Turkey bats Kurdish oil deal over to Iraq

Throughout this year, Ankara and Erbil have been buzzing with talk of a secretive deal between Turkey and Northern Iraq that would redraw the energy map of the Middle East. But now the agreement has been openly proclaimed by the parties doubts are growing about how, when and even if it will enter into force.

The deal, which officials said as long ago as April had been agreed in principle, will bring oil, and later gas, into energy-poor Turkey, give Ankara an ownership stake in a clutch of Kurdish oilfields and move the Kurdish Regional Government of Northern Iraq closer to economic independence from Baghdad.

For Turkey, the deal could reduce the country's trade deficit by $3bn-$5bn by 2016-17 because of transmission fees and cheaper gas, reckons Atilla Yesilada of GlobalSource, a consultancy.

But there is a complication: despite having its own flag, government and army, the KRG is not a sovereign state and its ability to sign international deals in the face of opposition from the Iraqi government is in question. After long arguing that central government approval was welcome but not essential, Ankara now says the future of the agreement is up to Baghdad and Erbil.

"The ball is now in the court of Northern Iraq and the Iraqi central government," said Taner Yildiz, Turkey's energy minister, last week.

For months the KRG and Turkey have been discreetly working on the details of a deal, with Ankara establishing a new state entity, the Turkish Energy Company, to take stakes in the Kurdish fields and Erbil building a pipeline from fields in its territory directly to the Turkish border. Baghdad and the US objected to the process, which they said violated the country's constitution and risked fracturing Iraq still further.

Ankara assumed that once the deal came into effect, Baghdad would change its mind - not least because a bank account would be set up to reserve 83 cents for each dollar of oil sales to the Iraqi central government, in line with the country's revenue sharing agreement. But as details of the agreement emerged, Baghdad made clear it would not acquiesce.

A day before Mr Yildiz unveiled the agreement at an energy conference in Erbil last week he flew to the Iraqi capital to begin direct negotiations.

It is unclear whether Turkey has in effect conceded a veto to Iraq, or whether the government of Nouri al-Maliki, Iraq's prime minister, will ultimately sign up to a deal that empowers the KRG but also enriches Baghdad's coffers.

Asked by the Financial Times, Mr Yildiz declined to confirm or deny whether Baghdad now had the final say in the deal.

Meanwhile, at an Opec meeting in Vienna last week, Abdul-Kareem Luaibi, Iraq's energy minister, argued that a deal could be struck swiftly if Iraq's concerns were addressed, but insisted payments for exports had to go through the central government's designated account for oil export earnings.

Some analysts argue the agreement remains a remote prospect. "For all the Kurds' bluster and their willing optimism, Iraq holds a lot of the cards here," says Crispin Hawes at Teneo, a consultancy. He says the KRG remains dependent on income from Baghdad, that Iraq does not need extra revenue from the North and that the dispute reflects fundamental differences over who should pay oil groups developing the fields.

However, Luay al-Khateeb, an adviser to the Iraqi parliament, argues an agreement can be struck as long as it is recast as a state-to-state deal between Baghdad and Ankara.

Turkish officials privately remark that if Iraq continues to object, the decision whether to proceed will come down to Recep Tayyip Erdogan, Turkey's prime minister.

With the infrastructure in effect in place the benefits of a deal are within Mr Erdogan's grasp. But the prime minister is also in the midst of an attempt to heal relations with Baghdad, an endeavour bound to be thrown off course if he proceeds with the KRG deal without Mr Maliki's consent. The Iraqi market as a whole is a bigger prize than just the North, and Turkish contractors are eager to overcome political difficulties that have prevented them from winning tenders in the south of the country.

It is not a choice that Mr Erdogan will relish making. Much, including Turkey's economic prospects and its diplomatic clout, will depend on whether Ankara and Erbil can get Baghdad to sign up to their ambitions.

Additional reporting by Ajay Makan in London

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