Baghdad, Kurds and Kilts

Neighbourly disputes are never pleasant. Domestic violence is high on the Police priority list as it seems we are apparently more likely to beat the living daylights out of our nearest and dearest than some complete stranger. That’s certainly not the case for many of us, but where Neighbours are concerns, all out war can often be declared ‘privately’ or ‘openly’ and it often escalates from the silliest of things. An over grown branch that reaches into your garden? A 72 inch TV with mega boost bass? A pet that likes the sound of its own bark yet goes unheard by the owners? Etc etc.

Investors will be all too aware of the neighbourly division between Baghdad’s central government and Kurdistan. The two have not seen eye to eye for many years – pre Saddam and post Saddam era’s.

For those that struggle with their geography, Baghdad to Erbil is virtually the same distance as London to Hawick (Scottish Borders) in terms of time via road. Some might say the journey is just as perilous too! In fact, the correlation between the Scots and the English is a good example especially when it comes to their apparent ‘want’ for independence.  For many years the Scots have complained about the way that Tax is split on the Oil&Gas industry. The question over the North Sea producing assets will linger for years to come but becomes more relevant if/when Scotland becomes independent? Some think it will never happen. And in this fast growing global village where cultural and physical borders get hopped over in a cyber second – one has to question whether the ‘need’ to be separate is still there.

It’s very different in Iraq. In fact the the entire middle east has under gone a huge shift over the last 3 to 4 years culminating in the recent uprisings and end to dictatorships. In years past – dictators normally asserted their power through weapons and armies. Today’s the new enemy is one that cannot be shot down – it spreads like wildfire. It’s called social media.

Investors focussed on Kurdistan are fully aware of the ‘media war of words’ between Baghdad and Erbil. Baghdad says that it has banned Exxon from the south and Exxon/Kurds say that Exxon has decided to leave. There used to be a time when Baghdad issued fierce words against any Oil company operating in Kurdistan. Threats were made and investors reacted with fear, share prices dropped and Baghdad felt like its power of ‘word’ was being heard.

These days investors listen to the PR media ‘words’ that come out of Baghdad, but instead of taking it at face value – it’s digested and then in most cases spat out as nothing more than ‘rants’ and ‘raves’. It’s been going on for some months now since the Super Majors entered Kurdistan and moved away from the south – thus openly defying the Baghdad government.

But something has changed of late – something potentially serious. The words have been replaced by armed forces. It seems Baghdad has regressed into passed era’s – Saddam days of ruling by aggression appears to have returned.

Whilst forces from both sides have been combative with minor skirmishes for the last decade, recent movements by armed forces have escalated. The Kurds have reacted by bolstering their forces of late. Kurdish security forces known as peshmerga clashed with Iraqi forces in the disputed town of Tuz Khurmatu on November 16.

A Military meeting will be held next Monday in the Iraqi ministry of defence in Baghdad heralded as an important development in defusing the crisis.

The move from ‘words’ to potential ‘war’ seems at odds with the neighbourly collaboration on Oil&Gas exports. While armed forces eye each other up over disputed/unresolved territories – the oil flows. This is most peculiar as in past times, the war of words has been enough to see the taps turned off.

So is the recent show of ‘armed’ response a mere bluff? What’s got Baghdad ruffled into making such aggressive moves?

Well, Kurdistan is just over a week away from launching its eagerly awaited Erbil Oil & Gas conference. Players like Exxon and Statoil that used to be partners to Baghdad but have since departed – are there to show their support for the fast growing region. It clearly is a worry for Baghdad.

Add to this reports recently that Turkey are set to take blocks in Kurdistan in a deal that could see them jointly operate and develop assets with Exxon. The US and Turkey tie up would send shock waves through Baghdad as some of the licence blocks under Exxon’s wing are indeed close to Kirkuk and other disputed areas.

Some might not be surprised that Baghdad has decided to send in the troops – clearly rattled that something ‘big’ might be coming via the Erbil conference? Or just flexing the muscle as a warning to all those currently in discussions?

The Erbil conference is set to kick off on Dec 3rd through to Dec 5th.

Whilst recent events look very concerning for investors – the fact that the ‘taps’ are still turned on and the oil is flowing between the two regions suggests that this recent action maybe more about adding strength where ‘words’ have failed.

I doubt the UN or the US will allow any meaningful conflict to occur. The UN is keen to see the country united under an Oil and Gas law. If this becomes evidently a non starter – then the UN and the US may begin to lean towards Kurdistan’s Independence. With the region now inundated with Super Majors, the people of Kurdistan may be ready to go it alone.

And that’s potentially a very big event for all International Oil&Gas companies involved in the region.

Turkey and the US are the key players that are needed to make this happen.

A united approach from these two at the upcoming Erbil conference could set the wheels in motion. Some believe that it started its spin when Exxon entered the region last year. The US and Turkey are also ‘united’ on their approach to Syria. Something that should not be overlooked by investors.

At the end of the day – if you can’t resolve your issues with your neighbours – ultimately you move or they move.

Kurdistan may be close to making the decision to move away from Baghdad for good. While the dog continues to bark, it’s not as loud these days. If Baghdad decides to use its bite – it could find itself put down pretty swiftly in this day and age.

HUB