Kurdistan Begins Exporting Oil, but Conflict is on the Horizon

Kurdish Iraq oil fields. The Taq Taq field is just below Kirkuk, while the Tawke field is in the far north, just below Turkey. (image: energy365dino.co.uk)

Updating our Heat Zone post of March 12th, a new player has entered the crude oil export game—Kurdistan, the semi-autonomous Kurdish region of Iraq. On June first, oil began flowing from two Kurdish oil fields to neighboring Turkey, from where it enters the global oil market.

How much oil? To begin, 90,000 to 100,000 barrels a day are flowing—a tiny, oily drop in a very large bucket. World oil production is almost 80 million barrels a day, which means Kurdistan’s contribution will increase production by just over a tenth of a percent. To put that in perspective, that’s not much above the Netherlands’ contribution to world oil production.

However, that’s just to start. Kurdistan is hoping to increase production to 300,000 barrels a day by year’s end, and 1 million barrels a day within five to seven years.  At that level, Kurdistan would be a significant player—it  would be producing more than Egypt and almost as much as the Persian Gulf oil sheikdom Qatar.  And since Iraq is currently producing around 2 million barrels a day, Kurdistan’s contribution could increase Iraqi crude production by 50 percent.

Normally, one would expect a country to be delighted at beginning what could lead to a 50-percent increase in their most valuable—or, for all practical purposes, only—export commodity. With Iraq generating more than 90 percent of its revenue from energy, it’s literally impossible to overstate the impact on the nation’s economy of adding 1 million Kurdish barrels of oil per day.

But this is Iraq, where normal is not, and even as oil begins to flow, the stage is set for strife over Kurdistan’s oil. Iraq fears, with more than a little justification, that Kurdistan would use the money, power, and international influence that crude provides to break away from greater Iraq. As the former head of Iraq’s state oil company, now a private-sector oil consultant, told the Chicago Tribune, “A political guess would be that the Kurds have decided to go their own way. Are they preparing for independence? It seems like they are.”

On the other side of Iraqi fears is Kurdish concern over unequal treatment. Under the deal struck between the semi-autonomous region and the central government, the western oil companies pumping the oil get 12 percent of the revenue, the central government gets 71 percent, and Kurdistan gets 17 percent.  At present, with Kurdistan supplying (even by year’s end) around 10 percent of the nation’s oil, that seems fair; but if Kurdistan reaches its goal of 1 million barrels a day while the rest of Iraq still produces only 2 million, then it’s a whole different story. Under that deal, “[i]f I’m producing 1 million and you’re producing 1.5 to 2 million, I’m subsidizing you, and that’s not fair,” says Kurdistan oil and gas minister Ashti Hawrawmi.  “Obviously, if we’re producing one third of Iraq’s production, it’s not going to work.”

Even ignoring the thorny question of Kurd independence, the economic stakes are enormous. Iraq has the world’s third-largest proven conventional oil reserves, with 115 billion barrels. Only Saudi Arabia and Iran have more. Those Iraqi reserves are including the known 3 billion barrels in Kurdistan, but it’s not including another 22 billion barrels the region could potentially hold—estimates given credibility by a recent discovery of a crude reservoir that could contain 2.3 to 4.2 billion barrels. Not only can Kurdish oil hugely increase Iraq’s daily output, but could also increase the nation’s total reserves by over 25 percent, adding an amount of oil greater than the United States’ proven conventional oil reserves.

There are more obstacles than the “merely” political facing Kurdish oil. Iraq’s infrastructure was never anything to brag about, and years of war and occupation have hardly helped. Getting Kurdish oil to the international market is a challenge and half. Of the almost 100,000 barrels a day which just began flowing, for example, 40,000 come from the Taq Taq field in the country’s far north. There’s no pipeline there, and no waterway or port—40,000 barrels a day are going to be trucked away for export! Since large tanker trucks might carry 8,000 gallons, which works out to a little less than 200 barrels, you’re talking 2,000 trucks a day.

Kurdistan is rough country, with little infrastructure and no direct access to the sea. Transporting oil from it is not easy.  That practical issue brings in significant political issues, such as how Kurdistan relates to the rest of Iraq and to its neighbors, since access to Kurdistan’s oil is controlled by Iraq’s central government and Turkey. There are also other little problems in Iraq, such as insurgency and occupation to contend with. Whether Kurdistan can even sustain, let alone increase, oil exports is far from settled.

In the meantime, though, the oil has begun flowing. As The HEAT Zone has noted, the timing is fortunate for HEAT USA customers: the expected ramp-up to more than 250,000 barrels a day by the end of the year will nicely coincide with peak heating oil demand in the Northeast.