Kurds Forge a Risky Oil Deal With Turkey

Kurds Forge a Risky Oil Deal With Turkey
http://online.wsj.com/news/articles/SB10001424052702304854804579234293171045128
Baghdad Refuses to Sign Off on Ankara's Pipeline Accord With Autonomous Iraqi Region, Leading Partners to Delay Shipments
By Emre Peker
Updated Dec. 2, 2013 7:52 p.m. ET

Kurdish President Massoud Barzani, center left, and Turkish Prime Minister Recep Tayyip Erdogan discussed the pipeline in Turkey last month. Associated Press

ERBIL, Iraq—The autonomous Iraqi region of Kurdistan said it agreed to supply Turkey with oil through a pipeline in a landmark deal that raised tensions with Baghdad, which fears the move could spark independence drives by other Iraqi governorates.

But the Monday announcement here, in the region's capital, was tempered by Baghdad's refusal to approve the deal, which it considers illegal.

As a result, Kurdish officials didn't begin shipping pipeline oil, as observers had expected, and Turkey pledged to organize trilateral talks between Erbil, Baghdad and Ankara to resolve the issue.

The tensions go to the heart of the disagreement between Kurdistan, a relatively prosperous and stable province, and Baghdad, where sectarian violence has soared in recent months as the central government strives to maintain control over restless regions. Iraq's ties with Turkey have also frayed, as Shiite Muslim-led Baghdad accused Ankara of meddling in its internal affairs by courting Sunni and Kurdish leaders.

The deal follows more than a year of negotiations between Turkey and Kurdistan over the contested $350 million, 125-mile-long pipeline, whose 300,000-barrel per day capacity stands to let Erbil export far larger amounts of crude to Turkey than it now can do by truck.

The approach by Turkey and Kurdistan, officials say, is aimed at coaxing Baghdad into agreeing to a deal they say will benefit everyone: Turkey gets much-needed oil, Kurdistan gets revenue and a greater measure of control over its economic and political destiny, and Baghdad gets to share the revenue.

"Through this landmark energy cooperation deal with Turkey, we are showing the new face of Iraq to everyone, we are showing that this is not a threat," Nechirvan Barzani, prime minister of the Kurdistan Regional Government, said at a Kurdistan-Iraq oil and gas conference in Erbil on Monday. "This is in the interest of Iraq, and history will prove this fact."

Mr. Barzani's bid is a risky one. Baghdad has repeatedly warned that it will act against any unilateral Kurdish push to market the oil in its territory, which Baghdad says is national patrimony. In retaliation, Baghdad could move to cut off the pipeline, which connects to Turkey through an Iraqi-Turkish pipeline, and it could confront Turkey in an international court, lawyers say. Baghdad, in a last resort, could intervene militarily, though many observers see that as less likely.

"The risk to Turkey of selling this crude without Iraqi approval is incredibly high," said Crispin Hawes, managing director for the Middle East at Teneo Intelligence, a global risk consultancy.

In a bid to assuage Iraqi concerns, Turkish Energy Minister Taner Yildiz traveled on Sunday to Baghdad to convince his Iraqi counterpart, Hussein al-Shahristani, to agree to the exports.

Sunday's meeting follows a breakthrough in talks in mid-October, after years of enmity over the issue. Last year, Iraq prevented Mr. Yildiz from flying to Erbil for the annual energy conference, forcing the minister to cancel his trip in midair.

Since then, Turkey and Iraq have moderated their tones amid diplomatic efforts that are expected to lead to a meeting between the two countries' once-hostile leaders.

"We also would like to have the consent of the central government of Iraq for the commercial export of oil from [Kurdistan] to Turkey and start a trilateral cooperation scheme that will be beneficial to all," Mr. Yildiz said Monday at the conference. He said talks with Mr. Shahristani were "positive" but didn't elaborate.

Mr. Shahristani said Turkey would seek Iraq's approval before accepting Kurdish pipeline oil.

Iraqi Deputy Prime Minister Rowsch Shaways struck a more conciliatory tone Monday. "Once we can pass a revenue-sharing law, our troubles will ease," he said. "One of the first steps that need to be taken is sit at the negotiating table with the Kurdistan Regional Government. We need to solve our problems peacefully through the constitution."

The Kurdish north of Iraq has enjoyed autonomy since the 1990-91 Gulf War when a U.S.-led coalition drove Iraqi occupying troops out of Kuwait. Since the overthrow of President Saddam Hussein in a second war in 2003, that autonomy has grown.

With an estimated 45 billion barrels of reserves, the region's promise of riches has attracted energy giants, including Exxon Mobil Corp. XOM +1.61% and Chevron Corp. CVX +0.98%

Their presence has done little to quell Iraqi and U.S. concerns that Kurdistan's growing autonomy could create an independent Kurdish state and trigger a Balkanization of Iraq as more governorates vie for autonomy.

"Baghdad is worried that if it OKs the agreement with [Kurdistan] it will lose its grip and become incapable of preventing other governorates from becoming more autonomous," said Sinan Ulgen, a former Turkish diplomat now with the Carnegie Endowment for International Peace.

The U.S., which itself has a strong stake in the region, supports the trilateral talks.

In recent weeks, Turkey has taken a new tack in trying to convince Iraq to support the deal, arguing that new oil revenue can help ease Iraq's domestic tensions, said energy executives and former Turkish officials close to the government. It has sought to enlist Washington in its effort to convince Prime Minister Nouri al-Maliki to agree, these people said.

But in a sign of the continuing diplomatic complexities, Kurdistan's Natural Resources Minister Ashti Hawrami on Monday declined to say when the pipeline would start operations after announcing last month that it could happen within weeks.

Write to Emre Peker at emre.peker@wsj.com

Corrections & Amplifications

This article has been corrected to change global risk consultancy's name to Teneo Intelligence. An earlier version of the story incorrectly called the firm Telio Intelligence.