Pipelines Politics

Is Iraq’s foreign policy at the regional and international levels dictated by its position as an oil producer and exporter or is Iraq managing its resources in function of what its alliances and relationships allows it to do? Judging by the past, oil has mostly been a victim of the politics of the regime. This does not only apply to the last one, but goes back as far as the mid-1960’s when politics started to take precedent over efficient oil policy. Today, managing relations with neighbors and beyond is a challenge to conducting an efficient foreign oil policy. This is further complicated by a new federal system where oil is turning into a divisive issue that is opening the way for the emergence of contradictory sovereign and ethnic interests, and adding to the challenges of conducting a unified foreign policy with unified oil interests in Iraq.

Geographically speaking, Iraq is almost landlocked with only one direct access to international oil markets to export its oil through the Mideast Gulf and the Straits of Hormuz. For that reason and at different times over the past decades, it has sought to diversify its oil export routes through neighboring countries, particularly Turkey, Syria and Saudi Arabia.

Iraq started exporting oil through Turkey since the mid-1970’s through a pipeline that connects Kirkuk in the north to the Ceyhan terminal on the Mediterranean. The bilateral agreement between the two states has been renewed continuously without any issues since then. The only issue being negotiated at renewals is the tariffs for the transfer of oil through the pipeline that crosses Turkish territories.

A pipeline system through Syria existed since the era of the IPC but when Iraq nationalized IPC in the mid-1970’s, Syria unilaterally nationalized that pipeline even though it did not own it. Another pipeline was laid later to give Iraq a second export route to the Mediterranean but again Syria closed that pipeline in 1983 when the bilateral relations deteriorated and alliances shifted over the Iran-Iraq war. As regional alliances changed again in the 1990’s, that line reopened again in 1998 but was never fully used because Iraq was under UN sanctions. The limited volumes that were pumped through were meant to be smuggled out and were not accounted for by the oil-for-food program.

History repeats itself with Saudi Arabia. Iraq built a pipeline named IPSA or “Iraq Pipeline through Saudi Arabia” in the late 1980’s to get access to the Red Sea, with a terminal at Muajjiz near Yanbu. The plan to build that pipeline emerged in the mid-1980’s following the “war of the tankers” that erupted in the Mideast Gulf during the Iran-Iraq war. At the time, there were two schools within Iraq’s oil sector; one that favored a pipeline through Jordan to Aqaba and the other which supported a pipeline through Saudi Arabia at a time of rapprochement between the two countries due precisely to the emerging alliances during the Iran-Iraq war. The latter school prevailed and the pipeline was built with Iraq financing it at 100%, including the facilities inside Saudi Arabia. Though it was partially functioning (at 500,000 b/d) since 1985 using the Saudi East-West pipeline to Yanbu, it was fully opened at full capacity of 1.65 million b/d in January 1990. Its lifeline was short, just eight months, until Iraq occupied Kuwait and relations were severed. The pipeline was later confiscated by Saudi Arabia in 2001, including the crude that was stored in it. The Saudis argued that Iraq failed to maintain the pipeline and pay its dues, thus any compensation due would go towards compensating Saudi Aramco.

The experience of those three decades demonstrate that Iraq’s oil needs – needs for access to markets through neighbors – did not influence the way it managed its relations with its neighbors. On the contrary, the fact is that its oil interests suffered as a result of the breaking of relations first with Iran in 1980 which restricted its production and exports, and impacted its relations with Syrian; then with Kuwait which led to a breakdown in relations with all its Gulf neighbors, let alone the international community.

The continuity in the relationship with Turkey is an exception and has much to do with the fact that there was no break in the mutual interests of the two countries. In fact, Iraq had leverage with Turkey it did not have with other neighbors which is the Kurdish card. It kept the Kurds in northern Iraq under check in order to stay on good terms with Turkey. But another important factor is that unlike with other neighboring states, the pipeline project is covered under a government to government agreement between Iraq and Turkey and the fact that Turkey owned and operated the facilities inside its territory, including the pipeline. This was not the case with Saudi Arabia for example where the deal between the two governments, though drafted and agreed, was never signed. Hence the vulnerability of the Iraqi owned infrastructure inside Saudi Arabia when the Gulf War erupted which led to its confiscation without compensation.

Oil at the service of politics

Under the previous regime, oil was used as a tool to gain friends and allies, whether by granting oil contracts – Russia and China and to a lesser extent France due to their role on the Security Council – or by selling crude to certain buyers and not to others considered hostile towards Iraq. The irony is that US companies, for example, did not lift oil during the sanctions even though Iraqi crude did end up in the US once exported. Other examples of using oil to advance political interests is the fact that Iraq did barter deals with India during the sanctions, and it gave Jordan part free/part discounted crude in order for the latter to facilitate the passage of goods and money.

By contrast to the past experience, there are several issues today that would require an alignment of foreign policy with oil requirements if Iraq wants to become a major oil power in regionally and globally. This is not simple or straight forward:

–         Iraq and Iran are political allies but could become competitors as Iraq takes back the long lost position as a major oil player, and a major producer and exporter of both oil and gas. In the old days the two nations competed. Within Opec, Iraq always sought parity with Iran. But looking forward, it is legitimate to ask whether Iran would now acquiesce to Iraq becoming the second biggest oil producer and exporter within Opec after Saudi Arabia.

–         Iraq still needs to diversify its access to markets, and access to the Mediterranean through Syria is a strategic issue especially in the context of an escalation in the Straits of Hormuz. But this is very much dependent on the fate of the current regime in Syria and the type of regime that will replace it. It’s worth noting here that having a transit line from Iraq is a Syrian interest as much as it’s an Iraqi interest.

–         Turkey is the second lifeline for Iraq’s oil but the problematic issue of the Kurdistan Region could have a negative impact on Turkish-Iraqi relations and the potential for Iraq to become the route for the GCC to Turkey and Europe.

This brings me to the second question: does Iraq have a unified foreign oil policy?

I think it’s legitimate to say that Iraq’s relations within the regional context are polarized and alliances are built on sectarian basis.

–         The Sunni community does not see in Iran an ally

–         The Shiite community does not see in the Gulf countries natural allies

–         The Kurds have their own priorities which are not necessarily in line with the national policy line or with that of the state.

The Kurdistan Region deserves an in depth look when it comes to the way the region manages its foreign relations according to its oil priorities which it defines independently of the federal government’s priorities. For example, despite tense relations with Iran at certain times, the KRG sends oil products for export through Iran and the latter is happy to channel those to international markets or regional markets for a fee.

The same contradictions apply to Turkey. Even though relations can sometimes become tense over Turkey’s bombing of PKK bases close to the Turkey-Iraq borders, the Kurdistan region is pursuing a deal with Turkey to build an independent pipeline to the Mediterranean to export crude produced in there. Since this is a much inflamed issue due to non-agreement between the region and the federal government over how regional oil production and exports should be managed, relations between the federal state and Turkey might come under strains despite the many economic interests Turkey has in Iraq.

Turkey’s trade with Iraq amounts to $12 billion /year and Turkey’s aim is to double it. Turkey is also benefiting from transit fees paid by the Iraqi government for the transport of Iraqi crude through its territories and Turkish refiner Botas is a customer for Iraqi crude and lifts its allocated volumes at Ceyhan. State company TPAO is involved in two contracts with Iraq’s oil ministry to develop gas, one in the south in partnership with Kuwait Energy in Siba gas field, and one in the north with Kuwait Energy and Kogas to develop the Mansouriah gas field. Turkey is also set to benefit from future Iraqi gas supplies which could easily displace Iranian gas to Turkey.

Splitting Iraq’s oil relations into Turkey-KRG and Turkey-Baghdad can only weaken the state’s bid to conduct an effective policy. It further limits the KRG’s ability to benefit from Iraq’s existing relations with Turkey. To name just one example, is the negotiation of transit fees for crude.   The current government to government agreement stipulates that Iraq will pay $2/bbl transported within Turkish territories but the tariff would be reduced when volumes pumped via the pipeline exceed 1 million b/d. The same would apply to exporting Iraqi natural gas to or via Turkey. The lesson to be learnt is that the powers and prerogatives of a sovereign government by far exceed those of an autonomous region.

Here it is up to the KRG to decide what its priorities are and whether they are ethnic or national, because ethnic interests could be contradictory with the national interest.

Today, oil has not been used in foreign relations yet – or to be more accurate, not fully used except with Iran to a certain extent: being an ally, Iran has sought to use Iraq as a transit route to export gas via Syria which Iraq acquiesced to, though on paper only so far. In fact, the opening of the Iraqi oil sector to international oil companies for the first time since nationalization, was not driven by an oil strategy or by foreign political interests. It was motivated by the need for cash as a result of the crash in oil markets and the drop in the oil price in 2008. Iraq could have used its oil assets and the opening of its sector to push its strategic interests in consuming countries, especially in Asia, by linking, for example, the award of contracts to certain countries’ companies to long term Iraqi presence in those countries, similar to Saudi Arabia’s pursuit of joint venture refineries and strategic storage in Asian countries.

But if Iraq wants to play an important role in Opec, and this is particularly important in view of Iraq’s uphill return as an oil power on international markets and within Opec itself, it has to manage its relations in a way to maximize the national benefits. For example, the choice of the next Secretary General of Opec will be a test case since Iraq has put forward a candidate and so did Saudi Arabia. The Secretary General has to be elected by consensus and so Iraq needs to lobby and build alliances within the organization which includes 4 GCC countries, 2 North African and 2 African countries, 2 Latin American in addition to Iran. I say this is a test case because it will reflect Iraq’s emerging alliances and relationships at the regional and at the international levels and will demonstrate whether Iraq is capable of translating the “entente cordiale” that emerged at the Baghdad Arab Summit in March into an effective foreign policy that serves Iraq’s oil interests.

This article is adapted from a talk given at a Carnegie Endowment workshop in Istanbul in April on Iraq’s Emerging Foreign Policy.