Even though the referendum result is not binding, it's a statement as bold as the new statue of a Kurdish Peshmerga soldier that overlooks the entrance to Baba Gurgur oilfield near Kirkuk.
A man rides a bike near a mural supporting the referendum for independence of Kurdistan in Erbil, Iraq September 24, 2017
But even though the referendum result is not binding, it’s a statement as bold as the new statue of a Kurdish Peshmerga soldier that overlooks the entrance to Baba Gurgur oilfield near Kirkuk.
The federal region of Iraqi Kurdistan has enjoyed relative autonomy from Baghdad since the early 90s. Visitors to Erbil, the region’s capital, could be forgiven for assuming that it is already a nation state given that it boasts its own army, parliament, central bank, and internet domain.
The bombastic and unapologetic Masoud Barzani, who has often clashed with Iraq’s leader Nouri al-Maliki, leads the regional government, the Kurdish Regional Government (KRG). Their largest spat to date has been over the right to export oil and who owns the revenue.
In 2014, the KRG began selling oil directly to clients rather than via Baghdad’s state marketer SOMO.
The crisis helped both parties affirm their nationalist credentials.
The KRG has constitutionally recognized authority over the provinces of Erbil, Dohuk, and Sulaymaniyah, but it also operates with de facto authority over parts of the Diyala, Nineveh, and Kirkuk provinces.
Kirkuk is of special interest given that half of the oil in the region comes from the wells there. This de facto authority has been further bolstered by the Peshmerga, seen as the protectors of the region after Iraq’s federal army fled in the face of Islamic State (ISIS) fighters.
Mosul, the former stronghold of ISIS is just an hour and a half’s drive from Kirkuk. By including Kirkuk in the referendum the KRG is hoping to legitimize its claim over the territory.
But the government is suffering financially as its oil revenue is low; much less than the 17% share of Iraq’s budget to which the KRG was entitled before its relationship with the federal government broke down.
The government has also been saddled with some rather costly overheads: feeding an active army, providing shelter to almost 2 million refugees, and trying to win back revenue-generating international firms that left because of ISIS.
The oil exports
Iraqi Kurdistan, including Kirkuk, produced an average of 602,000 barrels of oil per day in 2016, which is about 12% of Iraq’s total oil production.
At the moment, Iraq is the second biggest oil producer in OPEC, and Iraq’s Kurdish region has been estimated to hold 45 billion barrels of crude reserves, even more than Nigeria.
Today, around 85% of Iraqi Kurdistan’s oil is exported to Turkey through the 960-km long Kirkuk-Ceyhan pipeline to the Mediterranean in Turkey’s southeast.
Turkey itself has grown used to its inflow of Kurdish oil, using the majority of the oil itself, and also earns money by exporting Kurdish oil from Ceyhan to Europe and Israel. In the first half of 2017, USD5 billion worth of trade passed between Turkey and Kurdistan, a 20% increase over the same period the year before.
To some it could seem an unlikely arrangement, seeing as Ankara is engaged in a bloody war against Kurdish militants and has carried out air strikes on Kurdish forces in Syria.
Turkey opposes the formation of an independent Kurdish state in Iraq lest it encourage domestic separatist movements.
On September 25, President Recep Tayyip Erdogan threatened to cut off the pipeline that carries oil from Northern Iraq to the outside world, but he stopped short of saying that Turkey had decided to stop the flow.
Today, Kurdish oil production is led by Genel and DNO, while larger IOCs such as Mobil and Chevron are exploring in the country. There are also large state-backed companies involved in extracting Iraqi Kurdistan’s oil, such as China’s SINOPEC.
One of the biggest headlines this month came when Russia’s Rosneft signed off on a pipeline deal with Kurdistan on September 18.
Rosneft is expanding its investment in gas by agreeing to fund a natural gas pipeline. KRG and Rosneft agreed on production-sharing deals for five blocks earlier this year in June, with Rosneft intending to explore for gas in the future.
The deal is rumored to amount to over USD1 billion. The export volumes envisaged by this plan represent 6% of Europe’s total gas demand with exports due to begin in 2020.
Airlines are expected to take a bit of a hammering too. Shares in Turkish Airlines, which has direct flights to Northern Iraq, fell 6.5% on Monday. On September 26, Baghdad ordered the KRG to surrender its two international airports or face a shutdown of international flights. This antagonism is not expected to end anytime soon.
To put it lightly, neighbors seem a little bothered by the referendum and what it could mean for the wider region. Turkey and Iran fear it could lead to similar calls for independence for their respective Kurdish populations, while Iraq faces the prospect of losing a third of its country as well as very lucrative assets.
The US, meanwhile, is anxious that it will destabilize its coalition against ISIS, and also fear being blamed for the whole situation having supported the Peshmerga.
ISIS remains a threat.
With Turkey and Iranian forces conducting military exercises over their respective borders, investors will be anxiously watching events as they unfold.