Ethnic interests could trump economic sense

These days, Erbil has the feel of one of those gold prospecting towns of the old US west.

Investors of all stripes descend on the Iraqi Kurdish capital to spend their dollars, lured by high – indeed inflated – figures for suspected oil and gas reserves and promises of commensurate returns.

Some need little encouragement, but with each new contract signed, and as exports climb, even relatively conservative companies are taking the plunge, fearing they might lose out if Kurdistan proves the bonanza its leaders make it out to be. ExxonMobil was the latest, and the biggest, to dip a toe in the water.
 
It has been the Kurdistan regional government’s genius to sell itself as the last frontier in oil exploration and as virgin territory receptive to private enterprise, holding out development contracts with terms far more favourable than those Baghdad offers for Iraq’s huge southern fields.

Few seem to understand, or care, what Kurdistan’s strategy is, and appear content to be part of the game if it generates huge profits. Yet, that strategy, and its success or failure, will determine how much oil and gas will be exported and how much money stands to be made.

The Kurdish government has long seen its attempt to attract international oil companies as a strategic imperative, building up from small wildcatters such as Norway’s DNO via bigger companies such as Houston-based Marathon Oil to supermajors such as ExxonMobil.

It has made every effort to diversify the countries of provenance, signing contracts with outfits from the US, UK, France, Germany, China and others to bring international recognition and legitimacy to itself – and perhaps also to secure the region’s protection, should the need arise, or support for an eventual bid for statehood.

Underlying this strategy is Kurdish leaders’ drive to maximise the territory they control and the autonomous powers they exercise within it.

Hence their expansive interpretation of an Iraqi constitution they were instrumental in drafting, and their unrelenting struggle to incorporate “disputed territories” they claim were part of a historic – albeit undefined and undelineated – Kurdistan.

Several factors will probably constrain the Kurdish leadership in its attempt to free the region from the chains binding it to Iraq, a profoundly unhappy relationship of duelling nationalisms.

One is precisely those disputed territories. When Kurdish leaders say they hold reserves of 45bn barrels of oil and upward of 100,000bn cubic feet of gas, they neglect to mention that most of these reserves lie outside the Kurdistan region in areas whose status is yet to be determined – through a process that has become increasingly obscure – and whose riches constitute a potential casus belli for both Baghdad and Erbil.

When ExxonMobil entered the disputed-territories fray in October, by signing exploration blocks across the Green Line – the Kurdistan region’s constitutional boundary – it further increased the area’s strategic importance.

A second constraint is the unresolved relationship with the rest of Iraq.

Negotiations have dragged on for years over draft federal hydrocarbon legislation that would define Erbil’s powers, especially in signing contracts, as well as its right to export the region’s oil and gas through the national pipeline network.

The two sides have been far apart on an issue that goes to the very heart of their federal arrangement. Baghdad is accusing Erbil of seeking to tear up the country, and has incurred the reciprocal Kurdish charge that Iraq’s rulers are unreconstructed Arab nationalists using outmoded systems of governance.

A third constraint is the fact that Kurdistan is landlocked and therefore must depend on its neighbours for access to world markets. The most likely candidate, Turkey, has indicated that, while it is eager to serve as the principal export channel for oil and gas, the Kurdish government will have to co-ordinate its sales through Iraq’s state marketing board. This throws the Kurds back on to Baghdad and its centralising tendencies.

A final constraint is the eventual ceiling on Iraqi oil exports. For now, Baghdad is content to have Kurdish exports contribute to national revenues. However, if and when Iraq succeeds in producing the volumes currently bandied about – even at the estimates’ lower end – its neighbours are bound to weigh in and, through Opec or otherwise, seek to limit Iraqi exports in order to keep control over world prices and protect their own status as producers.

Once that limit is reached in the next few years, and if Iraq’s southern fields can satisfy demand by themselves, would Baghdad still consider giving a share to those pesky Kurds?

Baghdad and Erbil would be well served by a fundamental deal to settle these concerns, but their conflict would not be the first in which ethno-national interests have been allowed to trump sound economic and commercial sense.