In a region marred by old conflicts and new social unrest, semi-autonomous Iraqi Kurdistan seems to be sitting rather pretty. The Kurdistan Regional Government (KRG) is clocking strong growth in gross domestic product per capita (now well over $5,000) in an atmosphere of relative stability. Kurdish opposition protests against the KRG, which were attracting global attention between 2009 and 2011, seem to have been declining just as much as the economy has been rising. Today, watching the massive new construction projects under way and the global airlines plotting new routes to town, it does not require a PhD in macroeconomics to see that the provincial capital of Erbil is in a boom cycle.
The prosperity, of course, is oil-led: Kurdistan now produces 140,000 barrels per day (bpd) of crude, set to rise to 200,000 bpd in 2013 and 1 million bpd by 2015. This serious growth of wealth is set to last, as the KRG controls 45 billion barrels of oil reserves, out of an Iraqi total of 143 billion.
Turkey is a main partner of the KRG, and Iraqi Kurdistan imported around $5.5 billion worth of goods from Turkey last year, making the province the Turks’ eighth-biggest export destination. This Turkish-Kurdish trade relationship is also set for growth. KRG trucks presently carry crude to Turkey, but the first phase of a one million bpd pipeline bringing oil from Iraqi Kurdistan to Turkey is set to finish by end-2012, with a second stage due next year.
Yet, the story has potential downsides as well. Accusations were made at a cabinet meeting of Iraq’s central government this summer that the KRG is “smuggling” crude to Turkey. Though such charges had been leveled before, this was the first time the KRG was accused by Baghdad’s council of ministers, heightening the tension. The Kurds counter-argue that they have to export oil without recourse to Baghdad because of the federal parliament’s inability to legislate, manage and market the flow of crude.
Meanwhile, another row continues between Baghdad and Erbil over deals between the KRG and oil companies that are not, according to the central government, supposed to simultaneously operate in Kurdistan and the rest of Iraq. But it is exactly the increasing presence of major energy firms in the Kurdish north that provides the KRG with economic leverage, which allowed the Kurds in October to start exporting oil independently of Baghdad. Thus, Erbil is challenging Iraq’s central government by attracting oil companies to the Kurdish zone, while Turkey builds pipelines for the Kurds to carry crude to the Mediterranean, bypassing Iraq’s state-owned network and giving the KRG a basis for an independent economy.
Led by ExxonMobil, which signed with Erbil in late 2011, the KRG succeeded in attracting big energy companies such as Chevron, Gazprom and Total (along with dozens of smaller ones) during 2012. Baghdad had long-term production contracts with these firms, giving them fixed-rate returns on fields in southern Iraq, but the KRG offered production-sharing deals that are more lucrative, and the central government became unable to halt the drift of companies into the Kurdish zone.
In retaliation Baghdad recently froze operations in the rest of the country for ExxonMobil, which is selling its stake in southeastern Iraq, and has told Russian energy giant Gazprom to either cancel contracts in Kurdistan or abandon work in the south. But as an economic strategy, Baghdad’s attempt at strong-arm practices seems self-defeating, chasing away major oil companies just when it needs massive infrastructural investments to beef up its own oil production and revenues.
Some Iraqis like to see themselves as the world’s up-and-coming swing oil producer, replacing the Saudis in this role by mid-century. The International Energy Agency recently said that Iraq could make up “45 percent of global oil production growth by 2035”, and that if that happens, Iraq “would surpass Russia as the second-largest global oil exporter.” Yet, these figures include the Kurdish fields.
If they found a way to work together, Baghdad and Erbil could indeed turn Iraq into the preeminent global oil player, to the benefit of both. Reconciliation between the two does not seem to be a near-term prospect however — indeed, Baghdad revoking approval for Turkey’s energy minister to visit Erbil in early December can only spur Kurdish thoughts that they’d be better off going it alone.
Riad el-Khouri is an economist and a principal at Development Equtiy Associates Inc, Washington DC