Originally appeared in Russian at 1prime.ru
The Iraqi Kurdistan independence referendum in late September led to escalation of the economic crisis in the autonomous region. Having stopped paying salaries to the civil servants in the region, Baghdad took over the oil deposits in Kirkuk province, which had provided Erbil with half of its profits by exporting “black gold”. The Kurdish authorities also have to deal with thousands of refugees that left their homes in contentious territories, after the Iraqi Army and the Popular Mobilization Units had arrived there.
Oil as a priority concern
For more than 20 years, 90% of the Iraqi Kurdistan treasury has been filled by its oil exports. Until Baghdad took over the oil deposits in Kirkuk on October 16 of this year, the Kurdistan Regional Government had evaluated that it had had 45 billion barrels of oil in stock.
Besides the “black gold”, large natural gas deposits are also present in the region, although they haven’t been developed in any considerable way.
According to Govand Sherwani, an energy production expert of Salahaddin University in Erbil, “the autonomous region’s territory contains other natural resource deposits, though up until recently developing them was not a priority of the regional government.”
Until 2014 Erbil and the federal government had an agreement, according to which Baghdad sold all of Iraqi Kurdistan produced oil (approximately 300 thousand barrels per day). In exchange, the autonomous region received 17% of Iraq’s total budget, which was equivalent to $1 billion monthly US proceeds. However the abrupt oil cost drop in 2014 cut the amount of money sent from Baghdad in half. This led to a serious deficit in the autonomous region, including cutting pay to civil servants and to the Kurdish Peshmerga armed forces.
Controlling and losing Kirkuk
Paradoxically enough, the expansion of the ISIS terrorist group to Kirkuk in 2014 helped Iraqi Kurdistan patch the holes in the budget. When the radicals advanced, The Iraqi Armed Forces retreated from their positions in Kirkuk. Only the Peshmerga units reacted quickly enough and managed to fend off the terrorists, and also established control over the oil-rich province, which already was a historically contentious territory between the Kurds and the Iraqi government.
Bey Hasan and Avan, two largest Kirkuk oil deposits, now controlled by Iraqi Kurdistan, produced 250 thousands barrels per day. 50 thousands more were produced and exported in agreement with the federal government at the oil fields under control of Iraqi North Oil Company (NOC). Summing up, the production of oil in KRG-controlled territories reached 600 thousand barrels per day.
Since then Iraqi Kurdistan began to sell not only their own, but also their recently acquired resources to Turkish region of Ceyhan without proxy, despite Baghdad’s protests.
The Iraqi Kurdistan independence referendum changed everything. The federal troops took over all of the oil deposits in the province and entered the city of Kirkuk without almost any fighting, thanks to internal conflicts in the Iraqi Kurdistan government.
“After the Iraqi Army and Popular Mobilization Units had come, we lost 50% of our oil revenue. And you have to consider that oil is the main source of income for the region’s budget,” deputy of Kurdistan Regional Government Ministry of Natural Resources Dilshad Shaaban told RIA.
Energy production expert Govand Sherwani thinks that the autonomous region may be able to compensate the loss of Kirkuk oil by seeking out and developing new deposits in the future.
“A lot of oil and gas deposits in Iraqi Kurdistan are still not developed. The work of international companies in the region, of which there are about 50 from 15 countries around the world, may increase the number of active deposits considerably,” Sherwani said.
Oil companies and criticisms from Baghdad
Besides biggest European and North American oil companies, Russian Gazprom and Rosneft work in Iraqi Kurdistan, with the latest signing a contract of cooperation in the oil sector with the regional government.
Particularly, the contract stipulates oil trade from 2017 to 2019. In September of this year, both sides also negotiated whether the company would take part in financing the Kurdistan gas pipeline construction project. A week before the independence referendum Rosneft declared that it had signed the necessary documents for the production sharing agreement (PSA) with the regional government regarding the five blocks in the autonomous territory.
Baghdad harshly criticized Erbil’s expanding collaboration with the western oil companies. Iraq considers all the deals made without central government’s involvement illegal. On October 30, representative of Iraq’s Ministry of Oil Asem Jihad told RIA that the ministry had asked Rosneft to give an explanation regarding its position towards the Iraqi Kurdistan deals.
However, according to Kurdistan Regional Government official Dilshad Shaaban, “all the deals signed by Iraqi Kurdistan government, including the Rosneft ones, were signed according to Constitution of Iraq and Iraqi Kurdistan laws.”
“The confusion arises from the fact that Iraq did not have any “oil and gas” laws after approving the 2005 Constitution. In 2007, the Iraqi Kurdistan parliament issued law #22, concerning oil and gas, which is based on Iraq’s Constitution and includes the tools necessary to sign deals,” said the deputy of Kurdistan Regional Government Ministry of Natural Resources.
Shaaban, member of the parliament faction of the ruling Kurdistan Democratic Party (PDK), noted that “speculations regarding the legitimacy of the deals with international companies are politically motivated and have no legal basis.”
Baghdad hands Rosneft blocks to British Petroleum
Izzat Sabir, head of the Kurdistan Parliament financial and economics committee and member of PDK, estimates that the deals between Rosneft and the Kurdistan Regional Government are worth $3 billion. According to his data, some of the Russian oil giant’s deals may have to be renewed with the central Iraqi government. Three out of five oil blocks that Erbil and Rosneft prepared for production sharing are situated in Kirkuk province and recently “came under control of the federal government.”
Following the sudden “return of sovereignty” to the province, Iraq’s Ministry of Oil said that it plans to develop the Kirkuk oil deposits jointly with British Petroleum.
Nevertheless according to Dilshad Shaaban, both Baghdad and the British oil giant will have to cooperate with Rosneft and the regional government.
“Iraqi government and BP won’t be able to begin work and transfer Kirkuk oil to Turkey without cooperating with Rosneft and the Kurdistan Regional Government. Rosneft owns 60% of Iraqi Kurdistan gas pipeline stock. Therefore BP has to make a joint production deal with Rosneft and subsequent transfer of oil to Turkish Ceyhan,” Shaaban said.
According to Shaaban, “using old Iraqi pipeline (built during the 1980s) from Kirkuk across Mosul to the Turkish border would be impossible,” as this pipeline was partially destroyed by ISIS terrorists.
“The Kurdistan Regional Government decided not to hand Faysh Khabur border crossing [situated on Iraqi, Turkish and Syrian borders] over to the federal government, as it’s the only point through which you can transfer oil [to Turkey],” he added.
According to Govand Sherwani, there is a certain risk for the Russian company: it entered the local market during a critical moment for the autonomous region. However this situation also has a lot of positives.
“Giant companies can overcome these risks and enter the market without competition. Some of [Rosneft’s] projects had been previously presented by the US companies, but they had hesitated, and this part was given to the Russian company. The appearance of Russian companies is met positively by the regional government. Russian companies enjoy good reputations, and they have a lot of experience in the oil and gas sector,” said the expert.
Sherwani also noted, that the Russian companies’ interests and sizeable investments in Iraqi Kurdistan may be “a part of Moscow’s political support for Erbil in order to secure its strategic presence in the region.”
The Iraqi Kurdistan losing Kirkuk oil, and also sanctions from Baghdad and neighboring Iran and Turkey led to escalating the previously existing financial crises of the autonomous region. According to Izzat Sabir, head of the Kurdistan Parliament financial and economics committee, monthly revenue of KRG’s budget dropped from $800 to $300 million.
“Up until this crisis, the monthly revenue of Iraqi Kurdistan was $800 million, however cutting down on the oil exports due to recent events led it to drop to $300 million and even lower,” said the head of the committee.
Sabir noted that Baghdad does not pay the civil servants of the autonomous region, all the while the region’s internal revenue is not enough to pay the officials.
According to him, solving this economic problem is currently impossible, “until the military and political problems are solved.” “The future is unclear,” the official ruled out.
According to Abdullah Hasan who lives in Erbil, the economic crisis did not have a visible effect on lives in the cities and towns of Iraqi Kurdistan. Turkey — the main trade partner of the autonomous region — did not close its borders despite the threats to do so. Hence the stores are stocked with various groceries.
“You can say that the situation seems normal. However a lot of people stopped buying all that much because they are pressured for money. During last three years, we have been paid half of our salaries bi-monthly. Now, because of these events, we are not getting paid at all”, Abdullah says.
According to him, the economic situation is further complicated by tens of thousands refugees from Kirkuk, who left their houses in the contentious territories after Iraqi Army and PMU had arrived.
“They ask the government to provide temporary shelter at least, but the government can’t provide them with anything. Unofficially Erbil allowed them to live in the house not yet used,” he said.
On September 25, an independence referendum took place in Iraqi Kurdistan. According to the Kurdistan’s Independent High Elections and Referendum Commission, 92.7% voted in favor of independence. The government of Iraq declared the referendum illegitimate. Baghdad sanctioned the autonomous region after the referendum, and Iraqi Armed Forces started operations in order to return control over contentious regions, with Kirkuk and its environs being a priority. The sides try to engage in dialogue, but several serious conflicts are still unresolved.