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Will Iraq fall apart as political problems continue?

With Islamic State in control of large swathes of territory, Kurdish Iraq pushing autonomy and Basra itching for more money, Baghdad is losing control of its country – and its oil sector

The leaden winter sky over the Jordanian capital delivering squalls of sleet and snow offered a metaphor for a region sunk in gloom. The mounting horrors of the conflict across the border in Syria, not to mention the strain of coping with a million refugees from the country’s war-torn neighbour, casts a dark shadow on the brightest of days. But another regional conflict, in Iraq, is contributing to Jordan’s sense of unease. 

The fate of Iraq matters hugely to Jordan. The two countries were linked in the 1950s by Hashemite monarchies. In later years, when Iraq’s access to the sea at Basra in the northern Gulf was blocked by the war with Iran, a mutually advantageous political and economic relationship flourished between the two countries. Tankers loaded with Iraqi crude oil lumbered southwards across Jordan, wearing deep grooves in the tarmac on the road to the Red Sea port of Aqaba. In return, Jordan not only had access to a huge consumer market in Iraq, but crucially it also received Iraqi crude oil at a discount price, critical for a country which depends entirely on imports for all its energy needs.

Today, both arms of that relationship are broken. Jordan receives no Iraqi oil and political ties with Baghdad’s Shia-dominated leadership are nothing better than correct. Furthermore the view from Amman is of an Iraq being pulled apart at the seams, with no advantages to Jordan. 

“Iraq is being divided between Kurds and Turkomen in ethnic terms, not to mention the sectarian split among Arab Muslim Iraqis between Sunnis and Shia,” said Jordanian academic Dr Labib Qamhawi in his office up a narrow, hilly street close to Amman’s Third Circle. “The central state of Iraq exists in theory, but in practical terms its power is limited to Baghdad. The regions of Iraq, in reality, are something more than that, something between a region and a state.”

Dr Qamhawi’s opinion, on that bleak winter morning, was that a fragmenting Iraq offered Jordan little in the future. Developing a new special friendship with what once was a Sunni-dominated powerhouse to the northeast looks no more likely than the chances of that country remaining united. Iraqi oil at bargain prices will not be on tap again any time soon. The project to build the long-planned Iraqi export pipeline to Jordan remains on hold because of chronic insecurity along the proposed route through Anbar Province, where Islamic State (IS) remains powerful. A second proposed route to the south, following the line of the border with Saudi Arabia, is also by no means a certainty.

Torn governments

The most obvious indication of strain on the federal Iraqi fabric is the growing distance between the government in Baghdad and the Kurdish Regional Government (KRG) in Erbil. Since June 2015, the KRG has been exporting crude oil produced on its own territory, and some of that seized from federal control, via the Iraq-Turkey Pipeline (ITP) to Ceyhan without reference to Baghdad. At the same time, the Erbil authorities have received none of the 17% of federal revenue due to the region in the Iraqi state budget. 

The KRG’s calculation is that revenue from the approximately 0.6m barrels a day (see Table 2) of oil that it can export independently via Ceyhan far exceeds what it might expect to receive through cooperation with the federal government. Furthermore, the KRG seems unlikely at any stage to consider giving up territorial gains, made at the expense of the federal state, after the surge of IS forces in mid-2014. In particular, the KRG has taken control of Kirkuk, the city which Iraqi Kurds have always claimed as their “Jerusalem”. Handing Kirkuk and its oilfields back to Baghdad, as the KRG might be required to do under a compromise deal, is out of the question. 

Most Iraqis, whatever their views on the issue, accept that Kirkuk will remain under Kurdish control. “Through all the years I can remember,” said a former senior Iraqi oil sector official from the Saddam Hussein era, now in exile in Jordan, “Kirkuk was a red line. We would never let the Kurds take Kirkuk, whatever the price. Now, it’s gone.”

Divided oil
The manner in which Kirkuk has fallen under Kurdish control throws light on the power balance between the KRG and Baghdad. Since mid-2014 the Kurds have taken control of the Avana Dome of the Kirkuk oilfield and the Bai Hassan field, both previously operated by the federal National Oil Company (NOC). These two fields account for around 240,000 b/d of production. 

NOC, meanwhile, continues production of around 180,000 b/d, from the Baba Dome of Kirkuk and from its Jumbur and Khabaz fields. But NOC production is outside the government’s jurisdiction: it is either pumped to Kirkuk refineries (under KRG control) or into the KRG export system. The federal government receives no revenue from this production: NOC personnel are paid by Baghdad but operate under orders from the Kurdish Peshmerga and have no choice but to hand over produced oil to the KRG.

The reality, therefore, is that Iraq’s northern oil production – whether under KRG authority or nominal NOC control – is being exported via the ITP and the accruing revenue is being used exclusively to try to keep the Kurdish region financially solvent. But such are the pressures within Iraq to buttress the notion of a strong federal state that the government is acting as though circumstances were different. The Iraqi budget for 2016, for example, includes the previous year’s provision for the KRG to receive 17% of state revenue, in return for the handing over to the federal oil marketing arm, SOMO, of 250,000 b/d of crude oil at Ceyhan for export. This arrangement, agreed in December 2014, has never been implemented. 

Number crunching

At the same time, the federal government is including in its official production figures output that is beyond its control. Iraqi oil officials in late January announced that the country’s total production in December 2015 was 4.13m b/d, adding that this rate may be raised “even further this year” – a statement that was taken at face value by oil markets and had bearish effects. The Iraqi officials’ statements were misleading to put it mildly as its figures includes some of the KRG’s output. In reality, federal oil production in December 2015 consisted of 3.21m b/d from southern fields and 180,000 b/d from NOC operations, yielding a total of 3.39m b/d). 

Instead, the higher official published Iraqi production figure for December - 4.13m b/d (see Table 1) includes all northern and midland production in its official figures: 180,000 b/d of NOC production (pumped to Kirkuk refineries or exported via the KRG), and around 240,000 b/d from the former NOC-operated Avana Dome and Bai Hassan field, now managed, and operated by the KRG; plus the 175,000 b/d from Midland Oil Company (MDOC), exported by the government via the south.

The use of smoke and mirror to blur Iraq’s true crude oil production capacity – and accord it an artificially high ceiling – reflects the frailty of the federal structure. For if one takes at face value the federal and KRG export figures for December 2015 (Tables 1 and 2) and adds them together (counting some of the same figures twice), then the erroneous total would be a massive 4.71m b/d. 

The manipulation of figures also casts into doubt the credibility of any future output changes that might be agreed by major oil states. Iraq’s oil minister Adil Abdul al-Mahdi has pledged some kind of support for any potential Opec cuts (see interview in March issue). But the reality is that any cut agreed by Baghdad would affect only federally controlled production (that is, the 3.54m b/d from the south) and leave KRG output untouched. The federal government would effectively be subsiding KRG exports (which includes NOC production outside Baghdad’s control, as well as former NOC fields).

Furthermore, Iraq’s boast that production might be raised again this year also needs to be taken with a pinch of salt. Because of fiscal restraints, the international oil companies operating in southern Iraq have been told to put development spending on hold for 2016, while seeking to maintain current output. That makes any significant increase in production capacity this year unlikely. As BP’s chief executive Bob Dudley said in early February, “Iraq is clearly a country stressed” and the authorities “are going to be careful about the amount they want us to spend there”. BP operates the giant 1.4m b/d Rumaila field in the south of the country.  

Ownership of Iraq’s northern oil production is one of the key axes in the dispute between Baghdad and Erbil, and therefore one of the most obvious indications of the country’s possible fragmentation. But another symbol of weakening state authority exists closer to the capital, just 130 miles north of Baghdad, at Baiji. This is the site of what was Iraq’s largest oil refinery, with throughout capacity of 310,000 b/d. Today, it lies in ruins. The latest indications suggest that the facility has been damaged beyond repair as a result of many rounds of intensive fighting in and around it. Government forces made several attempts to wrest control of the facility from IS, before finally succeeding in October 2015. 

Even if government funding were available and the refinery rebuilt, its future would still be in doubt. For crude oil would need to be sourced from the northern fields, which are now either directly or indirectly controlled by the KRG. Given the KRG’s severe fiscal crisis and its strong emotional attachment to Kirkuk it is unlikely to agree to divert potential export volumes to a federally controlled refinery. As the exiled Iraqi oil official in Amman said, “the issue of Baiji is now so complicated and potentially awkward that it suits all sides simply to let it go on burning.”

For the Baghdad authorities, therefore, with the Kirkuk and Baiji issues – in their minds at least – still awaiting resolution, the focus has to be on southern production. Over the past three years output from fields in the south and exports through the Basra oil terminal have run remarkably smoothly, unaffected by the turmoil in central and northern regions. But the southern oil sector is not without potential problems, in some ways similar to the ones relating to the Kurdish region: the Baghdad government has made promises in its budget that it cannot meet.

The Basra region of Iraq is keenly aware that, with northern production and exports curtailed, it is the single engine room of the country’s output and exports. It feels, in short, that it is not being adequately rewarded by the central government for the key national role it is now playing. Of particular concern to people in Basra is the failure of the federal government to implement changes made to the Provincial Powers Law in 2013. Article 44 stipulates that state revenue allocations for all energy-producing governorates include $5 per barrel of oil or 150 cubic metres of any natural gas they produce. Under the 2015 budget the regions were allocated only $2/barrel and received just $1/b. The federal government said it could not pay the full amount until it received more revenue from exported oil. Under the 2016 budget the nominal allocation was again $2/b, but the Basra authorities say they have been told to expect only $1/b. 

Basra’s parliamentary members are demanding that their governorate’s role be recognised. They regard the shortfall in what they describe as “petrodollar allocations” as a debt that they will insist on being honoured. MP Fatima al-Zerkani says that “as representatives of Basra in the federal parliament we will press for the full amount under the law. If we feel we are being abused then we will not stop fighting for our rights that are legally guaranteed.”

A state divided

The injustice felt by southern Iraqis is nudging them towards the idea of greater autonomy from Baghdad, maybe one day even of independence. Already the Basra governorate has formed a company that will seek to develop and exploit oil and gas resources in the region – possibly following the KRG line in breaching the strict letter of the Iraqi constitution by negotiating directly with international oil firms.

From the perspective of the Baghdad government, keeping Basra happy is merely one aspect of the bigger task of holding Iraq together. It faces a huge challenge. Aside from disputes with the Kurds and growing impatience in Basra, the country’s second-largest city, Mosul, remains under IS control. The day may come when Iraqi, Peshmerga and other forces, having subdued Anbar Province, are able to drive IS out of the city. Yet the Iraqis are well aware that Turkey has historical claims on the region, and Turkish troops have recently been deployed there. Mosul’s automatic return to Baghdad’s embrace is not guaranteed. 

In the short term the central government’s options are limited. The Kurds are not looking towards a future where oil exports or national allegiance are shared with Baghdad. KRG President Masoud Barzani said in late January that “the time has come and the situation is now suitable for the Kurdish people to make a decision through a referendum on their fate”. As ever, his words were rife with ambiguity. He added that holding a referendum would not imply “proclaiming statehood, but rather to know the will and opinion of the Kurdish people about independence and for the Kurdish political leadership to execute the will of the people at the appropriate time and conditions”.

In Baghdad itself, the government of prime minister Haider al-Abadi faces pressures from within the ruling Shia coalition as it seeks to end the corruption and growing lawlessness in regions where its writ still holds. As Iyad Allawi, the Shia leader of a predominantly Sunni opposition bloc, said in January, “the political process has reached a dead end. Iraq lacks independent institutions. When people have a problem they turn to militias to solve them, not to state bodies.” Would Iraq become divided? “If things carry on the way they are, then anything is possible, including the division of Iraq.”

Looking at developments in Iraq from Jordan, there are no obvious silver linings under the clouds. The Shia-dominated authorities in Baghdad seem as tied as ever to Tehran. Kurdish and other northern Iraqi oil looks set to flow to Turkey for the foreseeable future, with little involvement from Baghdad. While Anbar Province in western Iraq remains off limits and pipeline routes to Jordan are in doubt, Jordan can expect nothing in the way of energy support from its traditional ally’s southern oilfields. 

Gazing eastwards over the Amman rooftops towards the invisible horizon, Qamhawi said Iraq “looks like a jelly, unable to act any more like a solid body”. That is not a healthy state of affairs for the country, for an increasingly isolated and gloomy Jordan, or for a global market that has blithely ignored the troubles brewing in Iraq’s oil sector.

The latest Basra-to-Aqaba plan

A new, more secure route to pipe oil from southern Iraq to Jordan faces familiar hurdles

Iraq needs to find another way of exporting its crude oil, rather than having all sales passing through the single Basra gateway at the northern tip of the Gulf. Jordan has no option but to import all the energy it requires. Iraq and Jordan share a common border: so what would make better sense than an oil pipeline linking the neighbours?

Sadly for both countries, insecurity over recent years in Iraq’s western Anbar Province has scratched a plan that had been mooted for years. The long-discussed idea was that a pipeline would carry oil northwards from Basra, past Ramadi in Anbar to Haditha, and from there southwestwards towards the Zarqa refinery in Jordan, before continuing to the port of Aqaba in the south. The pipeline would also have been able to supply Syria, under different circumstances from those prevailing there today. 

In 2013 Iraq prequalified 12 companies for the $18bn venture. That was a year before Islamic State’s (IS) insurgency. The terror-group’s surge through western and central Iraq put paid to this plan.

Since then another idea has blossomed. This envisages a pipeline setting off from Basra, but heading due west to a point close to the Iraq-Saudi border. It would then track along just to the north of the straight frontier line until passing into Jordanian territory and heading down to Aqaba, thus avoiding completely the dangerous territories of western Iraq. In the longer term, Iraqi oil could reach Egypt.

The idea has gained some momentum. An Iraqi delegation visited Jordan last November, and the oil ministers from the two countries joined forces with their Egyptian opposite number to sign a memorandum of understanding for the proposed project – with an estimated cost of $15bn, for completion over a three-to-four year period. The Iraqi oil minister, Adil Abdul al-Mahdi, says work will begin this year (see interview in March issue). The initial specifications for the pipeline are for capacity 1m b/d, with 150,000 b/d destined for Jordan’s Zarqa plant. 

However, with Iraq’s coffers depleted by the cost of the anti-IS military campaign, the housing of millions of displaced people and the slump in global oil prices, the prospects for the pipeline have not look promising. The Baghdad government says it would have to rely totally on outside funding.

Given the circumstances in Iraq, finding the money might have proved difficult. But a step forward was made in January. The Iraqi government says that China Petroleum Pipeline Engineering Corporation has established a consortium to invest in the latest Iraq-Jordan oil export project. The investment offer is supposed to be presented to the Iraqi authorities this spring. 

So far so good. But the devil may lie in the details – not so much in the ability of an international consortium to carry out such a project, but in how it will be kept safe. Several pumping stations would be needed at intervals along an extended stretch of pipeline in remote desert areas. Installing the necessary surveillance and security apparatus to secure the pipeline would be both time-consuming and expensive. 

Indeed, by the time such a pipeline is in operation – four or five years from now in all likelihood – the regional geopolitical and energy landscape could be different, influencing the success or otherwise of a huge cross-border project of this kind.

Jordan will hope that by then its expanded liquefied natural gas-importing facilities at Aqaba have helped to ease its domestic energy demand pressure. It is possible also that the development of renewable energy sources and the exploitation of its own considerable oil shale (or kerogen-rich) reserves will have diminished its hunger for oil imports from Iraq. So there is no guarantee that the latest proposal for an Iraq-Jordan pipeline will not join the long list of such ventures in the Middle East that have never left the drawing board.

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