x Abu Dhabi, UAETuesday 23 January 2018

Fall of Mosul has shifted the oil industry’s big picture

After the fall of Mosul, the Kurdish peshmerga forces took the opportunity of the withdrawal of the Iraqi army to move in to protect local populations and control vital territory disputed between them and Baghdad.

This is one of those moments that leaves us in a different landscape when the smoke clears, the familiar landmarks gone or deceptive. Like the oil embargo of 1973, the Iranian Revolution of 1979 or the Chinese demand surge of 2004, the fall of Mosul to the Islamic State of Iraq and the Levant (ISIL) and its nationalist, tribal and ex-Baathist allies appears sudden but is the climax of long-unfolding events.

Markets, as they so often do, are overreacting in the short term, and underreacting in the long term. Brent oil prices rose to a three-year high above US$113 per barrel. But there is no immediate impact on southern Iraqi oil production around Basra, while exports through the north have already been shut off for months by sabotage.

The shares of some oil companies active in Iraq’s Kurdish region fell — such as Gulf Keystone Petroleum, down 9.9 per cent. But again, their operations are not under immediate threat. If anything, they should benefit from the much stronger position of the Kurds.

But the bigger picture is radically different in four ways.

Opec’s recent meeting was one of the shortest and least contentious in its history — remarkable with one member overrun by insurgency, another under stiff sanctions, and a third barely exporting oil at all. Saudi Arabia and its Arabian Gulf allies can make up for missing Iranian and Libyan barrels through the summer. But Iraq’s oil production expansion is in question — not because of security, but because a distracted and chaotic Baghdad government will not make key decisions.

Secondly, after pretending that the disastrous invasion of Iraq could be expunged by an equally disastrous neglect of both it and Syria, the US is now drawn back decisively into Middle East affairs. It finds itself on the same side as Iran, at least on this issue, and the attraction of Iranian barrels returning to the market has increased. This may boost the chances of a deal over Iran’s nuclear programme and an easing of sanctions.

Thirdly, ISIL, too extreme for Al Qaeda, now controls large tracts of Syria and Iraq. Its rule may prove fleeting. Its extremism is likely to alienate local populations, and Baghdad, the US and Iran cannot tolerate such an entity in the heart of the Middle East. But the broader-based Sunni uprising will be resolved only with a political settlement. The area from Raqqa and Deir Al Zor in Syria to Mosul and Tikrit in Iraq has enough oil to be a viable autonomous region like the Kurdish region — if it can find a route to markets.

But the most decisive redrawing of the map comes in the Kurdish region. The Kurds, having run their autonomous region with a good degree of success and stability, overplayed their hand recently by attempting independent oil exports, with buyers deterred by legal action from Baghdad and their share of the central budget cut off.

But after the fall of Mosul, the Kurdish peshmerga forces took the opportunity of the withdrawal of the Iraqi army to move in to protect local populations and control vital territory disputed between them and Baghdad. Most importantly, they have taken over the city of Kirkuk, a key symbol of Kurdish nationalism, and its eponymous giant oilfield.

International oil companies have found about 12 billion barrels of oil in the Kurdish region since 2005. Kirkuk and its neighbouring Bai Hassan field, also now under peshmerga control, contain almost 14 billion barrels of remaining reserves. If the Kurds reorient the pipelines to run through their territory and establish secure exports to Turkey — whether in agreement with Baghdad or disregard of it — they have the economic basis for an independent state.

Baghdad and its allies may yet recover a tenuous grip. But even if the landscape looks similar, the ground has shifted, and the influence of the oil beneath is as profound as ever.

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis

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