The Spoils of Oil

An Iraqi petroleum worker walks past a gas burn off flame in the Anzalla oil fields in the Ninewa Province of Northern Iraq

It has long been speculated that oil can be a driver for civil conflict, and one needs to look no further for evidence than the sectarian power politics now playing out in Iraq. The oil-fuels-conflict hypothesis is well-documented in academic studies on war and conflict: In one such recent analysis, Michael Ross offers a comprehensive assessment of the causal links between civil conflict and oil in cases involving Middle East countries. Oil’s divisive role, if not properly managed, can fuel insurgencies and aggressive sectarianism that can hold grave economic and geopolitical consequences. This sober reality needs to move higher on the radar of the region’s leaders and the international institutions that interact with them.

[inset_left]A festering dispute between the Kurdish Regional Government (KRG) and the central government in Baghdad over how to manage oil investment and oil export revenues now threatens the possible devolution of the Iraqi state. [/inset_left]

Iraq’s murky constitutional clauses concerning oil development remain a major challenge to the nation’s unity. The Iraqi constitution claims to protect the country’s oil as the endowment of the “Iraqi people,” while at the same time leaving open the concept that responsibilities for oil field development may fall to the very politicians governing the ground under which the oil sits. In Iraq, this concept is a problematic one, as oil resources are geographically situated within domains of sectarian power—the Kurdish north, the Sunni-dominated Anbar region, and the southern Shi’ite regions around Basra—but not in and around the federal capital in central Iraq. Under Saddam Hussein’s authoritarian rule, this geographic anomaly was managed through repression. It mattered little that sectarian communities sat on the country’s oil and gas fields but received an ‘unfair’ share of the gains. The Tikriti clan held onto the spoils from oil by terrorizing its own people. Hopes that the prospects of a democratic Iraq would redress this history have been dimming in recent months, as the government of Nouri Al-Maliki has failed both in sustaining a broad coalition government as well as in crafting a solution to the divisive influence of oil.

A festering dispute between the Kurdish Regional Government (KRG) and the central government in Baghdad over how to manage oil investment and oil export revenues now threatens the possible devolution of the Iraqi state. In April, the KRG suspended 175,000 barrels per day (bpd) of oil exports controlled in its territories and hinted that a referendum on Kurdish independence might be forthcoming if Baghdad fails to comply with its revenue sharing vision. Under a compromise hammered out in early 2011, the Kurds were supposed to receive 17 percent of the income derived from oil produced in its territory, while Baghdad was to retain the remainder. But the KRG is developing its own oil via production-sharing contracts (PSCs) that provide ‘profit’ oil payments to international oil companies (IOCs) operating in the Kurdish north. Baghdad has stated openly that it objects to the contracting paradigm of paying profit oil to IOCs, and political negotiations for a definitive oil law are all but dead amid Iraq’s devolving political situation.

The Iraqi population is growing increasingly dissatisfied with its government’s incompetence in dispersing budget allocations and failure to provide electricity and vital public services. The KRG’s intransigence on the oil issue, combined with its post-war oil and economic boom, has roused demands for regional financial (and oil and gas) autonomy in other provinces, including Anbar, Salahaddin, Diyala, and Ninewa.

The Maliki government has countered by announcing an oil exploration acreage tender for foreign investors this month in an effort to show that as the centralized authority, it can and will develop resources across the entire country. The tender is both an exercise to reassert control over wayward regions seeking authority in oil and gas contracting and to counter criticism that the distribution of investments has so far not been implemented fairly by the current government. The tender includes three exploration blocks in Anbar near the western border with Jordan, two in Ninewa in the northwest by Syria, one just east of Baghdad, and several in southeastern Iraq near Najaf and in Diyala. But the tender is considered too little too late and comes against not only the reality of the ongoing dispute with the KRG, which is pursuing its own independent export policies with Turkey, but also against the backdrop of ambitions for an independent oil and gas industry for the Anbar region, which has already signed an exploration deal with Korean firm Kogas and is likely to pursue an energy export corridor (backed by Saudi Arabia) with the ‘new’ Syria, should a Sunni government take hold there. There are even hints that leaders around the oil-rich Basra region would like to control their own oil fate.

The upshot of the tendency toward autonomy goes beyond the problematic of political agreement inside Iraq. It has raised the specter that important regions will pursue their own foreign policy interests without consideration of the central government and/or a unified vision for international relations. The United States, while pretending to pay lip service to the center’s one state oil investment policy, has actually encouraged autonomous oil development in Anbar and elsewhere, focusing on the ‘income’ potential but failing to understand the political dangers this poses to a unified Iraq. Unwittingly, the US has laid the groundwork for the political devolution in Iraq that it sought to avoid.

The Iraqi central government may be counting on using the increasing oil revenue from southern Iraq to feed a war chest to assert itself across the country. But even this is risky business. The flap over whether ExxonMobil could or couldn’t take on a production sharing deal with the Kurds and still maintain its position as a key investor with the central government’s program in the major southern oil fields prompted the US major to withdraw as project leader of the Common Seawater Supply Facility (CSSF) project, a massive seawater processing and injection scheme that will be critical to the major expansion of Iraq’s largest oil fields. More recently, in light of continuing logistical problems with the CSSF, natural gas development, and other components needed to move the expansion program forward, the Iraqi central government has begun talks to downsize the unrealistic output targets for various oil field development programs, including Royal Dutch Shell’s capacity building project at super-giant Majnoon field. Norway’s Statoil has already withdrawn from its deal for West Qurna-2.

In sum, the promise of an oil renaissance in Iraq that would give it a head start at nation-building can fade quickly if its political leaders cannot figure out how to forge a national vision for a unified oil policy.  And this sad truth should be a cautionary tale for the entire region.

In light of the Arab Awakening, the struggle for who controls the riches from oil and gas resources across the Middle East may yet turn out to be like hidden corpses uncovered when drought dries a river bed. Libya’s civil war highlighted the long-standing acrimony spawned by Qadhafi’s failure to share oil revenues with Libya’s oil-rich eastern provinces. The Benghazians are bent to ensure they will now have their day in the sun; the same can be said for South Sudan. And with the Middle East citizenry ever more assertive of its rights and interests, the days in which sectarian minorities allow themselves to be deprived the spoils from oil under their feet may be numbered.

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