Less than a year after the departure of U.S. troops from Iraq, Baghdad is losing a primary lever over independent-minded Kurdistan -- its grip on the northern region's revenue-earning oil industry. Kurdistan's secret weapon? Foreign oil companies are exasperated with Baghdad's stinginess and allured by the Kurds' more liberal terms for oil contracts.
These companies are becoming an unintentional fifth column in Kurdistan's march toward economic autonomy. On July 31, France's Total became the third big oil company to break with Baghdad by signing an unsanctioned oil deal with Kurdistan. Baghdad, intent on full mastery over the nation's massive petroleum revenue, forbids oil companies from dealing directly with Kurdistan and instead requires them to bid for projects through the Ministry of Oil and to ship their oil through Baghdad-controlled pipelines. However, ExxonMobil, Chevron, and Total have now flouted Baghdad's wishes, putting their oil deals in Iraq's south at risk in the process. Their calculus is that despite the relative inferiority of Kurdistan's oil reserves, the potential upside there outweighs the downside threat of possibly losing access to Iraq proper, according to oil company executives with whom I have spoken.
The pressure will now be on Baghdad to somehow stem what is looking like an oil-company rebellion. It's yet another challenge for the Iraqi government, which is already struggling with rising violence and dropping oil revenue because of sagging global prices.
History has seen numerous states taken over by companies -- one thinks, for instance, of the United Fruit Company's activities in Latin America. But should this trend continue in Kurdistan, it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous. Of course, it will be up to the Kurdistan Regional Government (KRG) to ensure that it is not swallowed up by the companies, which was the fate of some Central and South American countries in the 19th and early 20th centuries.
Louisa Gouliamaki AFP/GettyImages
Kazakhstan is moving fast to pacify its restive west as a new video circulates in which police shoot and beat retreating oil workers protesting labor conditions. Two reasons: With parliamentary elections three weeks away, President Nursultan Nazarbayev (pictured above) wants to stamp out any political narrative conflicting with his long-time assertion of keeping Kazakhstan stable. Abroad, the jittery global oil market is already starting to factor in a possible disruption of Kazakhstan's 1.5 million barrels a day of oil exports, half of which is an extremely high-quality light variety.
The Kazakhstan unrest -- violence in the western city of Zhanaozen in which some 14 workers were killed -- caps an extraordinarily turbulent year in the world's oil patch. The distribution of power has been shaken up in the Magreb countries of Egypt, Libya and Tunisia, and violence continues to threaten the rulers of Syria and Yemen. Saudi Arabia is spending some $130 billion to stave off its own public dissatisfaction. In Russia, Prime Minister Vladimir Putin's seemingly unassailable hold on power has been challenged by a botched decision to return to the Kremlin, and a rigged parliamentary election. All in all, the uprisings have helped to push annual average oil prices to their highest level in history, exceeding $100 a barrel.
The trouble on the eastern Caspian Sea is the climax of a six-month-long labor strike by some 1,500 oil workers over wages and other grievances. These workers appear to have mounted their strike against two oil companies -- the state oil company, which goes by the acronym KMG, and a Chinese-Kazakh oil company called Karazhanbasmunai (here is a good explanation by Alisher Khamidov at eurasianet.org.). Last weekend, as the country prepared to celebrate the 20th anniversary of its independence, workers protested city plans to turn their strike camp -- the Zhanaozen public square -- into a festive place for dancing and public dining. It turned into a riot, with vehicles and buildings set aflame.
Iraq -- drilling in a (former) war zone: With the U.S. military role in Iraq officially over, so vanishes the main official outside protection afforded Big Oil, which is working there in droves. Iraq is the largest potential new oil bonanza on the planet -- it has the second-largest known reserves next to Saudi Arabia. For oilmen, this is a bracing new day: One can hire an army of former commandoes as security -- which the companies do -- but the presence of a friendly Western security force is a qualitatively different and assuring thing. Bombings are a regular occurrence; as the Wall Street Journal's Hassan Hafidh reports, BP temporarily stopped producing oil in part of southern Iraq's Rumaila field after someone bombed pipelines.
Yet business goes on: Big Oil's stomach for badlands rises in proportion with the potential output, and in the case of Iraq's three big southern fields -- West Qurna and Zubair (pictured above), in addition to Rumaila -- the companies have pledged to produce 6.8 million barrels a day. That is a massive goal, considering that the same companies -- BP, Italy's Eni and ExxonMobil -- plan to produce just one-sixth of that daily volume from fields of similar collective size on the Caspian Sea. The Iraqi government has a stake in ensuring the companies' relative safety as its ambitions are even greater -- it hopes to raise the country's production to 12 million barrels a day by 2017. Virtually everyone outside the country regards the higher aim as fantasy. One reason is that, quite apart from the security situation, Iraqi bureaucrats make it hard for the companies to operate, reports Bloomberg. "The red tape companies encounter in Iraq -- when they apply for employee visas, for example, or try to import equipment or seek payment -- seems to reflect attitudes rooted in the past," the agency writes.
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Has ExxonMobil -- the annoyingly prissy schoolboy who always obeys the teacher -- risked weakening one of its distinguishing pillars in order to break into a single oil patch? And if so, could that shake up the global oil market along with geopolitics?
We are referring to the news, indiscreetly disclosed by a Kurdistan official last week, that the northern Iraqi region has signed an oil exploration agreement with Exxon. The reason this is a problem is that Kurdistan has been in a long-standing turf war with the folks in Baghdad over how to divide the spoils from its hydrocarbon riches. Until it's settled, Baghdad has forbidden foreign oil companies with which it does business -- which include Exxon, Shell, Italy's Eni, France's Total, the China National Oil Corp., Russia's Lukoil and virtually every substantial name in the industry -- to sign any deals with the Kurds without its okay. In September, for example, the U.S. company Hess was barred from a new round of Iraqi leases explicitly because of deals it executed with the Kurds three months earlier.
The stakes are high not just for Exxon, but for Iraq, the U.S., and the international community: The commercial tensions arise a little over a month before the Dec. 31 deadline for U.S. troops to be out of Iraq, and a predictable rise of other, security-based challenges to Prime Minister Nuri al-Maliki. In an analysis, Reuters' Patrick Markey writes that a hard line against Exxon by al-Maliki could backfire by encouraging other companies to pull up stakes in Iraq proper and take up drilling in Kurdistan, hence jeopardizing his aim of building up oil exports from the south; but if he isn't tough enough, he could lose authority with other restive Iraqi regions.
The U.S., too, has a stake in stability on the ground once it leaves, and in Iraq's oil exports rising from the 2.9 million barrels a day it currently ships. The U.S. also is eager for a north-south agreement since it could result in Kurdistan's natural gas flowing into Europe through the proposed Nabucco pipeline, with which the U.S. hopes to curb Russian market dominance of the continent. Already, Genel, an oil company linked to former BP CEO Tony Hayward, is planning a 400,000-barrel-a-day oil export pipeline from Kurdistan, to be finished in the second half of 2013. In a statement, State Department spokeswoman Victoria Nuland said that the Obama administration had advised Exxon that "they run significant political and legal risks if they sign contracts" with Kurdistan.
A RAND Institute researcher has stirred up the green-energy edifice with a report concluding that clean fuels have little military value, and that the U.S. service branches are wasting millions of dollars by trying to replace their consumption of fossil fuels. The author, James Bartis, says agricultural products such as camelina will never produce much fuel, and that algae may but not for another decade or 15 years. The takeaway, says Bartis -- find out if there is a national strategic reason to get off oil, but don't look for it in the military.
That raised the hackles of the biofuels industry. The Algal Biomass Organization called the report "flawed." Tom Hicks, deputy assistant secretary of the Navy, asserted that Bartis didn't do the usual good RAND job, reports DoD Buzz.
There is a problem with Bartis's report, but not that it's inaccurate -- it isn't, which I figured out in a phone conversation with him last evening. The problem is that the folks who ordered up the report -- Congress -- asked an incomplete question. The result? Bartis's report is misleading by omission. His report focuses solely on non-fossil fuels, as Congress requested in a 2009 appropriations bill, and leaves out alternative energy such as solar and fuel cells. But the U.S. Army and DARPA, the super-secret military invention lab, have been developing the latter two for a surpassing military strategic goal -- to reduce the number of soldiers killed and maimed by roadside bombs while they guard serpentine fuel convoys into Iraq and Afghanistan.
"We were asked to look at liquid fuels," Bartis told me. "But if you need electricity," and it were cost-effective, "photo-voltaics would be a good option."
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.