Friday, February 10, 2012

U.S. Energy Influence in Iraq

Engineers at the Khurmala oil field south of Arbil, Iraq
On Jan. 31, Baghdad withdrew its opposition to a deal between ExxonMobil and the Kurdistan Regional Government, a move that reflects the conflicts between and among Iraq's various political actors. Energy negotiations with the United States are one arena where the al-Maliki government has been forced to make significant concessions recently. Iran typically holds the upper hand when it comes to influencing Baghdad and controlling Iraq's sectarian conflicts, but it cannot compete with the investment capital and technologies that U.S. firms can bring to bear.
Baghdad on Jan. 31 withdrew its opposition to the independent oil deal between the Kurdistan Regional Government (KRG) and ExxonMobil, meaning the American supermajor will continue its exploratory activities in Kurdistan.
Iraqi Prime Minister Nouri al-Maliki had been threatening to cut off ExxonMobil's access to Iraq's southern oil fields in response to the company's deal with the KRG, an instance highlighting ongoing tensions between the central government and the autonomous region in Iraq's north. Baghdad's recent reversal illustrates one avenue the United States may use to counter Iran's considerable influence in Iraq. Tehran's influence in Baghdad politics is far greater than Washington's, and al-Maliki's Shiite-led government is well-positioned to manage Iraq's sectarian strains and to maintain power. However, Iran cannot compete with the investment capital and technologies of U.S. firms, given Iraq's dependence on international investment to develop its vast oil reserves.
Iraq's Sectarian Politics
Three major conflicts have dominated Iraq's political landscape since the fall of Saddam Hussein. Sunni politicians seek to push back against Shiite dominance; the autonomous Kurdish region wants to assert itself against Baghdad's authority; and Iran and the United States are competing for influence in Baghdad. Though each of these players is pursuing its own interests, Iraq's Sunnis and Kurds share with the United States the desire to undermine Iraq's Iranian-backed, Shiite-dominated central authority. 
Iraq's Sunni opposition groups lack the means by which the KRG asserts its independence: northern Iraq's vast oil reserves. These reserves are important because they draw the interest of the same foreign energy firms that Baghdad needs to develop its potentially lucrative southern oil reserves. Though al-Maliki's government gives Iraq's Shia -- and, by extension, Iran -- a dominant position in the country's politics, Western investment in Iraqi energy is one arena where the United States can more effectively influence Baghdad politics.
Sunni Capitulation to the al-Maliki Government
Iraq's central government has continued to sideline the Sunnis from the political process and, ignoring Sunni demands for greater political integration, has worked to narrow the influence of Sunni political leaders in the Cabinet and parliament. Sunni-Shiite tensions most recently flared when al-Maliki issued an arrest warrant for Sunni Vice President Tariq al-Hashimi on Dec. 26. Al-Hashimi fled to Kurdistan to avoid arrest, and the mostly Sunni al-Iraqiya List political bloc boycotted parliament in protest. The Sunni political leadership, lacking economic levers to pressure al-Maliki and fraught with internal divisions, eventually capitulated -- al-Iraqiya returned to parliament Jan. 31 without gaining any concessions from al-Maliki.
Kurdish Conflict with the al-Maliki Government
The KRG has long struggled with Baghdad over oil revenues and over Arbil's authority to independently grant oil licenses to international companies. Baghdad has long held that only the central government can issue these licenses and has threatened to blacklist any firm that violates this perceived authority. The Kurds have been unable to meaningfully challenge Baghdad on this point, especially since Baghdad controls the majority of export lines for Iraqi oil. Only with strong foreign backing has the KRG been able to resist al-Maliki's strong-arming on this issue.
U.S. Energy Firms, American Leverage in Iraq
ExxonMobil's unilateral deal with the KRG helps illustrate the limits of Shiite influence in oil politics and the way the latter can be used to subvert Shiite and Iranian political dominance. ExxonMobil and the KRG reached a deal Oct. 18, 2011, and announced the agreement in November. Baghdad responded to what it considered an illegal deal by threatening to cancel ExxonMobil's contract in the southern West Qurna I oil field. ExxonMobil announced in December it had put its deal with the KRG on hold, and Baghdad stood down from its threats. The issue seemed settled until reports surfaced in late January that ExxonMobil was continuing its exploration and data-gathering activities in the province, despite Baghdad's disapproval.
ExxonMobil's original deal with Baghdad involved low-profitability infrastructure projects aimed at increasing output at the West Qurna I oil field. ExxonMobil agreed to the deal to curry favor with Baghdad, hoping to land better deals in the future. ExxonMobil is also heading a multibillion dollar international project developing a water injection system to increase output across Iraq's southern oil fields.
Iraq relies on these ExxonMobil-led projects to reach its ambitious production goals. Still, Baghdad had lapsed in its payments to ExxonMobil in the months leading up to the supermajor's foray into the KRG, and the government delayed construction of the vital water pipeline necessary for the water injection project. Faced with a deteriorating operating environment in southern Iraq, ExxonMobil sought to increase its earnings by striking a deal with the Kurds, whose infrastructure and production capabilities require outside investment more urgently than southern Iraq. The KRG's offer gave ExxonMobil a second option in Iraq, outside of the constraints imposed by the central government.
Baghdad's threat to blacklist ExxonMobil and other foreign companies was part of a containment strategy meant to discourage independent deals with the KRG. But Baghdad's problem runs deeper: Iran cannot provide the investment capital and technological expertise necessary to extract Iraq's vast oil wealth. As Stratfor has written in the past, Tehran actually would benefit from increased international involvement in the extraction of Iraqi oil, both in illicit funding and in access to imported industrial technologies. Still, it leaves Baghdad critically dependent on non-Iranian support to develop its oil infrastructure.  
Because of this dependence, Baghdad's threats progressively weakened. The threat to deny ExxonMobil access to its stake in the West Qurna I field was replaced by a threat to exclude the company from future bids to develop Iraq's southern oil fields. Last week, Baghdad retracted that threat, largely because it knows how badly it needs outside investment to revitalize and augment the production infrastructure of its oil industry.
Oil output is essential for the future of Iraq; as such, Iraqi Oil Minister Abdul-Karim Elaibi has repeatedly announced Iraq's plans to increase its oil output. Iraq has undertaken a massive oil export project -- the development of four single point moorings off its coast -- intended to give the country an additional 3.4 million barrels per day (bpd) in spare export capacity. Without projects like ExxonMobil's water injection system, Iraq's investments cannot generate returns.
Already there are reports that oil production levels in Iraq, a country with reserves to rival Saudi Arabia in daily production, have peaked at about 3 million bpd.
ExxonMobil's move cannot be understood purely in terms of a business dispute between Baghdad and Arbil. There are more than a dozen international companies developing Iraq's southern oil fields, and all will benefit from ExxonMobil's planned overhaul of the country's production infrastructure. If the American supermajor were forced to abandon projects in southern Iraq, it would take months to find replacement entities, adding to delays Iraq already cannot afford.
With ExxonMobil having set the precedent, we are seeing other foreign oil majors -- Chevron Corp., ConocoPhillips, Italy's ENI and France's Total SA -- move to deal directly with Arbil. Al-Maliki cannot afford a protracted dispute with his country's most important partner in developing Iraq's future. He had to back down from his threats, despite the precedent set against his authority over future Kurdish oil deals.
The Iraqi Government's Options
Al-Maliki remains firmly entrenched in the government's political, economic and security institutions and can continue to use his authority to politically sideline the Kurds and Sunnis on major issues. He underscored as much Feb. 8 when he reshuffled Iraq's senior military leadership to insert more of his loyalists and replaced the Kurdish chief of staff of the army with a Shi'i. Al-Maliki also retains the option to exploit the rift between the Kurds and Sunnis and keep tensions high between the two (particularly concerning the highly contested oil-rich city of Kirkuk), playing each faction off the other to maintain Shiite prominence.
Shiite dominance in Baghdad is one key reason Iran has been able to maintain the upper hand in Iraq as part of its broader struggle with the United States. That said, the precedent set by ExxonMobil's deal with the KRG, and Baghdad's eventual capitulation, sheds light on an important area where the United States can effectively compete with Iran for influence.
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