Irak

Oxford Institute for Energy Studies
Report Part Title: Background: a Brief History of Oil and Gas in the Kurdish Region of
Iraq
Report Title: Under the Mountains:

Report Subtitle: Kurdish Oil and Regional Politics
Report Author(s): Robin Mills
Published by: Oxford Institute for Energy Studies (2016)
Stable URL: https://www.jstor.org/stable/resrep31016.5
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2. Background: a Brief History of Oil and Gas in the Kurdish Region of Iraq
The current status of hydrocarbon resources in the KRI is heavily dependent on its politics and
external relations. In turn, these are strongly influenced by its history, both recent and more distant.
Oil and gas development has only become an important and contentious issue since 2005, following
ratification of the Constitution of Iraq and formalization of the region’s autonomous status, which made
it possible to attract international oil companies. The KRI’s external relations, which strongly influence
its energy policy, are guided by historical and geographic realities. However, historical patterns are
not immutable, and the KRG’s leadership has also made choices which have set its oil industry on a
very different path from that of Baghdad.
2.1. Political history

The Kurdish people are divided between Iraq, Iran, Syria, and Turkey, with smaller numbers in other
countries. The area of ‘Kurdistan’ covers about 190 000 km2 in Turkey, 125 000 km2 in Iran, 78 736
km2 in Iraq (including disputed territories), and 12 000 km2 in Syria. There are about 5 million Kurds in
Iraq (not all of whom live in the KRI) and the population of the KRI (stated by the KRG at 5.2 million5)
also includes non-Kurds as well as refugees and internally displaced people. Iran has 5–7.9 million
Kurds, Turkey 12 million (or possibly up to 22.5 million6), and Syria 2–2.5 million.7
The Kurds speak a number of related dialects of Kurdish, an Indo-European language related to
Farsi, of which Kurmanji and Sorani are the main varieties within Iraqi Kurdistan, and these dialects
are not easily mutually intelligible. However, the rise of the KRG, satellite television, and more
recently social media have been influential in fostering a sense of pan-Kurdish identity. Within the
KRI, especially around Kirkuk, there are also substantial Arab and Turkoman minorities, as well as a
large refugee population of Syrians and Iraqis fleeing fighting between the regime of Bashar Al Assad
and opposition groups, or escaping areas controlled by ISIS (the ‘Islamic State of Iraq and Al-Sham
[Syria]’ or ‘Da’esh’, its Arabic acronym).
The Kurdish sectarian majority is Sunni Muslim, with a Shi’ite minority. The Feyli Kurds are Shi’a, and
live in both Iran and Iraq. There are also minorities of non-Islamic religions: Yezidis and the closely
related Shabak, the Ahl-e Haqq, and some tens of thousands of Christians.
Following World War I, the San Remo conference of 1920, the Franco-Turkish agreement of October
1921, the Treaty of Lausanne of 1923, and the League of Nations judgement of December 1925 8
determined that the wilayat (province) of Mosul (containing the modern KRI) would be included in the
new British mandate state of Iraq; hence there would not be a Kurdish state covering parts of Iraq,
Syria, and Turkey. The British wanted to secure the anticipated oil resources of the Mosul area,
promising the French in return a 25 per cent stake. Neither the British nor the independent Iraqi
government that succeeded in 1932 kept to their assurances of establishing an autonomous Kurdish
government.
The establishment of the Kurdistan region dates back to the March 1970 autonomy agreement
between the Kurdish opposition and the Iraqi government, following years of heavy fighting. The
agreement, however, failed to be implemented and by 1974 northern Iraq plunged into another round
5
Website of Kurdistan Regional Government: www.gov.krd/p/p.aspx?l=12&p=214.
6
The divergence may result from the desires of the Turkish government and Kurdish nationalists respectively to downplay or
overstate the size of the Kurdish population.
7
CIA World Factbook.
8
‘A brief survey of The History of the Kurds’, Kendal Nezan, President of the Kurdish Institute of Paris:
www.institutkurde.org/en/institute/who_are_the_kurds.php.
Under the Mountains: Kurdish Oil and Regional Politics 2
of bloody conflict between the Kurds and the Arab-dominated government of Iraq. The 1975 Algiers
Agreement between Iraq and Iran withdrew Iranian support for the Kurds and their revolt collapsed.
The Iran–Iraq War of 1980–88, especially the 1988 Anfal genocide campaign of the Iraqi army which
included chemical weapons attacks against the people of Halabja, devastated the population and
environment of Iraqi Kurdistan. Mass population transfers, ongoing since the 1960s, were intended to
‘Arabize’ certain territories, for example around Kirkuk.
Following the 1990–91 First Gulf War, and the 1991 uprising of Kurds in the north and Shia in the
south against Saddam Hussein, the Peshmerga9 succeeded in pushing out the main Iraqi forces from
the north which, with establishment of the northern no-fly zone by the US-led Gulf War coalition, left
the region with de facto autonomy over its finances, military, and internal affairs, but without any
foreign diplomatic recognition. In 1992, the major political movements of KDP (Kurdistan Democratic
Party) and PUK (Patriotic Union of Kurdistan) established the semi-autonomous Kurdistan Regional
Government (KRG). During 1994–7, the PUK and KDP fought an intermittent civil war in which
several thousand people were killed.
The 2003 US-led invasion of Iraq and subsequent political changes led to the ratification of a new
Constitution of Iraq in 2005;10 this codified the status of the Kurdish region as a region within a federal
Iraqi state, with defined powers reserved to itself (see Section 4.2 for discussion of these powers in
the context of the oil sector). PUK leader Jalal Talabani became Iraqi president and the Kurds, usually
pro-American, became an important balancing force in Baghdad politics. However, their desire to
prevent the emergence of a strong Baghdad administration that might repeat Saddam Hussein’s
repressive centralization led them to favour a weak federal government.
Unlike most of the rest of Iraq, between 2005 and 2014 the KRI maintained a good level of security
and enjoyed strong economic growth and development; this included progress in signing and
implementing oil and gas exploration and development deals with international companies. However,
as discussed below, there were a number of intractable disputes between Baghdad and Erbil during
this period, of which the vague constitutional provisions regarding the hydrocarbon sector and
revenue-sharing were amongst the most important.
Tensions between Kurdistan and the federal Iraqi government mounted through 2011–12 on the
issues of power sharing, oil production, and territorial control. In 2012, the Iraqi government ordered
the KRG to transfer its powers over their military forces (the Peshmerga) to the federal government.
Relations became further strained by the formation of a new command centre – Dijla (Tigris)
Operations Command - for Iraqi forces to operate in a disputed area over which both Baghdad and
the KRG claimed jurisdiction.
The fate of Kirkuk was supposed to be determined by a referendum (covered by Article 140 of the
Constitution) which was originally supposed to have been held in 2007. No date has been set for the
vote on the future of this disputed area that is claimed by Iraqi Arabs, Kurds, Turkomans, and other
minority groups. None of the sides involved really wished the referendum to take place: Baghdad did
not wish to lose control of Kirkuk, the Kurds were not entirely sure of their support in the city (and the
KDP did not wish to weaken its position by acquiring a predominantly pro-PUK city), and Turkey
exerted pressure to protect Turkmen populations in the area and to prevent the KRG acquiring a large
revenue source.
During the Islamic State of Iraq and Syria (ISIS)’s 2014 offensive, in which they captured Mosul, the
KRG forces took control of the city of Kirkuk and the surrounding area, as well as most of the disputed
territories in northern Iraq claiming (not unreasonably) that this was to protect local populations from
ISIS. However, clashes have occurred (as in the disputed town of Tuz Khurmatu in November 2015 11)
9
Kurdish militia: ‘those who face death’.
10
‘Iraqi Kurdistan’, www.onwar.com/actors/type42/iraqikurdistan.htm.
11
‘Multiple dead in Kurd-Hashid fight in Tuz’, Iraq Oil Report, 13 November 2015, www.iraqoilreport.com/news/multiple-dead-in-
kurd-hashid-fight-in-tuz-17031.
between Al Hashd Al Shaabi (Popular Mobilization) forces – largely Shi’ite militias – and Peshmerga
forces, despite their alliance in principle against ISIS, but these may have predominantly local roots or
be related to indiscipline within Al Hashd Al Shaabi. Such disturbances, however, do raise concerns
over future political, or even armed, conflict between Baghdad and the KRG.
Political power in the KRI, as well as command of the Peshmerga, has largely been split between the
Kurdistan Democratic Party (KDP) led by Kurdish president Masoud Barzani, and the Patriotic Union
of Kurdistan (PUK), led by former Iraqi president Jalal Talabani until he suffered a stroke in December
2012. In 2009, the Movement for Change (Gorran), led by Talabani’s former deputy Nawshirwan
Mustafa, split off from the PUK; Gorran campaigned against corruption and nepotism in the two
established parties and attracted sizeable support which made it, on some measures, the region’s
second-largest party. In general, the KDP is more tribal and conservative, and has its base in the
governorates of Erbil (Hewlêr in Kurdish) and Dohuk, while the PUK is more urban and socialist-
oriented and is centred in the southern KRI in the Sulaymaniyah (Slemani) governorate, as well as in
Kirkuk. However, the Kirkuk governor, Najmaldin Karim, though part of the PUK, has established an
independent power base of his own. There are also a number of smaller Islamist parties.
The KDP has drawn closer to Turkey, and in particular to the AK party (AKP) of President Recep
Tayyip Erdoğan, while the PUK has historically been closer to the PKK (Kurdistan Workers’ Party) in
Turkey (which has waged a long insurgent campaign against the government in Ankara) and to the
PKK’s affiliate the PYD (Democratic Union Party) in Syria. The PUK has also been more in favour of
remaining within a federal Iraq, while the KDP has made several calls for outright independence. On 1
July 2014, KRG president Masoud Barzani announced that that Iraq’s Kurds would hold an
independence referendum within months, but this proposal has died down. Though a majority of
Kurds seems to be in favour of independence,12 the leadership has not taken decisive steps towards it
so far for various reasons: outside pressure, and also the rewards and useful leverage of holding
offices in Baghdad; the availability, until recently, of federal oil revenues; and the potential to advance
their interests (such as gaining ground in Kirkuk and other parts of the disputed territories) within the
framework of a weak Iraqi state. The USA, a vital political and security partner for both Baghdad and
Erbil, has also discouraged Kurdish independence aspirations, because of the potential for regional
destabilization.
Iraqi Kurdistan’s neighbours – Iran, Syria, and especially Turkey – have generally been opposed to
outright independence, fearing it would increase the demands of their own Kurdish populations.
Turkey has, though, been ready to encourage the KRG’s autonomy, preferring a malleable Kurdish
entity over which it would have strong economic and political influence, as a counterweight to the PKK
organization of the Kurds in Turkey, as well as to Baghdad. The KRG has also been a source of
lucrative business opportunities, not only oil and gas deals, but also in other trading. Eighty per cent
of goods sold in the KRI were made in Turkey, and trade volume expanded from $4 billion in 2009 to
$8.4 billion in 2012. 13 Turkish companies were particularly prominent in the engineering and
construction sectors.
Conversely, the alliance with Turkey has bolstered the position of the KRG, and of the KDP within it. It
has strengthened Masoud Barzani’s aspirations to a leadership role among all Kurds, not just those of
the KRI, as shown by his November 2013 visit to Diyarbakır (Amed), the most important city in the
12
‘New Public Opinion Poll On Iraqi Kurdistan’s Independence, 2 October 2012, Musings on Iraq blog:
http://musingsoniraq.blogspot.ae/2012/10/new-public-opinion-poll-on-iraqi.html. This source suggests 56% support in 2012,
though almost half of the ‘no’ respondents said Kurdistan had to develop further before it was ready for independence.
However, note a September 2015 poll suggesting 52% of Iraqi Kurds supported a more representative central government,
17% a loose federation, and only 20% partition of Iraq into three countries (Kurdish, Sunni Arab, and Shi’a Arab): ‘Middle East
2015: Current and future challenges’, Prepared for the Sir Bani Yas Forum, November 2015, Zogby Research Services:
http://static1.squarespace.com/static/52750dd3e4b08c252c723404/t/5667940fbfe8731ec365efa7/1449628687692/Sir+Bani+Ya
s+2015+Letter+FINAL.pdf.
13
‘Determined to Grow: Economy’, Invest In Group: http://investingroup.org/review/236/determined-to-grow-economy-
kurdistan/.
Kurdish part of Turkey – challenging PKK leader Abdullah Ocalan while attracting Kurdish votes to
(then) Prime Minister Erdoğan and the AKP. Turkey also provides a protector against Baghdad and
Iran.
Iran also exports significant quantities of goods to the KRI and is an important, though secondary, oil
export route. However, its policy is guided more by divide-and-rule – playing its favoured PUK against
the KDP, as well as the KRG against Baghdad.
However, various factors – the rise of ISIS, the autonomy established by the Syrian Kurds during the
Syrian civil war, and intervention by Turkey and other countries on various sides – have complicated
all alliances and they remain in flux. This was on display with the tensions between the KDP and PUK
Peshmerga, the PKK, and the YPG (Syrian Kurdish militia) during the long drawn-out operation to
recapture Sinjar (Shingal) in north-western Iraq from ISIS. Turkey can no longer rely on Baghdad or
Damascus to suppress their Kurdish populations, while Erdoğan’s close relationship with the KDP
involves Turkey in intra-KRG struggles.
Figure 1 shows: the boundaries of the KRI as recognized in the 2005 Constitution (the ‘Green Line’),
the KRG forces’ advance before and after the ISIS campaign from May 2014, the maximal extent of
the ‘disputed territories’, the deployments of PUK, KDP, and YPG (Syrian Kurdish) Peshmerga, and
the federal and Kurdish oil pipelines from Kirkuk to Turkey.
Figure 1: Political and military boundaries of the Kurdish region of Iraq (as of April 2015)14
In 2013, the term of President Masoud Barzani was extended for a further two years until August
2015. In June 2015, the rival parties to the KDP (mainly the PUK and Gorran) refused to extend his
tenure further. In October 2015, protests by government workers demanding unpaid salaries
escalated into attacks across the KRI on KDP offices. The KDP blamed these on Gorran and, without
proper legal authority, expelled Gorran ministers and parliamentarians from Erbil and from the KDP-
controlled parts of the KRI.15 This potentially dangerous situation was escalating further at the time of
writing.
14
(International Crisis Group, 2015).
15
Iraq Oil Report, 12th October 2015.
2.2. Petroleum history
The petroleum history of the KRI can be divided into five phases.
2.2.1. Kirkuk to the First Gulf War: 1927–91

In October 1927, the giant Kirkuk field was discovered by the Iraq Petroleum Company (IPC) – a
consortium of Standard Oil of New Jersey,16 Standard Oil of New York,17 Gulf Oil,18 Pan-American,19
Atlantic Richfield,20 Anglo-Persian,21 Royal Dutch Shell, the Compagnie Française des Pétroles,22 and
Calouste Gulbenkian23 – heralding the emergence of Iraq as a major oil-producing country.
Further discoveries followed in the vicinity of Kirkuk and other parts of northern Iraq. But exploration in
the areas now part of the KRI was very limited prior to 2004. The nationalization of most of IPC’s
concession area after the July 1958 revolution halted exploration in the country, and its assets were
fully nationalized by the end of 1975. After that, there was only limited exploration in the south of Iraq,
under service contracts. Various explanations for the lack of exploration in Kurdistan include the
opposition of the Baathist government to developing the region and, conversely, Kurdish opposition to
central government activities. But at least as important is that the area’s less certain geological
prospectivity and rugged terrain made it unattractive compared to the giant fields in the south.
A few fields were discovered in the KRI during this period – Chemchemal (gas) in the 1920s, Khor
Mor (gas) in 1953, Demir Dagh in 1960, and Taq Taq in 197824 – but development did not proceed.
The last well drilled before the First Gulf War was Jabal Kand, north of Mosul, in 1981. (See Figure 2.)
16
Later Exxon, now ExxonMobil
17
Later Mobil, now part of ExxonMobil
18
Later acquired by Chevron
19
Later Amoco, then acquired by BP
20
Later acquired by BP
21
Later Anglo-Iranian, now BP
22
Now Total
23
Now Partex
24
First drilled in 1960, but drilling was suspended in April 1961 due to the nationalization of most of IPC’s concession
Figure 2: Early exploration in the KRI25
2.2.2. De facto independence: 1991–2004

During the period of de facto independence from 1991 to 2004, there was some small development of
Taq Taq for local use from 1994–6, with the KRG completing two wells, but UN sanctions and the
unclear political situation meant that no international company could realistically operate in the region.
The Kurds did not have the technical or financial resources to make significant progress on exploring
or developing petroleum in their area. However, it is alleged that the KDP-controlled parts of the KRI
were a conduit for smuggling oil by the Saddam Hussein regime.26 The Kirkuk-area fields continued
production, under the control of Baghdad.
2.2.3. Arrival of international oil companies: 2004–10

Following the US-led invasion and overthrow of the Saddam Hussein regime, a number of bold
independent oil companies began to explore the KRI’s oil potential. Though larger oil companies also
assessed the region, they were deterred by the political risk and the lower perceived prospectivity as
compared to the south of Iraq, where numerous underdeveloped giant fields were available. The
Ministry of Natural Resources (MNR) was established in 2006, as the counterpart of the federal
Ministry of Oil in Baghdad. It divided the region into exploration blocks, roughly following the known
geological pattern and attempting to place one known structure per block (see Figure 3). Blocks were
labelled with K and a number (K1, K2, up to K48); eight mountainous areas of more doubtful
prospectivity were labelled with letters (A–H).
25
PetroCeltic
26
(Pollack, 2003, p. 81)
Natural Resources Minister Ashti Hawrami, appointed in May 2006, was the key figure in this policy. A
former engineer with the Iraqi National Oil Company, he worked for the British National Oil Company
on the North Sea during 1975–82, and thereafter in a number of consulting roles in the UK.27 This is in
notable contrast to most of his counterparts in the Ministry of Oil in Baghdad, who had no private-
sector experience and had not worked outside Iraq or, like Dr Hussein Shahristani, who were not oil-
sector professionals. Aligned with the KDP, Dr Hawrami pushed the investor-friendly policy, promoted
production-sharing contracts, and decided on the allocation of blocks to companies. His leadership
has encouraged the Kurdish oil sector to develop much faster than it would otherwise have done;
however, his confrontational style versus Baghdad has hindered any resolution of the various
disputes over the oil sector.
Figure 3: Division of KRI into exploration blocks28
Genel Enerji, backed by large Turkish investors, moved first, signing a production-sharing contract
(PSC) for the Taq Taq field in July 2002 (even before the fall of Saddam) and amending it in January
2004. Genel (which became Genel Energy in 2011 via a reverse takeover by former BP CEO Tony
Hayward’s Vallares investment vehicle) was joined in Taq Taq by the Swiss group Addax in July
2005, and production started at the end of 2008. Norway’s DNO signed a PSC in 2004 and
discovered the Tawke field in April 2006. Production began in June 2007 and ramped up sharply from
June 2009 when exports began. Western Zagros Resources, a spin-off from Canada’s Western Oil
Sands,29 was active in the KRI from 2004 and signed a PSC for the Kalar-Bawanoor exploration block
in May 2006. According to Article 114 of the Iraqi Constitution, the KRG and the companies involved
argue that their contracts are recognized as valid by virtue of being in force before the adoption of the
27
Ashti Hawrami (Abdullah Abdulrahman Abdullah) – Minister of Natural Resources, 10 November 2009, KRG Cabinet, website
of Kurdistan Regional Government, http://cabinet.gov.krd/a/d.aspx?l=12&a=32579.
28
PetroCeltic
29
Western Oil Sands was acquired by Marathon in July 2007, but Marathon chose not to retain the Kurdish assets, though it
later entered the Harir and Sarsang blocks.
Constitution.30 These contracts, therefore, have a different legal position from all subsequent PSCs
signed by the KRG.
In 2007, a consortium of the UAE’s Dana Gas and Crescent Petroleum was awarded a service
contract for the Khor Mor and Chemchemal gas fields; it rapidly proceeded to develop Khor Mor’s gas
for local power generation. Under this contract, Dana Gas and Crescent (joined by OMV and MOL in
May 2009 as the Pearl Petroleum consortium) are paid in condensate and liquefied petroleum gas –
produced as by-products. Finally, the Khurmala field, the northern part of the Kirkuk field, previously
under the operatorship of the federal North Oil Company, began production in July 2009, under the
operatorship of KAR Group, a local Kurdish company. These awards set the stage for the initial phase
of hydrocarbon exploration and development in the region (Figure 4 shows the situation up to 2006).
Figure 4: PSCs awarded in KRI by 200631
Although the underlying legal issues between the KRG and Baghdad were not resolved, progress in
production, growing awareness of the region’s prospectivity, and frustrations with delays in opening
up federal Iraq’s fields for development, led to an accelerating influx of medium-sized oil companies,
with OMV, MOL, Korea National Oil Corporation, India’s Reliance Industries, and Alfa-Access-Renova
(the Russian partners in the then TNK-BP) all signing in the latter part of 2007. Perhaps most notable
was the USA’s Hunt Oil, which signed for Ain Sifni in September 2007 in the face of official American
disapproval, since it was the largest company to sign for a PSC with the KRG to that date. Hunt Oil’s
CEO, Ray Hunt, was a fundraiser and advisor to George W. Bush,32 and the Kurds saw the deal as
30
‘The Authority of the Kurdistan Regional Government over Oil and Gas under the Constitution of Iraq’, (legal opinion),
http://cabinet.gov.krd/uploads/documents/James_R_Crawford_Kurdistan_Oil_Legal_Opinion_English__2008_07_09_h11m23s
26.pdf.
31
PetroCeltic.
32
‘Hunt Oil knew KRG oil deal in disputed territory’, Iraq Oil Report, 25 August 2011, www.iraqoilreport.com/politics/hunt-oil-
knew-krg-oil-deal-in-disputed-territory-6108/
granting them tacit approval. Furthermore, Ain Sifni was in the ‘disputed territories’, lying within the
legal boundaries of Ninewa province, though behind the ‘Green Line’.
Further awards followed in 2008, to other mid-sized companies, with Korea National Oil Company and
Talisman of Canada perhaps being the most notable. By then, a large part of the lower-lying part of
the KRI, easier to operate in and perceived as being more prospective, had been licensed (Figure 5).
In May 2009, Heritage (which later sold out to Genel) discovered the large Miran gas field, and in
October 2009, Gulf Keystone discovered the Shaikan oilfield, the largest found in the KRI so far; it
began test production in October 2010.
Figure 5: PSCs awarded in the KRI, end-200833
Federal Iraq’s offer of technical service contracts for several, mostly giant, fields, primarily in the south
of Iraq (First Round, for producing fields, June 2009; Second Round, for non-producing fields,
December 2009; Third Round, for gas fields, October 2010; Fourth Round, for exploration blocks,
May 2012) changed the situation considerably. Progress with the rounds, in the continuing absence of
a federal oil and gas law, marked a gamble both by oil minister Hussein Shahristani, and the
international oil companies. The plunge in oil prices triggered by the global financial crisis made it
imperative for Iraq to attract investment and boost production.
Although it is not clear what part the Kurds’ contract awards played in prodding Baghdad to move, the
federal government’s success in signing up Shell, ExxonMobil, BP, CNPC, ENI, Petronas, CNOOC,
Gazprom Neft, Total, Occidental, and several other major companies did deter them from considering
entries into Kurdistan. 34 The enormous volumes of promised investment and production, with an
implied plateau of 12 million bpd (barrels per day), deflected criticism of Baghdad’s oil policy. The
prospect of receiving a share of greatly increased federal oil revenues also increased the incentive for
the KRI to remain within the federal Iraqi system. However, Baghdad possibly made a tactical error by
33
PetroCeltic.
34
Though it was not the only reason they did not enter the KRI at this time.
rejecting bids by Shell, Sinopec, and Turkey’s TPAO for the Kirkuk field, which would have boosted
production and cemented its control of the field.
2.2.4. The entry of ExxonMobil: 2011–mid 2014

In November 2011, the KRG greatly strengthened its position, and escalated the dispute with
Baghdad, by signing PSCs for six exploration blocks with ExxonMobil. ExxonMobil was, as the world’s
largest non-state oil company, by far the largest player to enter the KRI to date, and hence brought
great financial, technical, and reputational resources. 35 As noted in Section 0 below, some of the
blocks were in territory disputed with the federal government, or were otherwise politically sensitive.
The KRG perceived that the presence of ExxonMobil gave it additional weight with the US
government,36 although reportedly ExxonMobil only informed the State Department after the deal had
happened. But most importantly, ExxonMobil was already active as operator of the giant West Qurna-
1 project in federal Iraq, with implications discussed below (Section 0 below).
TAQA (an Abu Dhabi government-controlled company), Total, Chevron, and Gazprom Neft also took
blocks in the KRI during 2012, bringing the financial strength, technical expertise, and implicit political
backing37 of major companies.
The blocks taken by ExxonMobil, together with the other awards, meant that by December 2012
almost the entire area controlled by the KRG was licensed (Figure 6), excluding some mountainous
areas of doubtful prospectivity. New companies seeking to enter would therefore have to face
elevated geological risk, or political risk (in the disputed territories), or take on blocks previously
relinquished by other companies as being unattractive, or purchase stakes held directly by the KRG
or by existing licence holders. Given the continuing uncertainty over oil export routes and payments,
larger companies were unready to commit to buying smaller players such as Gulf Keystone or
Western Zagros.38
However, production from the Tawke, Taq Taq, and Shaikan fields was constrained by disputes over
pipeline export access. From 2011 to December 2012, exports were possible via the federally owned
Kirkuk pipeline, but this arrangement halted from January 2013, forcing operators to sell to the local
market or export by truck.
35
Though it must be said that ExxonMobil has chosen to proceed only slowly with its Kurdish blocks to date.
36
Though see (Coll, 2012) for a more nuanced view.
37
Even if this was more in potentiality than actuality.
38
TAQA bought 17.98% of Western Zagros in October 2011 but sold it in November 2012 at a significant profit.
Figure 6: PSCs awarded in the KRI, December 201239
From December 2013, the KRG began to export and sell oil directly through its new pipeline to
Turkey, without reference to Baghdad. The federal government had not sought to block trucked
exports, which were in relatively small amounts, but from about November 2013 Baghdad responded
to potential use of the pipeline by initiating legal action against the shippers and buyers of Kurdish oil,
thus deterring most large traders and refiners, who were also major purchasers of oil from Baghdad.
The Kurdish Ministry of Natural Resources sought to disguise the identity of its customers; this
scheme included selling to, or via, Ashkelon in Israel, with which Iraq has no diplomatic relations and
consequently where it could not take legal action.40 As well as generating economic benefits, this deal
was in line with the low-profile establishment of Israel–KRG ties, as the KRG sought to diversify its
diplomatic alliances. Oil was transferred to other ships off the coast of Malta, and decoy ships were
used to confuse Baghdad’s tracking. Hungary’s MOL, holding exploration and production assets in the
KRI, was one company to buy Kurdish crude for its refinery. By November 2015, Natural Resources
Minister Ashti Hawrami claimed that about ten countries were buying Kurdish oil.
39
‘The history of hydrocarbon exploration in Iraqi Kurdistan: 1901 to 2012’, David Mackertich and Adnan Samarrai, PetroCeltic,
www.petroceltic.com/~/media/Files/P/Petroceltic-V2/pdf/Mackertich-Samarrai-2013-Geol-Soc-Zagros-conference-
presentation.pdf.
40
‘Exclusive: How Kurdistan bypassed Baghdad and sold oil on global markets’, Dmitry Zhdannikov, Reuters.com, 17
November 2015, http://mobile.reuters.com/article/idUSKCN0T61HH20151117
In January 2014, budget payments from Baghdad to the KRG were halted, leading to a deepening
budgetary and economic crisis in the region. This is discussed further in Section 4.3.
2.2.5. The onslaught of ISIS: mid-2014 and beyond

In June 2014, ISIS seized the city of Mosul, Iraq’s third largest, and made a rapid advance through
the surrounding territories. Through June and July, there was little fighting between ISIS and the
Peshmerga,41 but in August, ISIS overran the city of Sinjar, centre of the Yezidi religious group, and
threatened to attack Erbil, until US air strikes assisted the KRG forces in retaking most of the lost
territory. The lightly armed Peshmerga were revealed to have lost their combat edge during years of
peace, and their military performance was hampered by the division of command between the PUK
and KDP.
Following the fall of Mosul, Kurdish forces secured the city of Kirkuk and the surrounding oilfields of
Kirkuk, Bai Hassan, and Jambur.42 The KRG began the process of connecting the Avanah Dome of
the Kirkuk field (also linked by pipeline to Bai Hassan) to Khurmala so that oil could flow into the
Kurdish pipeline system. In November 2014, the Kurdish news agency Rudaw reported that the newly
secured Ain Zalah field (producing around 2 kbpd) was being linked by pipeline into the Kurdish
export system.43 It also appears that the Butmah and Sufaiya fields have been secured by Kurdish
forces. These last three named fields, which lie north-west of Mosul, are small compared to Kirkuk,
however.
The irruption of ISIS had, of course, major political and military consequences across the region,
which cannot be dealt with in detail here. In terms of effects on the Kurdish oil industry, the militants’
seizure of the Baiji refinery (Iraq’s largest, which is located near Kirkuk) led to severe shortages of
refined products, notably petrol (gasoline) and diesel, throughout northern Iraq and in the Kurdish
region, making the KRG aware of its vulnerability. Oil companies withdrew most expatriate staff,
though many later returned, and halted operations in blocks near the front lines. Wells of the small
Khabbaz field, south-east of Kirkuk, were attacked by ISIS on several occasions – in January, 44
February,45 and October 201546 – cutting 20 kbpd of production, which recovered to 11 kbpd after the
field was retaken.
The fighting against ISIS and the influx of refugees into the KRI worsened the existing budget crisis,
and made it even more urgent for the KRG to secure a reliable route for oil exports and payments.
The World Bank estimated the overall cost of the influx of refugees and internally displaced people at
$1.4 billion.47 The KRG has used the cost of the fighting against ISIS and of the refugee influx as
justifications for the lack of payments to the IOCs. However, control of the Kirkuk area fields also
considerably increased the immediate oil production available, with Avanah and Bai Hassan output
freeing up oil from Khurmala for export.48
ISIS and its antecedent groups in Iraq relied on smuggling and extortion of oil and products from the
Baiji refinery to fund their activities, even when the area was notionally under central government
41
(Iraqi Kurdistan: The Essential Briefing, 2015)
42
‘Kurds take 2 vital oil fields near Kirkuk, increasing tensions with Iraqi gov’t’, 11 July 2014, CBSNews:
www.cbsnews.com/news/kurds-take-2-vital-oil-fields-near-kirkuk-increasing-tensions-with-iraqi-government/.
43
See also ‘KRG solidifies hold on Ain Zalah’, Iraq Oil Report, 26 March 2015, www.iraqoilreport.com/news/krg-solidifies-hold-
on-ain-zalah-14284/.
44
‘Kurds Recapture Oil Facility In Northern Iraq From ISIS’, The World Post, 31 January 2015,
www.huffingtonpost.com/2015/01/31/isis-oil-iraq_n_6584434.html.
45
‘Iraq oilfield output suspended after IS fighting -oil minister’, Mustafa Mahmoud, Reuters, 2 February 2015,
http://uk.reuters.com/article/2015/02/02/mideast-crisis-iraq-oil-idUKL6N0VC1SJ20150202.
46
‘North oil facilities face ongoing IS attacks’, Iraq Oil Report. 3 February 2015, www.iraqoilreport.com/news/north-oil-facilities-
face-ongoing-is-attacks-16671/.
47
(World Bank, 2015)
48
‘Pipeline upgrade to boost Kurdish oil exports’, Alexander Whitcomb, RÛDAW, 28 October 2014,
http://rudaw.net/english/kurdistan/281020142.
control. More recently, as widely reported,49 ISIS’s direct control of oil facilities has expanded – mostly
in Syria but including fields in Iraq it held for a period of time following the capture of Mosul. Kurdish
traders were reportedly active in this trade through long-established networks,50 transporting ISIS oil
by truck and on-selling it to Turkey and Iran or refining it locally. Although the KRG made efforts to
clamp down on the smuggling in late 2014, the extent of complicity with senior figures remains
unclear.
49
e.g. ‘Inside Islamic State’s oil empire: how captured oilfields fuel Isis insurgency’, The Guardian, 19 November 2014,
www.theguardian.com/world/2014/nov/19/-sp-islamic-state-oil-empire-iraq-isis; ‘Isis Inc: how oil fuels the jihadi terrorists’, The
Financial Times, 14 October 2015, www.ft.com/intl/cms/s/2/b8234932-719b-11e5-ad6d-f4ed76f0900a.html#axzz3s7CJCnXo.
50
e.g. ‘First Kurds arrested for smuggling ISIS oil’, Alexander Whitcomb, RÛDAW, 13 November 2014,
http://rudaw.net/english/kurdistan/131120142.

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Oxford Institute for Energy Studies

Report Title: Under the Mountains:

2.1. Political history

Under the Mountains: Kurdish Oil and Regional Politics 2

Under the Mountains: Kurdish Oil and Regional Politics 3

Under the Mountains: Kurdish Oil and Regional Politics 4

Under the Mountains: Kurdish Oil and Regional Politics 5

2.2.1. Kirkuk to the First Gulf War: 1927–91

Under the Mountains: Kurdish Oil and Regional Politics 6

2.2.2. De facto independence: 1991–2004

2.2.3. Arrival of international oil companies: 2004–10

Under the Mountains: Kurdish Oil and Regional Politics 7

Under the Mountains: Kurdish Oil and Regional Politics 8

Under the Mountains: Kurdish Oil and Regional Politics 9

Under the Mountains: Kurdish Oil and Regional Politics 10

2.2.4. The entry of ExxonMobil: 2011–mid 2014

Under the Mountains: Kurdish Oil and Regional Politics 11

Under the Mountains: Kurdish Oil and Regional Politics 12

2.2.5. The onslaught of ISIS: mid-2014 and beyond

Under the Mountains: Kurdish Oil and Regional Politics 13

Under the Mountains: Kurdish Oil and Regional Politics 14

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