Iran – Iraq: Oil deal in Kirkuk likely to undermine Turkey

Date first published: 23/01/2018

Key sectors: energy

Key risks: political stability; regional competition

On 9 December, Iraqi Oil Minister Jabal al-Luaibi confirmed an oil exchange deal with the Iranian government, whereby Iraq will send up to 60,000bblpd of crude oil from the northern Kirkuk oilfields to the Kermanshah refinery in Iran. In return, Iraq will receive refined Iranian oil to its southern ports in Basra. The deal is currently set to last for one year and is subject to renewal. Once implemented, the exports will mark the first resumption of Kirkuk oil activity since the October 2017 federal government offensive to retake the disputed territories in Kirkuk province from the Kurdistan Regional Government (KRG). The quantity of oil exports will still fall short of Kirkuk’s production capacity, which was around 300,000bblpd prior to the offensive. Tehran and Baghdad also announced initial plans to build a Kirkuk-Kermanshah pipeline, with suggestions this could replace the strategic Kirkuk-Ceyhan pipeline export route.

The federal government recaptured the oil-rich city of Kirkuk and its oilfields from the KRG in October 2017 in retaliation to the KRG’s staging of an independence referendum on September 25. The referendum was widely opposed by Baghdad and neighbouring countries, including Iran and Turkey, due to their sizeable Kurdish populations. The KRG controlled Kirkuk since 2014, following an offensive to recapture the territory from the Islamic State (IS). Throughout this period, the KRG exported Kirkuk oil to Turkey through surviving pipes in the Kirkuk-Ceyhan pipeline. While Turkey supported Baghdad’s recapture of Kirkuk and its oilfields largely due to domestic and regional concerns over Kurdish nationalist aspirations, the recent Iran-Iraq oil developments could undermine Turkey’s role in the regional oil market. Ceyhan has become a key hub for exports to regional markets and trading houses.

Rather than serving Turkish oil interests by resuming Kirkuk oil exports via the Ceyhan pipeline, Baghdad’s recapture of the territory and the consequent deal with Tehran may well undermine Turkey’s economic domination of the Kirkuk oil market. The deal allows the Iraqi federal government to export Kirkuk oil to Iran bypassing territories controlled by the Kurdistan Democratic Party (KDP). Oil exports will be transported by truck, transiting through territory controlled by the Patriotic Union Party (PUK), which is accused of cooperating with Iran to facilitate Baghdad’s takeover in October. The PUK is likely to benefit from the deal by earning a share of truck-transited oil exports. However, transporting oil by road is expensive and inefficient. The construction of a direct Kirkuk-Iran pipeline remains tentative, and faces several operational risks, particularly the high costs of pipeline construction in the mountainous region and risks of attacks by Iranian Kurdish separatist groups.

The oil deal is likely to undermine the KDP’s authority, as the party previously monopolised oil revenues and exports through the working portion of the Kirkuk-Ceyhan pipeline which passed through Kurdistan and underpins the KDP’s economic relationship with Turkey. Meanwhile, bypassing Turkish export routes, and the eventual construction of a direct pipeline to Iran from Kirkuk would undermine Turkey’s potential to become a regional energy hub, a role that would be facilitated by its strategic Mediterranean position.  The deal, seen by some as a reward for Iranian support in the successful recapture of Kirkuk, will also extend financial benefits to the Iranian government and deepen its already expansive relationship with the Iraqi federal government, which may have broader political repercussions with regional and international actors closely eyeing Iran’s leverage in Iraq.