2007-07-06 Iraqi Kurds move ahead with plans premised on future carbon domination. 

The Iraqi cabinet signed off this week on a draft oil bill establishing the basis for the sharing of oil and gas revenues between the three largest sectarian and ethnic groups, Kurds, Shia and Sunni Arabs.

Despite the cabinet decision, Kurdish and Sunni Arab parties signaled that they were unwilling to countenance the bill in its current form, and a lively debate and further delays are expected before the likely passage of an altered version of the bill either next week or later this month.  

Meanwhile, the KRG is pushing ahead with ambitious plans to transform its area of control into a holiday destination and major transport hub for international airlines.

Work has begun on a US$325 million upgrade of regional capital Irbil's airport terminal and a runway is under construction capable of serving the largest passenger aircraft, while the newly created KRG Board of Investments has approved US$4 billion in largely private construction projects since last August, according to a recent IHT report.

A number of high-end hotel and resort developments are currently underway. In May, ground was broken on a five-star hotel in Irbil to be built by Kempinski Hotels. Interestingly, US Defense Department official, Paul Brinkley, attended the groundbreaking ceremony for the luxury complex, which is being built in Irbil with funding from Turkey's Elegan Group, which has been involved in residential construction projects in the city since 2002.

The involvement of Turkish companies in the KRG is an indication of the complexities underlying Turkish-Kurdish relations and may throw light on the seeming Turkish decision, under significant US and KRG pressure, to pull back from a large-scale military assault on the northern Iraqi enclave controlled by the Kurdistan Workers' Party (PKK) and associated groups.

Turkey sent several thousand troops into the mountainous region in early June, and there has been a series of low-scale clashes since, but the Turkish military has so far refrained from the expected major offensive.

The potential appears to exist, with the further easing of tensions between Ankara and Irbil, for the expansion of oil exports from KRG-controlled fields to the Turkish port of Ceyhan, effectively bypassing the current Iraqi government-controlled pipelines that give Baghdad a whip-hand over oil exports.  

Major international oil companies have proven wary of establishing direct exploration and drilling deals with Irbil in the absence of surety concerning the future honoring of such contracts by Baghdad, leaving the field open to smaller companies gambling on a potential windfall from future KRG control.

A version of the draft law agreed between the Iraqi government and KRG in June establishes regional control of contract negotiations, with deals to be approved by a central government committee. The KRG is the only quasi-sovereign entity established so far under the terms of the 2006 Iraq constitution, which establishes the basis for a fully federated system with regions exercising significant budgetary and governance freedom from Baghdad.

The June draft bill is a reflection of this ebbing of central control, establishing that "Funding sovereign expenditures of the Federal Government and strategic projects of benefit to all [are] to be agreed with the governments of the Regions and Governorates, provided that this does not impact the balance and needs of the governments of the Regions."

The US understands that without an enforceable agreement on future carbon revenue sharing, Iraq Shia and Sunni Arabs have no real interest in establishing a unified federal state delimiting their sovereign powers within their areas of control.

While the al-Maliki government may succeed in securing the passage of the draft bill, this will be essentially a Pyrrhic victory establishing revenue sharing in form but not content, while setting the scene for, at best, hidden contracts and large-scale obfuscation of actual oil flows on the part of the KRG.

Sunni Arab parties in the Iraqi legislature understand this and have made their opposition to the draft bill clear, with the largest of the community's political blocs, the Iraqi Accordance Front (IAF), pulling out of the governing coalition late last month.

The bloc ostensibly left the government over Prime Minister Nouri al-Maliki's firing of IAF parliamentary speaker Mahmoud al-Mashhadani and a manhunt for a legislator sought for his role in a 2005 assassination attempt on a fellow MP. However, the clear motivation appears to be the denouement of oil bill negotiations, in which Sunni-Arab leaders have appeared to play almost no role.

There have been growing tensions between the KRG and Iraqi central government in recent weeks, with seeming efforts on the part of the Iraqi government to strengthen stipulations in the law guaranteeing its control of revenues.

The KRG issued a statement on 3 July underlining its opposition to the proposed changes, saying "The Iraqi cabinet’s legal committee […] has gone beyond its remit by making material and substantive changes to the content of the law."

While significant US pressure is likely being brought to bear on the KRG to acquiesce, realpolitik demands an alternative long-term strategic approach.

US work in rehabilitating Iraqi oil infrastructure and establishing the path, through the oil law, for its companies to gain competitive advantage in future contracts could be undone in post-civil war Iraq if the Shia-dominated central government and Oil Ministry were to exercise effective control of oil revenues and supply. This could potentially lead to the post-civil war rehabilitation and extension of refining capacities in Shia-controlled areas, with Russian or Chinese help.

Tehran, whose current energy crisis stems primarily from a lack of domestic refinement facilities, could then use its leverage in providing Iraqi reconstruction aid to offset the potential extension of international sanctions and solve current energy woes – dramatically exposed in recent petrol riots – through establishing a relationship with Iraqi refineries.

This constitutes a worst-case scenario for Washington. However, it becomes tangible when viewed in light of the long-standing relationships between Shia Iraqi leaders and religious authorities in Iran and the establishment of tripartite and bilateral agreements in 2006 by the al-Maliki government, Damascus and Tehran for reconstruction aid and security cooperation.

Given the effective seizure of the Iraqi Oil Ministry by Iranian-allied Shia parties, and the degeneration of the ministry in a post-war morass characterized by collapsing production, corruption and the alleged misappropriation of funds for sectarian purposes, it seems inconceivable that the US would place significant pressure on the KRG to live up to its commitments under the terms of the legislation.

The US-KRG relationship is deep-seated and has a strong security component related to the ongoing covert struggle to destabilize the Iranian border and prevent the spread of insecurity into the relatively quiescent north.

Despite significant Turkish opposition, the KRG appears on the verge of gaining suzerainty over areas it claims as integral parts of the Kurdish homeland, in particular the ethnically mixed city and oil-rich region of Kirkuk.

In the contested city, non-Kurds have allegedly suffered a campaign of harassment and intimidation that has led to a reversal of the Saddam Hussein-ordered Arabization of Kirkuk. This reversal received official backing through the Iraqi government's endorsement in March of a program to resettle the city's Arab population in other regions.

Under the constitution, the future of the Kirkuk region is to be decided in a regional referendum that has been repeatedly delayed by Baghdad due to the certainty of a Kurdish victory. Kurdish parties may yet succeed in establishing a quid pro quo whereby a solid date for the Kirkuk vote is established in return for their acquiescing to the oil law.

Regardless, the KRG's future predominance in the north and preeminence in regional oil supply and decision-making appears assured.

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