Could a future Kurdistan ever be viable?
The Iraqi Kurdistan Regional Government (KRG) resisted pressure to postpone the referendum from regional powers — Turkey and Iran — and international ones, the United States and Britain. The KRG was confident the referendum would receive wide Kurdish support but could an independent Kurdish state be economically sustainable?
World Bank said federal Iraqi government budget transfers constituted 85% of the KRG’s fiscal revenue. The recent suspension of transfers obliged the KRG to withhold civil service salaries. The nascent Kurdish oil industry’s estimated share of employment in Iraqi Kurdistan is just 1%.
The KRG suffers from the excessive role of the public sector. It is the main employer, accounting for more than 50% of total employment and 26% of all non-military employment. Salaries, pensions, social assistance and subsidies (electricity, fuel, water supply and agriculture) take more than 50% of the budget. Pharmaceutical and medical supplies are subsidised by the Iraqi Ministry of Health.
The precariousness of Iraqi Kurdistan’s fiscal situation reflects the volatility of crude oil prices and KRG’s supply network. Would any future Kurdish state be able to control and export Kirkuk crude? Would Turkey allow a landlocked future Kurdish state to sustainably run crude oil through its only export pipeline?
The pipeline, which crosses Turkey to the Mediterranean and international markets, has a capacity of 1.6 million barrels per day (bpd). The only other way for the Kurdish government to export crude is by truck, smuggling small amounts of oil to north-eastern Iran.
Turkey, however, which is concerned about the effect of the Kurdish independence movement on its Kurdish minority, threatened “tough action” against Kurdish interests. Kurds are 15- 20% of Turkey’s population.
Iran is wary, too. Kurds make up approximately 10% of its population and an armed Kurdish party is active in north-eastern Iran.
It’s clear Kirkuk will be the new battleground. Iraqi Oil Minister Jabar Ali al-Luaibi told Reuters that Iraqi oil exports averaged 3.8 million bpd in June and Iraqi production totalled 4.3 million bpd. The figures include Kurdish production of about 520,000 bpd. Most of Iraq’s oil production is from the Basra governorate and other southern provinces.
Kirkuk, where Iraqi oil was first discovered, is in the north of the country. The population of the Kirkuk governorate is a mix of Arabs, Turkmen and Kurds. Iraq’s Northern Oil Company, a subsidiary of the Iraq National Oil Company, has operated the Kirkuk field in the past few decades.
In 2014, Kurdish peshmerga forces ousted the Islamic State (ISIS) from Kirkuk and retained control of the field. Late in 2014, the Kurdish government struck a deal with Baghdad to split Kirkuk oil revenues. Kirkuk’s reserves are estimated at 1 billion barrels, with a current production capacity of between 200,000 and 300,000 bpd.
Differences between Baghdad and Erbil led to a suspension of the agreement, so a new deal was concluded. The accord is valid while Kurdistan remains an integral part of Iraq.
It maintains the Northern Oil Company as operator of the Kirkuk field. It allows the Kurdish government to export Kirkuk crude along with oil from other Kurdish territory. The Kurdish government is required to pay Baghdad the value of half the Kirkuk exports. These have averaged 250,000 bpd or approximately half the crude exported from Kurdish territory.
However, Baghdad has accused Erbil of failing to pay the federal government what it owes and Erbil has accused Baghdad of failing to transfer 17% of Iraqi oil revenue.
Baghdad has categorically rejected the Kurdish referendum in Kirkuk, calling it “unconstitutional.” The Iraqi Army is fighting ISIS in Shirqat and Hawija, near the Kirkuk border.
It’s obvious that oil exports will be a dilemma. Whether Turkey shuts down the Kurds’ sole pipeline remains to be seen. What is certain is that Turkey will hold out the threat and this may deter international oil companies from investing in an independent Kurdish state.