In May, Iraqi-Kurdistan for the first time ever sold oil to international markets, defying a ban on oil exports from the central government in Baghdad. According to Friedbert Pflüger, the Kurdish Regional Government (KRG) will have no problems finding investors and customers to build up its potentially huge oil and gas business. With the current crisis in Iraq, Baghdad should come to terms with the KRG if it wants to share in the proceeds.
While Iraq faces the prospect of a potential breakup following the conquests by the radical Islamist ISIS group, the autonomous Kurdish region in the country’s north has remained stable. The Kurdish Peshmerga militia are securing the border.
The economy is growing rapidly thanks to an abundance of fossil resources. Their former adversary Turkey, dependent on affordable energy supplies from its neighbour in northern Iraq, has become a partner – indeed a benevolent hegemon of sorts – for the Kurds, enabling them to independently sell their resources in Turkey and on global markets – against the will of the central government in Baghdad.
Recently, the Kurdish capital Erbil recorded an historic success: the first ever sale of oil produced in Iraqi-Kurdistan to Austria’s OMV, BP, and Rosneft. Coming from the Turkish port of Ceyhan, the first tanker carrying Kurdish oil had already anchored in Trieste on 8 May. After a second tanker holding over a million barrels of Kurdish crude departed on 22 May, Baghdad filed an arbitration request with the International Chamber of Commerce in Paris alleging that Turkey had violated the countries’ pipeline agreement, and tried to apply political pressure to prevent the cargo from being discharged. To no avail: The oil has – via the Transalpine Pipeline – already reached European refineries. The second sale of oil from the Kurdistan Region was transported by a tanker last week, with a third and fourth tanker ship now in Ceyhan being loaded with Kurdish oil for other international buyers.
Baghdad’s attempt to prevent the sale of Kurdish oil – and of natural gas beginning in 2017 – is doomed to fail. Energy almost always makes its way to where it is needed. National and ideological borders hardly play a role when it comes to international energy trade. The German-Russian energy partnership survived the worst days of the Cold War. Between 30 and 40 per cent of Venezuelan oil exports made their way into the United States in recent years. Only under the most exceptional circumstances can the flow of energy to where it is needed most be interrupted, such as through the imposition of sanctions by a superpower like the U.S. on Iraq in the 1990’s. In this case, if there is no external interference, Turkey won’t turn down its neighbour’s inexpensive oil!
The potential of Kurdish oil exports is large. The Kurdish Regional Government has said production could reach a million barrels a day as soon as 2015. With estimated reserves of 45 billion barrels of oil (which is more than e.g. those of the US or Kazakhstan, putting Kurdistan into the top-10 of the world) and, according to the KRG’s own account, 2.8 to 5.7 trillion cubic meters of natural gas (more than a country like Norway) , Iraqi-Kurdistan is set to become a major energy supplier. 
The main problem for Iraqi-Kurdistan thus far has been its long-running conflict with the central government in Baghdad over a “hydrocarbon law”. Erbil insists on a market-based commercialisation of its resources, and it does not want to be subject to the state’s energy monopoly claimed by Baghdad.
At the same time, the Kurdish regional government has assured Baghdad that it will share the earnings from the sale of its resources according to the prevailing formula – 83 per cent for Baghdad, 17 per cent for Erbil – and that it will ensure transparency across all sales. In an interview with Reuters on 25 June, the Kurdish National Resources Minister Ashti Hawrami insisted the Kurdish region would increase their exports to 1 million barrels per day by the end of 2015 (from 125,000 bpd currently), but also said the Kurds would share the proceeds with Baghdad.
The central government in Baghdad, however, has so far viewed all Kurdish oil sales as illegal. The question now is whether Baghdad will change its tack. There are many good reasons for doing so. By sharing in the proceeds from Kurdish oil sales, Baghdad would earn substantial revenues. And there are additional reasons why finding an agreement is in Baghdad’s interest. Prime Minister Maliki needs the Kurds for a stable government, and he needs the Peshmerga to contain ISIS.
In a televised interview, Kurdish President Massoud Barzani very strongly indicated that the Kurdistan Region could very likely seek independence from the rest of Iraq should the current crisis continue. Baghdad has so far dismissed efforts at international mediation as interference in internal affairs. However, there is no good reason why the two sides couldn’t agree to some form of independent arbitration. By showing a willingness to compromise, Baghdad could prove that it has a real interest in keeping the Kurdish Region a part of Iraq.
On the other hand, if Maliki’s government does not show such willingness quickly, the Kurdish Region will inevitably forge its own path. As the reporterfrom Reuters, who interviewed Ashti Hawrami, noted: “About 20 Western energy executives were waiting to meet Hawrami when Reuters visited his office.”
Prof. Dr. Friedbert Pflüger is the Director of the European Centre for Energy and Resource Security and Managing Director of Pflüger International Consulting GmbH, Berlin, which is active in Iraqi Kurdistan.
The IEA’s World Energy Outlook 2012 has more modest predictions. It sees production rising to 500,000-800,000 barrels per day in 2020 (page 430). The main reason is the large investments that are needed to increase production. According to the IEA, Iraqi Kurdistan has proven reserves of 33 billion barrels of oil and 1.2 trillion cubic metres of natural gas.