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from Stratfor.com
Summary
While the insurgency continues to take center stage in Iraq, divvying up oil revenues remains a back-burner issue. This will not last indefinitely. The Kurds may have a number of constitutional guarantees to their oil possessions in the north, but it is only a matter of time before the oil issue develops into Iraq’s next conflagration.
Analysis
The big question for the Kurds in Iraq is the division of oil revenues – a subject that has remained on the back burner while the insurgency has absorbed the country’s attention. While Sunni and Shiite factions in Iraq have been embroiled in internal disputes over how to proceed with a shakly political agreement, the Kurds have stayed out of the fray and remain focused on preserving their oil rights.
The Kurds face a growing dilemma as the political process moves forward in Baghdad. Any political arrangement by the Sunnis, Shia and Kurds ultimately will revolve around power and money. Momentum toward such an arrangement, which advanced considerably following the death of Abu Musab al-Zarqawi, is what will enable the United States to set a timetable for withdrawing from Iraq. Both the Sunnis and the Shia must bring something tangible to the table in order for the insurgency to be reduced. For the Sunnis, this means containing the insurgency, while the Shia must rein in the militias.
For the Sunnis to deliver, certain institutional and political guarantees need to be made. This is where money and power enter the equation. Iraq’s oil fields are concentrated in the Kurdish-dominated north and the Shiite-controlled south. By playing the insurgent card, the Sunni political leaders have made room for themselves at the negotiating table to ensure that Sunnis will not be excluded in the oil revenue-sharing process. This strategy only works if oil revenues are distributed through the central government.
Up to this point, the Kurds have quite adeptly secured their position regarding oil revenues. Several key articles in the Iraqi Constitution were designed explicitly to serve the purpose of maintaining Kurdish oil rights:
- Article 112 of the constitution states: “The federal government in cooperation with the producing regions and governorates shall administer the extracted (produced) oil and gas from existing oil and gas fields provided that the proceeds (revenues) are evenly distributed in accordance with the demographic distribution around the whole country, and a specific share of the proceeds for a specific period of time shall be allotted to the regions which were unjustly deprived by the previous regime, and were affected by it, to secure a balanced development of the different areas of the country and this shall be regulated by law.”
This section specifies that the central government’s powers do not extend to the actual process of extracting oil and gas, which includes exploring, drilling and managing producing fields. Instead, these powers fall to the regional governorates, while the central government handles the process of exporting and marketing oil and gas. Even in this scenario, the central government’s limited involvement in the process depends on whether federal and local administrators agree on “an even demographic distribution of the oil and gas proceeds (revenues),” and a specific additional share or top-up above the demographic rights, for a period of time for the deprived areas. The deprived areas should be read as the Kurdish north and Shiite governorates in the south.
- Part 2 of Article 112 states: “The federal government together with the governments of the regions and governorates shall put in place (draw up) requisite strategic policies for the development of the natural oil and gas resources in order to achieve for the Iraqi people the highest benefits by adopting the most modern market-driven principles and techniques to encourage investments.”
However, should the local and federal governments fail to agree on the issues of developing fields or dividing revenues, the regional governorates are then empowered to implement their own laws.
- This idea is outlined in Article 115, which explains how the regional laws supersede the federal laws: “Any rights that are not stated under the exclusive powers of the federal authorities shall come under the authorities of the regions and the governorates, and with regard to all the other jointly shared authorities between the federal government and the regions and governorates the priority shall go to the laws of the regions and the governorates in the case of conflicts between them.”
In addition to these guarantees, the constitution excludes any mention of new and undeveloped fields, unexplored areas or discovered fields. By leaving out this critical component of the constitution, the Kurds get de facto rights over the vast undeveloped oil fields in the north. Only 17 of 80 discovered fields in Iraq have been developed and only 2,300 wells have reportedly been drilled (of which 1,600 are actually producing oil).
Also, conveniently for the Kurds, the constitution does not specify who controls new contracts, production-sharing agreements and major service contracts. Since these instruments are not designated in the constitution, this authority falls to the regional governments. Despite what is written in the constitution, Iraqi Oil Minister Hussein Shahristani, a Shi’i close to top Shiite cleric Ayatollah Ali al-Sistani, has insisted that the Ministry of Oil in Baghdad should handle all production, exports and exploration bids.
With these constitutional guarantees in place, the Kurdish Regional Government (KRG) in the relatively stable north has been cautiously moving forward in signing production-sharing agreements and memoranda of understanding with foreign oil companies, including Norway’s DNO and Turkey’s Genel Enerji, in the face of mounting opposition. On June 12, DNO announced that it had discovered 100 million barrels of oil in its 250-square-mile licensed area near the Turkish border in the Kurdish north.
As announcements of new oil tenders conducted by the KRG continue to creep into the media, the Sunni political faction has become increasingly unnerved. Fearing that they could be left on the losing end of the bargain once the insurgency wanes, Sunni political leaders are calling for the constitution to be amended to curb guarantees that clearly work in favor of the Kurds.
To amend the constitution, the Sunnis need a two-thirds majority. Theoretically, the Sunnis and Shia could work together to amend the constitution on a Pan-Arab vs. Kurd basis. Such a vote, however, would be extremely difficult to obtain. The Sunni faction combined has a total of 55 seats in the 275-seat parliament. To get a two-thirds majority, a large portion of the Shiite bloc would have to be on board with the Sunni vision of undermining regional autonomy. Such a strategy becomes complicated when one takes into account that a good chunk of the Shiite bloc has publicly campaigned for a federalist model for Iraq that would carve out a southern Shiite enclave. With a fair number of Shia interested in maintaining their regional authority, the Kurdish and Shiite interests in this scenario largely merge and work against Sunni interests.
Nevertheless, the Kurds still have a good deal to worry about. While the KRG has its oil guarantees on paper, what happens on the ground is a different matter. Iraq has limited export options because of continual insurgent attacks against the country’s oil pipeline. Currently, more than 90 percent of Iraq’s exports go from the southern fields in Shiite territory to the gulf. The government is attempting to restart the 600-mile Kirkuk-Ceyhan (Turkey) dual pipeline in the Kurdish-dominated north, but has not had the best of luck. The North-South pipeline, also referred to as the “Strategic Pipeline,” is intended to export crude oil to Rumaila in southern Shiite territory but is completely offline and will remain so for a considerable amount of time. Once the insurgency wanes to a point where these pipelines can be sufficiently repaired, the actual work could be done within a year. However, a dramatic decline in insurgent violence is likely years away. When that point is reached, the Shiite ability to contain the Kurds will depend on their ability to shut off the North-South pipeline to cripple Kurdish oil exports from the north.
For the Sunnis, the biggest lever against the Kurds’ oil ambitions is their ability to disrupt the oil flow through insurgent attacks. Since the start of the Iraq war, there have been 315 attacks (successful and attempted) against the Iraqi oil infrastructure. These include attacks against refineries, pipelines, buildings, security personnel and managers. Of these attacks, the majority (between 160 and 170) were in northern Iraq, particularly around Kirkuk’s Baiji refinery and pipelines leading to the Turkish port of Ceyhan. More than 100 attacks took place in central Iraq, particularly near Baghdad’s Daura refinery and pipelines leading southward. Finally, nearly 40 attacks took place in southern Iraq, particularly near Basra. The majority of pipeline attacks have focused on Sunni Arab territory over which oil from Kirkuk transits or to which it flows.
While tensions are mounting over the question of oil rights, this issue will not boil over until attention is detracted from the insurgency. And that brings us full circle: For the insurgency to wane, the Sunnis need security and institutional guarantees, which evidently include the right to oil revenues. At the same time, the Kurds will be unlikely to budge substantially from the constitutional guarantees already put in place. The Shia, meanwhile, are already embroiled in their own internal debate over who gets control of the southern oil fields.
Oil is money, and money is power. In the case of Iraq, the entire notion of a federal Iraqi republic rests on the question of whether the country’s oil revenues can be equitably divvied up, and the complications surrounding this question are piling up by the day.
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