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What happens when Mosul falls?

The battle for the city is the prelude to wider struggles for political influence in the region and control of northern Iraqi oil production

The Iraqi-led offensive to drive Islamic State (IS) fighters out of the country's second-largest city has made slow but significant progress. By mid-November, Iraqi forces had recovered one third of the eastern side of Mosul, while Kurdish Peshmerga and Shia militiamen were encircling the city. The ultimate defeat of IS in Mosul seems assured. Less clear is what awaits northern Iraq-and its oilfields-when the city is liberated.

Of particular importance to the federal government is the fate of territory and population centres taken over by the Iraqi Kurds since the start of the IS surge in mid-2014. At the top of its list of concerns is the fate of Kirkuk, which the Peshmerga captured in the early days of the IS offensive in mid-2014. Kirkuk is one of the disputed regions awaiting a political agreement between Baghdad and Erbil in accordance with articles in the federal constitution. When the dust settles in Mosul, the wrangling over Kirkuk and its oilfields will start in earnest.

The view of the Kurds is that Kirkuk is historically part of their territory and they will never surrender it. If Baghdad sticks to its stance, that federal sovereignty over Kirkuk is non-negotiable, then one should expect at best a period of tension between Baghdad and Erbil, at worst clashes between the army and the Peshmerga-with inevitable disruption to oil production and exports. The sovereignty dispute could also push Iraqi Kurds further towards independence. The prime minister of the Kurdish Regional Government (KRG), Nechirvan Barzani, said in October that "once Mosul has been freed we will sit together with our partners in Baghdad and talk about our independence. We've been waiting for too long."

Leaking system

Kurdish independence would have a profound effect on the northern oil sector. In the early days of the IS surge, the Kurds took over production of the Avana Dome at the Kirkuk oilfield and the nearby Bai Hassan field (with combined production of around 275,000 b/d, formerly operated by the federal North Oil Company-NOC) to stop them being captured by the jihadists. They remain in Kurdish hands, with crude oil fed into the KRG's export system and pumped to Ceyhan in southern Turkey. NOC still operates other fields, with output averaging 180,000 b/d. At present, under a deal reached earlier this year after many months of non-cooperation, 150,000 b/d of this is fed into the KRG export infrastructure and 30,000 b/d supplied to the Kirkuk refinery. Kurdish independence would torpedo this uneasy arrangement.

A collision between the federal government and the KRG would also complicate Iraq's production agreement with Opec. Until the meeting on 30 November, Baghdad was including KRG production as pat of the country's overall output, even though the federal government was not receiving revenue from it. It isn't clear, yet, how that will changed now that Iraq has accepted Opec's lower estimate of its production.

Furthermore, figures produced by the two authorities implied that Baghdad was double-counting output from the Avana Dome and Bai Hassan-including it both in federal figures and KRG data. The aim was to boost Iraq's nominal production ahead of the Opec cut. So, for example, Iraq's published production for September was 4.77m barrels a day. The realistic figure was 4.5m b/d.

Now Iraq has both accepted the lower number and agreed to cut from it. Now that this double-counting seems to have been eliminated, Iraq's true output levels will only be plain once its 210,000 b/d worth of cuts agreed with Opec are visible. These are likely to be made from federally controlled fields in the country's centre.

Iraq's northern oil sector after Mosul is liberated could be impacted by other potential sources of instability. IS grew out of the marginalisation of Iraq's Sunni community during the premiership of Nouri al-Maliki. Little has changed during Haider al-Abadi's time in office. Sunnis still feel that the Shia, in charge of government in Baghdad, are excluding them from key positions in public life.

The defeat of IS in Mosul will not, therefore, eradicate Sunni resentment. While most disapprove of IS' extreme ideology and brutal methods, they could be attracted to another group that emerges to take up their cause. At the same time, IS fighters are likely to merge into the community and carry out isolated acts of terrorism-like the suicide bombing of a wellhead and pipelines at the Bai Hassan field in August.

Another potential source of instability for northern Iraq and its oil sector stems from Sunni-Shia tension around Mosul, with Iran-backed militias playing a key part in the anti-IS campaign. The Abadi government insists that the battle for the centre of Mosul will be conducted exclusively by Iraqi forces, with the Shia militiamen remaining outside. Nevertheless, while many senior officers appointed by Maliki have been removed, Shia still dominate the ranks of the army, with some units in the Mosul campaign flying sectarian flags.

Until all these Mosul-related issues are resolved, Iraq's northern oil sector will remain vulnerable to interruptions of one kind or another.

Vulnerable fronts: Iraqi oil Source: Petroleum Economist
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