Kurdistan—The Would-Be Country

Kurdistan is a country you won't find on the map. It has 25 million inhabitants, and they are the largest ethnic group in the world without a sovereign homeland.

The post-World War I partitioning of the Middle East scattered the Kurds among several countries. The British promised them their own home eventually, but so far it hasn't happened. Today they are the majority people in a wide swath stretching from southeastern Turkey through northern Iraq and northwestern Iran. Sizable minorities also are present in districts of Armenia, Georgia, Syria, and Azerbaijan.

They resist being digested by the countries that include them, so they are persecuted. In Iran, it is illegal to use a Kurdish name. Turkey continues to deny that Kurds are a distinct ethnicity, although many ethnic Turks think of them as gypsies. The official story (this is not a joke) is that Kurds are Turks who got lost in the mountains and forgot they were Turkish. In Iraq, Kurds have come close to carving out a sovereign state in the northern, oil-rich part of the country. Perhaps because of the strength that demonstrates, it is in Iraq that they have encountered the worst treatment.

Fearing that Kurds might side with the Iranians in the Iran/Iraq War, Saddam Hussein undertook a campaign of wholesale murder against them, including attacks with chemical weapons. More than 50,000 Kurds (or, by some estimates, 200,000) were slaughtered, and 2,000 villages were destroyed. Saddam also tried to "Arabize" the city of Kirkuk by driving out Kurds and resettling Arabs from central and southern Iraq.

Later, in the Second Gulf War in 2003, the Kurds joined the United States in attacking Saddam's government in Baghdad, a fact that no Iraqi national government is ever going to forget. Since the war, Kurds in northern Iraq have lived under an uneasy truce between their own Kurdistan Regional Government (KRG) and the government in Baghdad.

To Saddam, Iraq's Kurds were an enemy of the regime. To the Iraqi government that followed him, they are a minority that continues to spit at Baghdad's authority.

The Kurdistan Regional Government (KRG) is as close as the Kurds have gotten to self-rule. Since 1971, it has been an odd, semiautonomous authority controlling a region of northern Iraq while holding the Iraqi government at arm's length. It commands its own armed forces but still relies on the government in Baghdad for its budget. It's a reliance from which Kurds want to escape.

That escape is starting to happen. Kurdistan is one of the most successful and stable parts of Iraq—to Westerners, the not-so-crazy part. Though 94 percent of Kurdistanis are classified as Sunni, religious sentiment among them comes with tolerance. The sectarian strife that torments the rest of Iraq is absent.

Kurdistan produces oil that Baghdad claims as its own. The KRG disagrees. In practice, such arguments are won by the party that can deliver the oil to the buyer, and the KRG has recently arranged to do just that.

Foreign oil companies stood back from Iraq during the decade of American invasion and occupation. More recently, as U.S. involvement diminished, Baghdad became keen to revitalize its old oil fields. To that end, the central government signed a raft of multibillion-dollar deals with foreign operators.

The government's goal was a bit ambitious: a production rate of 8 million barrels per day by 2017. (In 2010 it was 2.4 million bpd.) At first, foreign oil companies fell over each other to stake their claims in Iraq. It should have been a bonanza for everyone involved. But the bonanza didn't happen.

In dealing with foreign oil companies, the Iraqi government missed the critical distinction between vast and infinite, as small children easily do. It asked foreign oil companies to provide the know-how and the billions of dollars of capital needed to develop the country's vast deposits in exchange for nickels. Rich as those resources are, there are minimum terms that any energy company would require, and Iraqi officials were too inept to calculate what those minimums might be.

When the world's biggest energy company, Exxon, turns its back on 115 billion barrels of proven oil reserves, that's a strong sign that the owner of the reserves doesn't know when to say yes to the best offer it is likely to get. Vast resources or not, if the contract is too stingy, Exxon is not going to bother. Many other companies have also concluded that working in Iraq is just not worth the risk and the effort. Iraq's recent oil auctions have drawn few bidders.

Baghdad now offers only service contracts, under which operators are paid a flat fee per barrel produced. For the operator, this works out to less than a 1 percent share of profits, with the Iraqi government taking the other 99 percent.

The low payments on offer from the Iraqi government would essentially turn Big Oil companies into hired hands. Baghdad wants even more than having its cake and eating it, too. It wants expert foreign bakers to buy the ingredients, bake the cake, frost the cake, and then slice and serve it—and say "Thank you" for minimum wages and no tips.

Nevertheless, some of Iraq's fields are so large that even a 1 percent take is marginally attractive for an outsider, as is the case for BP in the Rumaila field. Mostly, though, the profits are too slender to attract many takers, especially given the challenges of operating in a war-torn country. Some oil companies initially went along with Baghdad's terms in the hope that an appreciative government would offer them better production-sharing opportunities down the road. That hope has been disappointed, and now the biggest of Big Oil companies are turning away.

Their attention has moved to the north, where the KRG holds sway. Whatever has been paralyzing officials in Baghdad—whether it's arrogance, ignorance, wishful thinking, or an inability to evaluate a proposal—it is working to the advantage of the Kurds.

Kurdistan is offering developers a 20 percent share of the oil they produce. Despite the political risk, the hostility from Baghdad, and the fact that the area hosts less than a third of Iraqi oil, a 20 percent share makes Kurdistan a whole lot more attractive than the rest of Iraq. Kurdistan's infrastructure and security advantages are additional big pluses. There is less violence in the region than in the rest of the country, and it has functional airports, highways, and trains, as well as electricity that doesn't go down like the sun every day.

After carefully calculating the goodwill and opportunities they could lose in southern Iraq and the profit they could gain by dealing with Kurdistan, the oil giants are throwing their hats on Kurdistan's table. And almost as an afterthought, in doing so they are supporting Kurdistan's long-sought ambition to control its own resources in the fashion of a sovereign state.

Exxon Mobil, Chevron, and France's Total—three of the world's biggest oil companies—have reached accords with Kurdistan, adding to the three dozen production-sharing agreements the KRG has signed with smaller companies. To Iraq's central government, the deals are illegal and an insult to Baghdad's authority.

So far, retaliation has been economic rather than military. Baghdad has said it "will disqualify and terminate the contract of any company signing a deal with the Kurdistan region without the approval of the [Iraqi] oil ministry."

Acting on that policy, in 2012 Baghdad barred Exxon and Chevron from bidding on contracts anywhere in Iraq. It cut Exxon's participation in the West Qurna-1 field (with 8 billion barrels of reserves). And it has threatened to cancel Total's stake in the now-producing Halfaya field in southern Iraq unless Total stays out of Kurdistan.

Spokespeople from Exxon, Chevron, and Total have been publicly silent about Kurdistan. However, an official from one of the three companies, speaking off the record, put it this way:

We understand completely that if we enter into a contract in the north, we're probably going to be blackballed in the south. So the question is: Have we exhausted all our options for getting a deal in the south on terms that we find acceptable? The answer for companies heading for the door is yes.

Turkey is also thumbing its nose at Baghdad's authority over its northern region. In the spring of 2013, Turkey's state-run oil firm, Tiirkiye Petrolleri AO, struck a deal with Exxon for projects in Kurdistan. The agreement gives Iraqi Kurds a route for sending crude oil directly to world markets via a Turkish pipeline.

Kurdistan's petroleum industry operates under all the geological, engineering, and economic risks and uncertainties of drilling for oil anywhere. In addition, it faces the political and military uncertainties of dealing with a breakaway district that may or may not succeed in asserting aspects of sovereignty in the face of Baghdad's objections. What is clear right now is that several of the world's biggest oil companies are betting on Kurdish oil, even though doing so deals them out of the rest of Iraq's immense oil potential.

The ramifications of all this are highly political. Iraq's prime minister took his complaints over the Exxon and Chevron deals straight to the White House. So far, while Obama "discourages oil dealings with the KRG," his administration admits that American companies have to make decisions based on economic considerations.

Kurdistan has left Baghdad in a bad spot. The Iraqi central government can continue offering low-paying service contracts for help in developing its oil resources and can blackball companies that deal with the KRG. But the blackball threat forces Big Oil to choose sides, and every foreign oil firm that cuts a deal with Kurdistan adds to the region's autonomy.

Assuming the current Baghdad government retains its hold on power, it has two other options.

The simple solution is to offer production-sharing terms that make business sense. Doing that would undercut the incentive for foreign energy companies to deal with Kurdistan. The Exxons and Chevrons of the world want to do business with Baghdad, provided the deal is reasonable.

Alternatively, Iraq could negotiate a handover of resource rights to Kurdistan and retain a share of what the Kurds collect, an arrangement that would cement the region's autonomy. That's not impossible, but given Baghdad's low aptitude for business calculation, it's a long shot.

From Big Oil's point of view, it hardly matters, as all three options bode well. If Iraq continues with the status quo, Big Oil can turn to Kurdistan. If Baghdad offers better terms, Big Oil will jump at exploiting Iraq's mammoth oil fields. And if Iraq and Kurdistan were to resolve their differences, Big Oil would have access to both regions.

Oil money tips the balance everywhere and regularly leads to political power. And that may well be the case here. By wooing Big Oil with reasonable terms, the KRG has enlisted Exxon, Chevron, Total, and a long list of other oil firms as de facto allies in its fight for full autonomy.

Neither truth nor freedom nor justice has a seat at the table in Iraq. Big Oil's goal is profit, and its deals with the KRG testify that the KRG has sovereign control over Kurdistan's resources. Future Kurdistani schoolchildren may be taught that Exxon was their country's Lafayette.

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