Iraq Oil & Gas Production: Geopolitical Compromises and Kurdish Autonomy

The following guest essay is by Kevin Kane. Kevin is a market analyst, economist, Asia political affairs strategist, and Korean language linguist living in Seoul, South Korea. Kevin previously published American Freedom from Oil: A Bipartisan Pipedream.


Iraq Oil&Gas Production: Geopolitical Compromises and Kurdish Autonomy
By Kevin Kane

As Royal Dutch Shell and other majors increase their investments in Iraq, some oil market analysts argue that Iraq could export over 12 mb/d (million barrels per day) within a decade, significantly shifting global production closer to 100 mb/d from the present 83.5 mb/d inventory supply. Are Iraqi oil production estimates too ambitious or perhaps, not optimistic enough?

The northern Kurdish-governed territory of Iraq situated between Iran, Turkey, and Arab-Iraq is of particular importance to these expected Iraqi oil production estimates. The Kurdistan Regional Government (KRG) publicly claims to possess oil reserves greater than half the cumulative value of all the oil reserves within the Organization of Economic Cooperation and Development (OECD) community. Kurdish-Iraqi production may reach 250,000 b/d by the middle of this year and up to one mb/d before 2012.

As American forces draw down as a part of the U.S. exit strategy, many oil and gas uncertainties remain. Specifically, the KRG possess few incentives to accurately report proved reserves or encourage oil investment while the U.S. hands over political and military control to the Iraqi people—meaning that Kurdish-Iraq could possess even greater reserves than publicly stated.

Kurdistan Sovereignty over Oil Reserves

When some in the U.S. were encouraging partitioning Iraq several years ago, one could only imagine that the Iraqi-Kurds were not exactly disappointed at the prospect of having sovereign control over the future of their nation, including its oil reserves. Thus, one would be rational to assume that many Iraqi-Kurds had little intention and few incentives to cooperate with the Iraqi Central Government after liberation in 2003 from Saddam Hussein’s control of Kurdish territory Iraq.

After 2003, 7.5 million Iraqi-Kurds immediately secured their own perimeter within Iraq and set up a visa system requiring Arab-Iraqis to obtain permission to enter KRG-governed territory. The KRG then asserted themselves as an autonomous international power by establishing diplomatic channels with a number of countries including the US, UK, Germany, France, Russia, and Italy via consulates and representative offices independent of Baghdad. The KRG simultaneously took control of their oil fields and signed Exploration and Production (E&P) contracts with Hunt Oil, Det Norske Oljeselskap AS, SK Energy, and countless other oil companies to explore, develop, produce, and export oil without intending to share profits with the Iraqi Central Government.

The KRG only began to take a real interest in working with the Iraqi Central Government after the U.S. started to focus on stabilizing Iraq, which included the surge as well as encouraging sectarian cooperation and parliamentary coherence. Following the success of the U.S. troop surge in 2007 and the stabilization of Iraqi’s political affairs in 2008, the Iraqi Central Government, now more organized and confident, ruled in June 2009 that all foreign investment oil contracts made directly with the KRG are illegal.

The Iraqi Central Government now takes 83% of all oil export revenue from Kurdish territory. Because the U.S. is drawing down its forces and turning internal conflict matters over to Iraq, the world should expect the KRG to ignore central government authority and revenue-sharing agreements after the U.S. is gone.

Once the Iraqi Central Government is unable to enforce their legal authority over the KRG after the U.S. exits Iraq, the KRG will likely encourage more wildcat drilling, draw soil samples, and collect the data necessary to potentially transition reserve classifications from possible and probable to proved reserves (U.S. Reserve Classification System). The Iraqi-Kurds will then both claim all, or most, of the potential oil profits and potentially increase their commercially recoverable proved reserves estimates.

Geopolitics, Intervention, and Energy Supply Compromises

Some analysts argue that the official establishment of a Kurdistan state could create a domino for anywhere from 21 to 28 million other Kurds to stand up and demand autonomy in Kurdish-dominated regions across the Middle East. Therefore, these analysts argue that Turkey and Iran might take military action to prevent the KRG from asserting autonomy over Kurdish territory in Iraq in order to prevent the dominos from falling. However, it is unlikely Turkey and Iran would undertake such military action for fear of a blowback from Kurds within their own border regions, an outcome that would only emboldened regional Kurdish solidarity. What is more, Turkey and Iran would also be wary of taking responsibility for nation building in Iraq given the very costly U.S. experience. Thus, it is unlikely any outside forces will forcefully intervene in the Kurdish pursuit of sovereign control over northern Iraq.

Moving past the domino fear, economics proves to be the true ruler of Kurdish regional relations. Insofar, Turkey and Iran appear to prioritize investment over fear of this domino theory as both countries continue to send millions of dollars in Foreign Direct Investment (FDI) into Kurdish-Iraq due the neo-liberal nature of the KRG’s economy. In fact, in June 2009, a Turkish oil company investing in Kurdish-Iraq began exporting 40,000 b/d of oil back to Turkey through an agreement with the KRG: an estimated one billion dollars worth of oil per year at $80 per barrel.

In addition to potentially becoming a significant oil import source for Turkey and the rest of the Western world, the KRG also controls strategically located natural gas reserves that could become increasingly valuable to Europe’s diversification strategy. With almost 89% of Iraqi’s natural gas reserves within Kurdish territory—an estimated 2.83 Trillion Cubic Meters (TCM)—the European Union will likely pressure Turkey to work with the KRG—even should it become sovereign—to bring this gas to European consumers.

The KRG may be able to support some of Europe’s greater strategic needs to diversify their gas import sources and supply their fastest growing energy input source—natural gas—over the next two to three decades, particularly due to the increasing use of combined cycle gas turbines to generate electricity. Thus, if the KRG asserts itself as a sovereign country by ignoring Iraqi Central Government authority, Turkey will not cease oil and gas imports from Kurdish-Iraq out of fear of a Kurdish autonomy domino theory, whether this be by dint of personal economic interest or foreign pressure. In fact, such an outcome may induce Turkish leaders to work more closely to resolve internal conflicts with Kurds living in Turkey.

With foreign investment coming into the KRG from all over the world, these nations are sending a subtle message to the KRG: “Our governments prioritize economic development and energy security over politics.” Although regional leaders make speeches discouraging a sovereign Kurdish-Iraq, their investment actions juxtapose their rhetoric, particularly in the case of Turkey. More important than the words in a leader’s speeches are the measurable actions of their government.

Kurdish Nationalism, Oil, and Power

Like Israel after 1945, the KRG have not wasted anytime to ensure they are powerful enough to never be dominated by an occupying culture or military force, including by Arab-Iraqis that once forced on Kurds their language, culture, and rule of law. The Iraqi-Kurds are securing support from the international business community, tapping into economic integration, organizing a loyal and professional military, and developing close ties with liberal nations that prioritize development over ideology.

While Kurdish-Iraq could hold one of the keys to increasing or decreasing the expected Iraqi oil production over the next 10 years, we must remember that asking the Kurds in northern Iraq to remain unified with the rest of Iraq would be like asking Koreans after 1945 to remain unified with their previous Japanese occupiers. Thus, Iraq will not be unified should the Iraqi-Kurds have their day to decide for themselves, and that day may be coming soon.

36 thoughts on “Iraq Oil & Gas Production: Geopolitical Compromises and Kurdish Autonomy”

  1. Good article. Strange that it didn't mention the all-important referendum on the status of Kirkuk though. That one has the potential to ignite a new civil war between Kurds, Arabs and Turkmen. A failure to come to a decision (or for the KRG to continue with a policy of trickling de-Arabization) leaves the region a bit more precarious.

  2. 12 mbd from Iraq?
    I wish the best foir the Kurds and Iraqis and hope they choose cooperation over war.
    Jeez, what if a new regime comes to Iran, one more favorable to oil field development there? Do we get another 5 mbd from them?
    Anm what if Chavez is dumped and conditions improve in Venezuela for oil field development?
    One might say then that Peak Oil deferred for yet another generation–while extraction techniques continue to improve.
    Oh, and don't foget the 500 billion barrels Brazil says its has in the Tupi. Or the 100-year supply of natural gas unlocked now in U.S. shale. Or the fact that the Sauds appear able to pump at 10 mbd plus. I guess they did not read Simmons book.
    Really, with a little luck we could be talking fossil fuel glut for generations.
    Only obstinate idiot politics is preventing that.

  3. They have to cooperate Benny. The Kurds are landlocked. Autonomy works better than independence for both sides. The Kurdish people are cool. They're the most pro-American people you'll find anywhere.

  4. I think it's more a case of selfish interest Maury. The leaders of the two main Kurdish factions are self-enriching gangsters. They don't want to rock any boats by overstepping the mark and looking for a national territory. They are more interested in being business friendly.

  5. The area is still war lord country and much of it is stuck in time some centuries back.

    What is right, fair or good has little to do with anything. The feudal lord must WİN!

    Not only Barzani & Talabani are self enriching gangsters but all the leaders are with politicians leading the way. İ read about their BS daily.

    Pro-American? A common misconception in the US due to news coverage. They are pro whoever is helping them today. Yesterday means nothing. Without American support Barzani would have a lot more trouble with all other İraqi parties and he knows it.

    The political leadership would be perfectly willing to spend how ever many lives necessary to stay in power as they are living just fine today. The average guy – who cares!

  6. I wasn’t as clear above as I should have been. At least one liberal reader (in the comments) was put off by what I wrote about George W. Bush and Kurdish pro-Americanism.

    Kurds aren’t Republicans. Not once did anyone say “I thank George W. Bush for freeing us from Saddam.” Thanks were always given to America as a whole. I never heard a single disparaging remark about the Democratic Party, John Kerry, etc.

    Anyway, Kurdish pro-Americanism goes way beyond mere thanks for getting rid of Saddam Hussein. Kurdish people think like Americans in ways that surprised me again and again. Admiration for American values and culture is ubiquitous in that region. Even the Islamists I met were weirdly pro-American in some ways – and again it’s not just because the US destroyed Saddam Hussein. It goes deeper than that, and I’ll get into it in detail in future posts.

  7. Maury – İn that part of the world you would be surprised at how everyone agrees with you and likes you!

    Just like they agreed and liked the last visitor as well.

    İ remember when İ was in İran in 2001 – Bush was more popular than the supreme leader! At least that is what İ was told by many.

    Until Barzani has his hands on the oil wealth of the region he will be very pro-American. He needs leverage against various parties and countries on all sides.

    Later we will see what his feelings are.

  8. While this is an interesting article about Kurdistan, the claim that "The northern Kurdish-governed territory of Iraq situated between Iran, Turkey, and Arab-Iraq is of particular importance to these expected Iraqi oil production estimates. " is seriously inaccurate. The contracts awarded so far in the two rounds of Iraqi auctions to the IOCs are entirely in the south and the center of the country, with almost all the weight of production being in Basra and Amara provinces. See here and herefor details.

  9. I was just quoting Clee. Russ thinks the Kurds pro-Americanism is a media trick or something. It's true Arabs and Persians don't think much of the US,at least publicly. Most are police states,and the popular media reflects the views of the totalitarian rulers,who aren't exactly enamored with democracy.

    The Kurds are a whole nuther story. They really do like America. As Totten said,they're more pro-American than Americans.

  10. 'the claim that "The northern Kurdish-governed territory of Iraq situated between Iran, Turkey, and Arab-Iraq is of particular importance to these expected Iraqi oil production estimates. " is seriously inaccurate.' The contracts awarded so far in the two rounds of Iraqi auctions to the IOCs are entirely in the south and the center of the country

    I would say that inference is seriously inaccurate. The contracts awarded so far were deals cut by Shahristani, the current oil minister. Shahristani is in no position to auction off northern oil fields. He can't even claim that his deals on southern fields are legal or constitutional, since the background to all of this is the failure to pass legislation regarding the distribution of oil revenues. In effect, both the Kurds and the central government are going it alone. The locations of the successfully auctioned fields are more an indication of where Shahristani can exercise some control, coupled with the perception of international companies that these are the more stable parts of Iraq in which they can work. The media seems to gloss over the fact that even though the December round of auctions was more successful than the July one, there were still half the fields on auction that did not attract bids, such as East Baghdad which is probably considered too unsafe. (Btw, the KRG claimed that the July auction was illegal and unconstitutional, as Baghdad does for any of the KRG deals).

    Meanwhile up north, the infrastructure already exists (via the Kirkuk-Ceyhan pipelines, with some nursing) to export 1.6 mbpd and the KRG claims they can hit 1.0 mbpd by 2012. That is not small beans in the overall context, and there is undoubtedly room for significant further growth.

  11. Hi Maury – İ live in that part of the world and see a bit more of it day to day. Don't forget the gangster or feudal parts – it is a very different world!

    'Totten said,they're more pro-American than Americans' – easy for a tourist to say. Like İ pointed out they need protection and without oil money there is only one place and way to get it.

    The Kurds know when and how to suck up and who to play the game for.

  12. Stewart,

    Thank you for your comment. However, my assumption comes from perhaps a different angle than you anticipated. You are only focusing on distribution of oil reserves and development-production investment. However, you may not be assuming that an autonomous Kurdistan could destabilize Arab-Iraq, which would worsen the investment climate, increase risk for multinationals, and decrease expected production for non-Kurdish areas, not to mention what will happen if the Kurds grab Kirkuk: a major transit route.

    Jalal Talabani is Kurdish. Imagine Sunnis and Shia trying to pick a president between the two of them without Kurdish participation, and what that dispute would do to investment in Arab-Iraq, and expected oil production.

    Thank you though. It is possible that I should have clarified what role Kurdish-Iraq could play in Arab-Iraq's expected Iraqi production.

  13. Russ,

    I am a man of Irony. You make a good point about Kurds looking for friends where they can get them.

    You live overseas I take it, as do I. I found something interesting after some reflection after immersing myself in graduate school as a minority in Asia. As an American, I like anyone who likes America. Its the nature of American people to want to seemingly love anyone who just likes America. I am not sure, both interpersonally, or historically, that we are very different from the Kurds.

    Look at how the U.S. picks its allies today, from dictators to democracies, we take our friends wherever we can get them.

    Its the nature of human beings, American alike, not something specific to Kurds.

    What is important, however, is the long-term intention of seeking those relationships, and that is where the Kurds may become important. The are seeking a neo-liberal economy, and what comes next is the function of time: development and authentic democracy.

  14. I'm not clear on why there would be a stable autonomous Kurdish-Iraq after the westerners pull out in a couple of years. Wouldn't there be instability as the Kurds try to maintain autonomy, and wouldn't that keep Iraqi (Arab+Kurd) oil exports from increasing to 6x from 2 mb/d to 12 mb/d in 10 years?

  15. Clee,

    Thank you for your comment. Well, intuition and a-priori observations–for what they are worth as a predictive power–offer us some insight.

    Judging from the Kurdish grip on their own borders–almost non-existent suicide bombers and acts of terrorism within their territory–the KRG appears to know how to create a stable territory. The Kurds are organized a the lowest levels and they are following their government's direction without significant disruptions at the grassroots level. The Kurds have a stable environment not by dint of luck, but by sound governance and an economic culture conducive to stable investment. Thus, drawing from their success so far, they will likely keep it together if Iraq falls apart.

  16. Hi Kevin,
    As İ had not paid all that much attention to which part of İraq bombs went off in İ had to go back and check.

    Only looked at Mosul but if you call that tight control Obama needs you as a press secretary! Great spin!

    One point İ differ on – whether people like or dislike the US is not my problem and İ could care less. As long as they don't try taking out their personal problems on me no problem.

    Stability in Northern İraq would be to everyone's benefit – The Kurds should keep their crazies bottled up inside İraq. Barzani has marginal interest in doing so.

  17. Mosul isn't under Kurdish control Russ. Kurdish area don't have that crap. That's why Iraqi's looking for a little peace and quiet moved to Kurdistan during the conflict. All they needed was a Kurd to vouch for their good character.

    The Kurds' pro-American attitudes have done them more harm than good. We looked the other way while Sadman Insane tried to exterminate them. They were slaughtered once again when they heeded Bush Sr's call to overthrow Sadman. We did establish a no-fly zone over northern Iraq,but the Kurds had already fought the Iraqi army to a standstill.

  18. Hi Kevin – İ was wrong on Mosul!

    İ still do not believe the KRG is great and wonderful though.

    Over the years while working outside the US İ learned not to get too worried about who liked the US and who didn't. İf a country is willing to co-exist while pissing and moaning it is perfectly fine.

    That is totally different than North Korea or the İranian clergy – they seem to have little interest in anything except 'winning'.

  19. Krikuk’s present status is a “special zone” in Iraq. The Kirkuk population—mostly Kurdish—were not permitted to participate in Iraq’s last election cycle. The Central Government fears the change in share of votes due to their participation.

    The KRG proposed a referendum–commensurate with the wishes of the Kikruk population–to vote to adopt Kirkuk as a part of KRG territory. The central government refused. Thus, its only a matter of time before the KRG absorbs Kirkuk.

  20. İn the event the KRG gets control of Kirkuk they then have the potential to control substantial oil wealth.

    İf they have the funds then they could widen their battle for a separate Kurdistan which many countries in the region are not interested in seeing.

    Kirkuk needs to stay separate from the KRG to satisfy many – the Arabs, The Turkomen, Turks, Syrians, İranians to name a few.

    As far as having business or political friends in Asia – for someone who has never worked/lived there it is a bit difficult to imagine the attitude. İ am not talking about living in a foreigners camp at Al Jubail but living as normal people (though with money). Personal relationships are pleasant and more what İ consider normal.

    Honesty, loyalty and the clap are of equal good – only if your competitor has them. Self preservation at the moment is often the only consideration. To tell a lie is not a sin, bad or anything of concern.

  21. Clee,

    We are off the Kurdish topic here, but since you started it…

    The numbers claimed by these folks seem a bit too good to be true – but then we are used to that with biomass to alcohol producers.
    They say that with wood at $60/ton, they can produce for $1.40/gal.
    Now, a ton of (air dry) wood has 16GJ/ton. Butanol has 110MJ/Gal, so 9 gal BuOL = 1GJ. If they got 100% yield, that would be 144 gal of BuOH/ton of wood.
    At $60/ton for 16GJ of wood, that is $3.75/GJ for feedstock. At $1.40/gal for BuOH, that is $12.60/GJ, great money if you can get 100% yield.

    But you can't. The lignin fraction is unused, so there is about 30% gone, and you will still have other residuals, and energy inputs (for separation).
    So I'l allow them 50% energy return (still better than ANY ethanol plant using corn, let alone cellulose).
    So they get 8GJ back, = 72 gal BuOH per ton.

    To cover their feedstock cost, they need $0.83/ gal, leaving them with $0.57/gal to cover all their costs, inputs, cost of capital and a profit margin.

    That seems like a very low margin to me – A 1 million gal/yr plant has $570k to cover costs? If they can do that, then they deserve to make zillions.

    The CEO certainly talks a good game.

    BUt Since RR is a butanol expert, we'll see what his take is on this.

  22. I started it? I was referring to Maury's comment. I would definitely be interested in RR's take on Cobalt Biofuels.

    Did they say the lignin fraction is unused? I must have missed that. I don't know enough about wood to know where they get the "sugar" from to feed the bacteria. But if they aren't using the lignin, perhaps it becomes part of the "valuable co-product" that they sell to improve their profitability.

  23. So we'll blame Maury for getting us off the Kurds and into this..

    The valuable co-product would indeed be the lignin, same as it is the residue from pulp mills, about 25-35% of the mass, and 30-40% of the energy . It is the equivalent of the distillers grain left over from corn distillation. The lignin is high protein, and can be used as animal feed – it is also high energy density, about 23GJ/ton, similar to mid grade coal, but much cleaner. As to it's value, for anything other than fuel, I am not sure.

    The sugar comes from two sources, the wood sap itself, a small amount, and from the cellulose and hemicellose. The whole idea is to break open the structure to get at the sugars. But cellulose is very strong material and does not come apart easily – that is why they are all struggling with cellulosic ethanol.

    Once you do break it open, you ordinary glucose (6 carbon sugar) and Xylose (5 carbon sugar). Many yeast/bacteria can ferment the glucose, and they are trying things like genetic engineering to get them to ferment the xylose.

    Bottom line – IF you can get the glucose, you have 30-40% of the energy available, and 40-60% if you can use the xylose – that's why I assumed a 50% yield, but I still think that is optimistic.

    They go out of their way to not quote any numbers on yields etc, which makes me suspicious – most process people are proud of their process and want to tell everyone about it, especially when it is deemed to be "successful".

  24. Clee,

    Had a look at that story – typical RR stuff – very thorough! Cobalt mention using vapour distillation but comparing the vapour pressure graphs for butanol and water, Butanol always has the higher boiling point.

    BUt they have obviously come up with something.

    They have gotten their share of gov't funding to build that place with a 1ft diameter column – we'll see if they ever get around to building a full scale plant – no one else working with cellulosic has yet.

  25. Funny story about Cobalt. They were at the Pac Rim Summit, but I missed their presentation. That night I was having dinner, and this guy walks up and starts talking about butanol. I went through the standard problems, and he got really aggressive with me. Said I should have seen Cobalt's presentation; that I might have learned a thing or two. He started telling me that they had achieved butanol titers of above 10%. I said "That's interesting, because it phases out of water at below 8%." (For the layperson, that's like claiming that you produce ice at 70 degrees F).

    So I knew he didn't know what he was talking about, but he just kept on. Later on, I looked it up, and he was actually talking about iso-butanol. That is a different compound, and of lower value. You try to avoid making that in a butanol plant. But the guy I was talking to didn't know the difference.

    I am very skeptical butanol can be economically produced biologically. Perhaps iso-butanol, but it isn't the same fuel.


  26. What is the difference between ?n?-butanol and isobutanol as a fuel… compatibility with current popular fuels, any differences needed in handling, distribution, blending, etc. (i.e. why do you try to avoid making iso-butanol?) Thanks.

  27. The heating value is lower for i-butanol for one. The vapor pressure is higher as well, but that might not be a problem. It might work OK as a fuel, but if so the petrochemical industry could crank up production anytime. It's not like we couldn't produce loads of i-butanol today. We could, and we choose not to. As I said, in the chemical industry the demand is much lower for i-butanol because it simply isn't as versatile.


  28. Hi Clee,

    The reference I had shows a bigger gap than that; more like 10%. I wondered about it, because it doesn't seem like there should have been that large of a difference.

    But the primary issue is simply lack of testing as fuel. A lot is known about n-butanol. Not so much about i-butanol. The other thing is that the phasing concentration is higher for i-butanol. If you get n-butanol in water above 7.7%, it phases out and the separation is easy. You have to get i-butanol above 10%.

    On the other hand i-butanol is less toxic to the bugs, so you can get it up to a higher concentration.


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