Politics Foreign Affairs Culture Fellows Program

How Oil Rules Iraq

From the ISIS insurgency to Kurdish independence, Iraqi politics depend on who controls the crude.
oil soldier

There is an oil tanker the size of four football fields representing the full measure of Kurdistan’s independence. And it’s sitting off the coast of Galveston, Texas.

This tanker is just one thread in the emerging story of Iraq’s tumultuous evolution, and oil’s commanding role in it. During the war, critics liked to say “it’s all about the oil,” but that is now truer than ever before. Kurdish sovereignty depends on it. The Islamic State in Iraq and Syria (ISIS) is fueled by it. And all through the violence and political crises of the last summer, the oil has continued to pump, keeping a fragile central government one step from implosion.

“Oil is the central facilitator of all the actors’ ambitions—it is how the Kurds hope to obtain eventual independence, how ISIS can finance the much larger organization it has become, and how the Iraqi state stays afloat,” said Steve LeVine, an energy expert and Future Tense fellow at the New America Foundation, in an interview with TAC.

“Absent oil, we would have a very different situation.”

Kurds Go to Court

The giant tanker United Kalavrvta is carrying 100 million barrels of crude oil pumped in Kurdistan and destined for LyondellBasell Industries, a Dutch-owned company in Texas. It has been anchored off the Texas coast in the Gulf of Mexico for a month. This week, a federal judge in Texas threw out a seizure order that could have drawn U.S. marshals into the protracted dispute over who owns the oil—Kurdistan or the central government in Baghdad.

The judge’s order, however, said, essentially that the U.S. has no dog in the fight, and the Kalavrvta can sail on, Kurdish flags flying. Iraq has a small window in which to appeal.

This is a critical juncture because the U.S. is saying, despite a recent U.S. State Department declaration otherwise, that it will not stop the Kurds from selling oil from their fields in the north, effectively bypassing the central government. Baghdad says that, constitutionally, Kurdistan Regional Government sales must go through the oil ministry and more importantly, they must share the revenues. But since December, the Kurds have shipped an increasing amount through Turkey—so far, some 6.5 million barrels via the Ceyhan terminal alone according to Turkish officials—reportedly to ports in Israel, Egypt, and beyond.

Just last week, amid the news that foreign oil giants, including Chevron and Exxon Mobile, were evacuating people from northern Iraq due to the violence, Kurdistan announced that it was working to significantly raise their pipeline’s export capacity from its current 300,000 barrels a day to 500,000 within months.

“The Kurds are becoming more confident of their ability to export crude independently of Baghdad,” said Julian Lee, a Bloomberg oil strategist, in a recent report. “At least four of the seven tankers that loaded Kurdish crude from Ceyhan have successfully discharged their cargoes, suggesting that willing buyers are starting to emerge.”

It also suggests that Baghdad’s bark is rapidly losing its bite. The Kurds have hired the best Washington lawyers to navigate the foreign market channels, and are clearly unphased after years of being stiffed on billions in oil revenues the central government was supposed to be sharing all along. If buyers in the region are willing to deal with Kurdistan as a rightful independent entity, then they are ready to produce the goods.

“The point is, the more they sell abroad the more legitimacy they have,” notes LeVine. For the Kurdish oil industry at least, recent instability in the north has made it stronger.

But for how long? 

ISIS Oil Barons

The rapidly advancing jihadist forces of ISIS have been effective in laying siege to and capturing strategic areas across northern Iraq (find a good map of this here), especially at or near oil-producing facilities. This includes Baiji, the nation’s largest refinery, which has been the scene of several intense battles between Iraqi government forces and ISIS fighters since the spring. ISIS reportedly briefly captured the refinery, which is big enough to produce a third to half of the oil for Iraq’s domestic energy consumption, in June. At the time, fighting produced a plume of black smoke that could be seen by satellites in space.

Iraqi forces said they thwarted new ISIS attempts to take Baiji again this week. It’s not clear how much production is actually occurring there right now—it went offline in June, and at least one report suggests that ISIS fighters have been messing with its pipelines ever since.

Meanwhile, the relentless violence that has displaced 1.2 million Iraqis, many of them minority Christians and Yazidis, has also sent a number of foreign oil companies fleeing, with others “battening down the hatches.” But with the Baiji siege it’s becoming clear that alongside the Kurds’ increasing oil empowerment, new ISIS oil barons are also emerging, stronger and better fortified for the next fight.

“They are basically a bunch of terrorists who grow (and shrink) based on whatever cash they can get,” said Luay al-Khateeb, a visiting fellow at the Brookings Institute who is also an energy policy advisor to the Iraqi parliament.

They used to get their funds from sympathetic sources in the region, he told TAC. Now 60 percent of their assets are coming from smuggled oil, and they are using it “to expand their activities and recruitment and cause future harm.”

In addition to the oil and gas fields it commands in Syria, ISIS now controls seven small but functioning oil fields in Northern Iraq, and is smuggling oil out and selling it at a discount price in the Kurdish regions of Iraq, Syria, Jordan, and Turkey, he added.

Al-Khatteeb said the militants could be making upwards of $2 million a day from smuggled oil. The fields in Iraq they now control have an output capacity of 80,000 barrels a day. This jibes with recent IEA (International Energy Agency) reports. More recently, Theodore Karasik, director of research and consultancy at the London-based Institute for Near East and Gulf Military Analysis, estimated that total ISIS oil earnings could reach as high as $3 million a day.

An Aug. 25 report by Indira A.R. Lakshmanan for Bloomberg said ISIS now has the “ability to self-finance on a staggering scale.” Other financing includes extortion, imposing taxes and other smuggling, she reports, as the funding stream from outside donors now “pales in comparison” to ISIS’s income from these illicit activities.

But oil barons? Not quite yet, cautions LeVine. While everyone is inclined to believe the worst, the oil ISIS is reportedly smuggling to buyers is crude and delivered on trucks. There’s no concrete measurement available of how much they are selling, or what they are selling it for, although al-Khatteeb has estimated their price to be between $25 and $60 a barrel, a steep discount from the average $100 a barrel oil runs for on the world market.

Other impediments to ISIS’s newfound business model remain, such as the maintenance requirements of the fields they control. Are the militants paying workers and engineers, and are they able to get spare parts? If so, how much are they spending on that? We don’t know. “Some have cast doubt … even though they have a 80,000 barrel a day capacity in Iraq, they may only be producing half that because of maintenance requirements,” said LeVine.

And as far as getting the oil out of the country, the Kurds are less likely than ever to allow any more smuggling over their borders.

“We have one big fact—they control the fields, which produce this volume of oil. Beyond that the rest is murky,” LeVine said.

South Is Safe, for Now

Even with these unknowns factored in, it’s clear that the oil industry in the north is on an unpredictable trajectory that, while helping the Kurds break out, will require a lot more fighting and a major push by the Kurds, Baghdad, and increasingly the United States, to stabilize a market everyone believed would be flourishing once Saddam Hussein was toppled in 2003.

In the south, Saddam’s old Shia enemies seem to be faring best, at least where oil is concerned. Experts tell TAC that production in the south, while down slightly, is humming along so far, free of the violence and political rancor in the north. Thanks in part to that southern oil, Iraq is pumping at a higher capacity than during the Saddam era, 3.1 million barrels a day, and prices have remained the same. BP, which works the Rumaila oilfield (the largest in Iraq at about 1.4 million barrels per day), initially cut staff because of the violence, but made a show to investors by the end of July assuring them that production was back to normal.

“(ISIS) can send suicide bombers (to the south) but they cannot wage a war or occupy or echo or replicate what’s happening in the north,” said al-Khatteeb. “So far key investments are far from danger.”

Corruption Is the Constant

Southern security stability is great for the foreign companies and the big oil interests in Baghdad, but even steady production doesn’t necessarily translate into economic stability in Iraq—a critical weakness that led to political and social upheaval in the Sunni areas, which ISIS was able to exploit fully this year. One of the major complaints against the former al-Maliki government was that oil riches weren’t trickling down to local governments in the form of services and resources.

Iraqi unemployment is quite high—hovering around 15 percent—and the poverty rate is anywhere from 18 to 28 percent depending on the source. According to the World Bank, only 46 percent of the country’s economy doesn’t depend on oil, which means the economy is “structurally weak.” So in a literal sense, oil is the biggest game in town, the “central facilitator in everyone’s ambitions,” as LeVine put it, even as it only benefits a few.

“Poor governance, an inefficient and easily co-opted judiciary system, inconsistent regulations, and security issues keep Iraq at the bottom of the global rankings for business,” according to the World Bank. Continuing violence and political instability will only make it worse.  For now, Iraq is on a path to continued GDP growth, with some estimates expecting as much as 6.3 percent growth this year, thanks to oil. “But no one knows where the money is going,” points out LeVine.

“A lot of corruption and waste. It is a source of discontent and instability. That’s not going to simply go away,” he said, even if ISIS is driven away or the Kurds decide to play ball with Baghdad. “It’s not going to vanish.”

Kelley Beaucar Vlahos is a Washington, D.C.-based freelance reporter and TAC contributing editor. Follow her on Twitter.