to the Kurds' strategy. By exporting crude outside its core territory, the KRG demonstrates it can monetise oil where the federal government cannot. The calculation is that while negotiations with despised former premier Nouri al-Maliki may have failed, the KRG may be able to extract concessions from novice oil minister Adel Abdul-Mehdi and Baghdad's cash-strapped prime minister Haider al-Abadi. 

Ultimately Baghdad and Erbil are locked in the same dispute they were 10 years ago. While Baghdad predicates the legitimation of the KRG's oil sector on it remaining interdependent on the rest of Iraq, Erbil says it has the right to do whatever is necessary to manage oil and gas on its own. 

Internationally, Kurdish strategy is gaining ground. While the US once saw the KRG's ambition as a threat to Iraq's fragile unity and regional stability, the rise of IS has seen White House resolve crumble. The dynamic is shifting quickly. November saw a large rise in crude sent through the KRG export line, increased loadings from KRG-allocated storage at Ceyhan, and a consistent pattern of exports involving tankers loading, off-loading and re-exporting cargoes via Israel.

The IS crisis will accelerate the denouement of the KRG's dispute with Baghdad, one way or another. In or out of federal Iraq, Kurdish oil is destined to reach the market in greater volumes through 2015. The delivery will continue to be fraught with risk, but a significant new oil exporter has been born. 

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