Iraq, Turkey Threaten Kurdistan's Oil Boom After Controversial Independence Vote

By Benoit Faucon and Sarah Kent Features Dow Jones Newswires

Iraqi Kurdistan's independence referendum Monday has returned its renegade oil industry to the spotlight, prompting Turkish President Recep Tayyip Erdo an to threaten to cut off its petroleum exports and Baghdad to call for a de facto boycott of Kurdish crude.

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Kurdistan has built up an independent oil sector against the odds, defying Iraq's central government in Baghdad, which claims control over the country's crude revenue. The result is an industry that accounts for 80% of the Kurdistan Regional Government's revenue and that exports over 400,000 barrels of oil a day--about the same as petro-states like Qatar and Ecuador.

More than half the region's production is exported through a Turkish pipeline, the result of a controversial deal in 2013 with Ankara that allowed the Kurds to bypass Iraq's state oil company and sell crude independently. Baghdad has long complained about the deal, but international oil companies now routinely buy Kurdish oil and sell it abroad.

A move toward Kurdish independence could change the equation for Mr. Erdogan, who has waged a deadly, costly battle with Kurdish separatists. On Monday, Mr. Erdo an made a veiled threat to close the Kurdistan-Turkey pipeline, saying: "We own the tap, once we close it, that is done also."

Oil prices rose Monday after Mr. Erdo an's comments, approaching their highest levels of 2017, with Brent crude, the international benchmark, trading at $57.10.

Mr. Erdogan's comments came after the Iraqi government called for all countries to "deal exclusively" with the Baghdad on oil and other matters. A senior adviser to the Iraqi oil industry said the government would pursue legal action if the Kurds declared independence.

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Richard Mallinson, geopolitical analyst at consultancy Energy Aspects, said the tough comments could prove to be little more than rhetoric. Baghdad has had no success convincing other countries to lay off Kurdish oil, while Mr. Erdo an has competing interests in the region.

"The Turks have a very visceral fear of this movement toward Kurdish autonomy so I think Erdogan could be quite willing to take tough measures," Mr. Mallinson added.

The Kurdistan Regional Government didn't immediately respond to requests for comment. Over the weekend, Kurdistan's Ministry for Natural Resources' Twitter page called Baghdad's oil regulators "corrupt" and accused the federal government of not paying the Kurds for oil in the past.

Kurdistan has worked to improve financial stability in its oil sector ahead of the referendum and tried to settle its debts with key players.

Earlier in 2017, the regional government signed a deal to sell crude to OAO Rosneft and is working with the Russian state-oil company to develop new oil fields. In August, it signed deals with key producers to settle long-standing debts and agreed to pay out $1 billion to end a lengthy legal battle with United Arab Emirates-based Dana Gas and its partners.

Most producers in Kurdistan are second-tier companies like Norway's DNO ASA and Genel Energy PLC, which focus almost exclusively on the semi-autonomous region. Western giants like Exxon Mobil Corp. and Chevron Corp. have dabbled in exploration in Kurdistan but haven't made major investments. Others have preferred not to risk their relationship with Baghdad, which controls Iraq's giant southern oil fields.

Kurdish exports from the region have steadily grown, with major oil traders offering loans in return for barrels of oil. It costs less than $2 to extract a barrel of crude oil in Iraqi Kurdistan, according to Genel--one of the cheapest rates in the world.

--Summer Said and Yeliz Candemir contributed to this article.

Write to Benoit Faucon at benoit.faucon@wsj.com and Sarah Kent at sarah.kent@wsj.com

(END) Dow Jones Newswires

September 25, 2017 11:09 ET (15:09 GMT)