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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Iraq’s New Oil Law Highlights The West’s Fading Middle East Influence

  • Iraq's pursuit of a unified oil law since 2017 is seen as a step towards national unity but may threaten Kurdistan's semi-autonomous status and exclude Western energy involvement.
  • Russia and China are increasing their presence in Iraq's oil market, capitalizing on reduced U.S. influence in the Middle East and leveraging strategic alliances.
  • The new oil law, controlled from Baghdad, is intended to manage all oil and gas production in Iraq, consolidating power and possibly marking a shift away from Western energy dominance.

Rather like the man falling from the 20th floor of an office block saying ‘So far, so good’ when asked how he is doing, so several Iraq oil industry watchers have characterised the inexorable move towards a unified oil law being rolled out across the country. Untroubled though the journey may be, however, the thud at the end of it is likely to mark a stark new reality from which the West is excluded.

The journey began back on 25 September 2017 with the non-binding but much-trumpeted vote on independence for the people of the semi-autonomous region of Kurdistan in northern Iraq. In exchange for providing boots on the ground in the fight against Islamic State with their fearsome Peshmerga army, the Iraqi Kurds had quietly been assured by the U.S. and its Western allies that they would finally be granted their full independence from Baghdad, as analysed in full in my new book on the new global oil market order. Great Britain had promised the Kurds the same in 1920 in the ‘Treaty of Sèvres’. Just under 93 percent of voters in the semi-autonomous region voted for full independence from Iraq in that September 2017 vote, whereupon Iran and Turkey made sure that they did not get it, by occupying various strategically critical positions across the region, including those in and around its key oil reserves. The key reason why these two countries did not want the Iraqi Kurds to gain their independence was that they have very sizeable Kurdish communities of their own, and they did not want them getting ideas about their own independence either.

Russia’s broad foreign policy since the foundation of the Soviet Union in 1922 has been to project its own solutions into regions of chaos, and - if that chaos did not already exist - to create it. Given President Vladimir Putin’s often-quoted declaration that the subsequent collapse of the Soviet Union was ‘the biggest geopolitical catastrophe of the century’, it is no surprise that he has extended its broad core foreign policy objective. Back in September 2017 what Russia wanted in the Middle East - to add to the enormous inroads it had already made in neighbouring Iran - was to extend its influence further into Iraq, but it could not do so in the south, as the U.S. still had a major presence there. The next best thing was to establish its own presence in the semi-autonomous region of Kurdistan, until such time as it could use its influence there to extend its scope into southern Iraq and then preside over the unification of the two Iraqi regions into one country over which it could exercise control.

The first stage of this was easy enough to accomplish, as the Kurds in northern Iraq no longer trusted the U.S. or the West after their September 2017 vote for independence was ignored. The Kurds also needed money, as the political dispute with southern Iraq meant that no money was going to the Kurdish Regional Government (KRG) in the north from the sale of the region’s oil, as had been agreed in a ‘budget disbursements for oil sales’ deal agreed in 2014. What Russia formally did after the vote in 2017, then, was to effectively take over the semi-autonomous region of Kurdistan’s oil sector in its entirety – literally, lock, stock, and barrel. This was done through three mechanisms, as also analysed in full in my new book. First, it provided the KRG with US$1.5 billion in financing through forward oil sales payable in the next three to five years. Second, it took an 80 percent working interest in five potentially major oil blocks in the region together with corollary investment and technical and equipment assistance. And third, it established 60 percent ownership of the vital KRG pipeline through a commitment to invest US$1.8 billion to increase its capacity to one million barrels per day. 

The second stage of Russia’s plan was then to create so much turmoil between the north and the south of Iraq that it would only be a matter of time until the south would no longer tolerate the semi-autonomous region having any autonomy at all, as also analysed in full in the book. Again this was not too difficult and was achieved by the Russians acting as the ‘devil in the ear’ of the KRG’s teams that have tried to negotiate subsequent ‘budget disbursements for oil sales’ deals to the one originally agreed in 2014. The tactic Russia employed was to encourage the Kurds to ask for increasingly higher payments from the south and, until it received them, to quietly go about selling some of its oil independent from Baghdad – primarily via Turkey, with which Russia has long enjoyed extremely close ties. Happily for Russia – and facts of which was already acutely aware – the issues of firstly, how much the Kurds should receive from the budget and, secondly, if it was legally entitled to sell any of its own oil, were fundamentally unsolvable problems. This meant that Russia itself could enhance its role with both the Kurds and in the north and the official government of Iraq in the south even more by acting as a self-styled ‘unbiased arbiter’ between the two sides.

On the issue of the amount that the Kurds would receive from government in Baghdad, the former thought it should be a lot more than the 17% of the federal budget after sovereign expenses that had been the cornerstone assumption of the 2014 deal. Unsurprisingly, the latter disagreed, and thought it should accord with the percentage share of the Kurdistan population in the overall population of Iraq. This, according to Baghdad, was 12.67 percent. According to the Kurds, it was nearer 26 percent when all population data and requisite extrapolations were made, and in any event they dismissed the demographic notion that lay at the heart of the calculation. In the meantime, the legal basis for the Kurds being able or not to sell oil from their region was, if anything, even less clear. According to the KRG, it has authority under Articles 112 and 115 of the Iraq Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 – the year that the Constitution was adopted by referendum. The Federal Government of Iraq argues that under Article 111 of the Constitution, oil and gas are under the ownership of all the people of Iraq in all the regions and governorates as administered through the central government in Baghdad.

With chaos and animosity sufficiently kept on the boil, Russia’s big break to put into action the third stage of its plan came with the U.S.’s end of combat mission in Iraq in December 2021. Even better for Moscow was that the U.S. seemed happy to dramatically downsize its presence across the entire Middle East, having also unilaterally pulled out of the Joint Comprehensive Plan of Action (‘nuclear deal’) with Iran in 2018, Syria in 2019 – including protracted internal White House discussions about the catastrophe of pulling out from the strategically crucial Al-Tanf exclusion zone that was the tri-border junction of Syria, Jordan, and Iraq – and Afghanistan in 2021 as well. All the while, Russia’s key ally against the U.S. and its own allies – China – had been making inroads into several major Middle Eastern countries, initially through the gift-horse of the ‘Belt and Road Initiative’, as analysed in full in my new book on the new global oil market order. All of this meant that southern Iraq was inexorably moving into Russia and China’s sphere of influence, while northern Kurdish Iraq was increasingly completely isolated. 

Given all of this, it should not surprise anyone then that on 3 August this year, new Iraq Prime Minister, Mohammed Al-Sudani, clear stated that the new unified oil law – run, in every way that matters, out of Baghdad - will govern all oil and gas production and investments in both Iraq and its autonomous Kurdistan region and will constitute “a strong factor for Iraq’s unity”. Nor should it surprise anyone that a very high-ranking official from the Kremlin said recently at a meeting with senior government figures from Iran that: “By keeping the West out of energy deals in Iraq – and closer to the new Iran-Saudi axis - the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise,” a senior source who works closely with the European Union’s energy security apparatus exclusively told OilPrice.com

By Simon Watkins for Oilprice.com

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