Can oil and water mix?: Creating opportunities for Iraq-Turkey cooperation

Last week saw a flurry of diplomatic activity between Baghdad and Ankara. The top priorities in the talks that took place in Erbil, Ankara, and Baghdad almost simultaneously were oil exports, the presence of the Kurdistan Workers’ Party (PKK) in Iraq, and Iraq’s water crisis.

The visits by Ankara’s foreign and energy ministers to Iraq and by Baghdad’s oil minister to Turkey were preparations for an anticipated visit by Turkish President Recep Tayyip Erdoğan to Iraq, which Iraqi sources think could happen in September, to agree on a way forward on these thorny issues. The outcomes have been unimpressive, with public statements offering no new ideas and little more than reiterations of long-established positions, demands, and expressions of hope. But there is an opportunity for Iraq to shake things up and improve its bargaining position, at least on the oil export issue, possibly more.

What’s at stake for Iraq and Turkey?

First, Baghdad and Erbil seek the resumption of oil exports from Kirkuk and the Kurdistan region through the Iraq-Turkey Pipeline (ITP). These have been halted since March, when Iraq won an arbitration case at the International Chamber of Commerce (ICC) against Turkey for allowing unilateral exports from the Kurdistan region without Baghdad’s approval. The loss of 450,000 barrels per day (bpd) of exports for five months has cost Baghdad and Erbil some $5 billion in unrealized gross revenue. The monetization of this oil is necessary to implementing Iraq’s $150 billion 2023 budget and keeping the daunting $48 billion deficit in check. Turkey’s direct losses are smaller, to the tune of $2 million-3 million a day in oil transit fees, setting aside the lost opportunity of a revitalized oil and gas trade with Iraq.

Second for Iraq is water. The country is experiencing yet another dry year that has seen lakes and marshes disappear as the volume of water flowing down the Tigris and Euphrates from upstream neighbors Turkey and Iran dwindled, forcing Iraq to take desperate measures, such as installing new pumps to extract water from dead space in reservoirs along both rivers. The situation is particularly dire with tributaries originating in Iran, like the Little Zab, whose water has been blocked by Iran for weeks, and with the Euphrates, which Iraqi water officials say currently runs dry before it can meet the Tigris at their iconic confluence near Basra. In July, the Food and Agriculture Organization (FAO) in Iraq reported the Euphrates measured a mere 56 cm deep in Nasiriyah, causing 90% of the nearby marshes to go dry.

The third issue is security, particularly the presence of the PKK on Iraqi territory stretching from Sulaymaniyah and Makhmour to the east, to the rugged Qandil Mountains in the north, and all the way to Sinjar near the Syrian border in the west. Turkey has conducted numerous airstrikes to weaken the PKK inside Iraq and insists that either Baghdad or Erbil must take action to end the PKK “virus” that’s spreading, in Ankara’s view, along hundreds of miles of its southern border. Iraq has its own problems with the PKK, whose presence, and that of its affiliates, has attracted heavy-handed Turkish military action and destabilizes the war-ravaged Sinjar in western Nineveh Province.

Deadlock continues

With regard to the PKK, Tukey’s Foreign Minister Hakan Fidan repeated the argument that the PKK presence must end, whether with Baghdad’s or Erbil’s cooperation. The problem is, neither has the power or political will to act decisively. Their ability to take action is complicated by the material and political cost and difficulty of a fight with an entrenched guerilla opponent, and by the fact that PKK affiliates, especially the Sinjar Resistance Units (YBS), have strong local support in Sinjar, where they are seen as legitimate defenders of the traumatized Yazidi minority community. And the ruling parties in Erbil don’t view the PKK with the same eye. While the Kurdistan Democratic Party in Erbil considers the PKK a foe, the Patriotic Union of Kurdistan in Sulaymaniyah has been sympathetic, if not supportive. There is also evidence of growing collaboration between the YBS and powerful Iran-backed factions in the Popular Mobilization Forces, who have supported attacks against Turkish forces in Iraq. Unsurprisingly, Prime Minister Mohammed Shia al-Sudani could do no more than tell Ankara’s envoy that his government was ready to cooperate with Turkey to prevent attacks originating from its territory, in reference to actions by the PKK, but called on Turkey to avoid unilateral military action that’s been embarrassing both Baghdad and Erbil.

Progress was dismal on water too. Sudani celebrated a new agreement to establish a joint committee on water. This arrangement is too little for the magnitude of the unfolding environmental, economic, and social crisis. Not only did Ankara stop short of making any commitments to releasing more water to save the communities that depend on the Euphrates — the International Organization for Migration says a third of the 85,000 Iraqis displaced by water scarcity lived in Dhi-Qar Province along the river — but in fact forming such a committee simply repackages an agreement made in 2021 during the Kadhimi administration.

With regard to oil, where Ankara controls the literal switch, the latest talks did not produce an agreement. Turkish stalling could not be more transparent. Turkish officials said they needed more time to inspect the pipeline and storage tanks at the Mediterranean port of Ceyhan for damage from the Feb. 6 earthquake. This is hardly believable considering that the flow of oil continued for 46 days after the earthquake, and was halted on March 25 hours after the ICC made its ruling in Iraq’s favor. Surely that was no coincidence. Instead, Turkey is using the ITP as the bargaining chip it holds to extract concessions on oil and security cooperation from Erbil and Baghdad. An Iraqi oil official familiar with the talks told Reuters that it was “not an easy job to reach an agreement soon and we have a lot of thorny issues. Turkey has demands and conditions that require further talks.” Reports in Iraq say that in addition to reducing the amount in damages it must pay (set by ICC at $1.5 billion), Turkey has made other tough demands, including deep discounts on oil, dropping all claims against it, higher oil transit fees at $7 per barrel (as opposed to a maximum of $1.18 per the current pipeline treaty, as renewed in 2010), and renumeration for pipeline maintenance costs.

Iraq’s unused leverage

Rather ironically, Turkey’s decision to prolong the halting of Iraqi (both federal and Kurdistan Regional Government) oil exports has realigned Baghdad and Erbil’s interests so that, for the first time in a long time, Baghdad wants Erbil’s oil to reach international markets as much as Erbil does.

With mutual interests at risk, and in light of the recent convergence in their positions on the management of oil resources, reflected in Erbil’s agreeing in April to allow Iraq’s state oil marketer (SOMO) to handle its oil exports, Erbil and Baghdad can turn the tables.

With additional technical steps taken in line with the political agreement made in April, Baghdad and Erbil can be in a much stronger position on oil than they currently perceive themselves to be. The key is maximizing the utilization of oil produced in Kirkuk and the Kurdistan region in the downstream sector inside Iraq, namely refineries, and to a lesser extent power plants. A comprehensive strategy should look at crude oil as a fungible commodity, with barrels flowing to wherever they generate the most economic return. Such a strategy may include several tactics:

First, action is needed to ensure that the maximum capacity of the Kalak, Bazian, Nineveh, and Dukan refineries in the Kurdistan region, which can process up to 230,000 bpd of oil, is utilized to absorb as much trapped production as possible to meet domestic demand nationwide, and potentially to export surplus refined products.

Second is to use trucking to move oil produced in the Kurdistan region to refineries and/or power plants in central and southern Iraq. This can replace feedstock coming from the country’s southern fields and free up more of that oil for export. The cost of transportation, assuming for example 240-mile trips from Kirkuk to Iraq’s newly built 140,000 bpd Karbala refinery, will be significantly less than the $7 demanded by Turkey. For comparison, it costs Jordan $6.80 per barrel to transport Iraqi crude oil by tanker trucks for 600 miles from Kirkuk to its refinery at Zarqa.

Third, officials in Baghdad and Erbil should consider planning ahead to ensure the right infrastructure is in place to allow an additional 150,000 bpd of oil produced in Kurdistan to flow towards the Baiji complex, where a refinery of that capacity is undergoing reconstruction with a target of becoming operational before the end of 2024.

Some growing pains can be expected as Erbil and Baghdad try to further integrate their energy sectors but the two governments have the capacity to adapt to Ankara’s continued blocking of exports and the payoff can be worthwhile. Baghdad and Erbil can turn oil from an issue where they need Ankara’s cooperation into a bargaining chip of their own. Discounted oil can be offered to Turkey if the latter reciprocates with reasonable terms for the long-term usage of the pipeline, and shows more cooperation on addressing Iraq’s water crisis.

There are gains for Turkey to make as well. Now that Erbil and Baghdad are much closer to being on the same page on export management, reduced uncertainty can help Iraq invest in ramping up production from Kirkuk to get more oil flowing through Turkey to make the ITP more profitable. Addressing Iraq’s urgent water needs creates more favorable conditions for involving Turkish companies in modernizing Iraq’s irrigation systems, to the benefit of both riparian states. Baghdad may also consider giving the green light to reviving prior schemes to sell Kurdistan’s gas to Turkey.

The PKK issue may, for the foreseeable future, be an intractable one but that shouldn’t prevent the two neighbors from making progress elsewhere. Iraq and Turkey should see respective abundance in oil and water as an opportunity for integration and interdependence rather than conflict and exploitation.

Omar Al-Nidawi is a Middle East analyst focusing on Iraqi political, security, and energy affairs. He is the Director of Programs at the Enabling Peace in Iraq Center (EPIC).

Photo by AHMAD AL-RUBAYE/AFP via Getty Images