Inside the U.S. Push to Keep Kurdish Oil Under Baghdad's Watch

The United Leadership, a tanker containing about one million barrels of oil from Iraqi Kurdistan, has been stuck at sea for two months. The ship has been mostly anchored off the Moroccan coast, the victim of legal threats against potential buyers. It is mired in a battle between Kurdistan, intent on parlaying the sale of such oil into independence, and the US and Iraqi governments, which are just as determined to prevent that and keep Iraq whole.

But people with knowledge of the situation say the US has signaled that it may stop actively discouraging potential buyers. If these people are right—and the US warnings are tempered—the market could see a fresh supply of 500,000 barrels of oil a day of Iraqi Kurdish oil by the end of 2014 and double that volume a year later.

Kurdistan already operates under relative autonomy but such new oil would probably accelerate its advance toward independence from Iraq as the region would be able to stand on its own feet economically. Baghdad cut off the funding for Kurdistan’s budget in February—but with the oil proceeds, Kurdistan would be able to pay its civil servants and other governmental expenses.

The shipments of Iraqi Kurdish oil could also reduce global oil prices that have been steady at an average above $100 a barrel for three years running.

Ever since major oil companies began to strike deals in Kurdistan three years ago, Baghdad has threatened to blacklist them for illegally going around the central government. When Kurdistan began to export oil through Turkey at the beginning of this year, Baghdad threatened to sue any company buying the crude for theft—for buying oil stolen from the Iraqi state—hired a Western law firm to do so, and said it was in arbitration proceedings with Turkey for allowing oil to be loaded onto tankers at the Mediterranean port of Ceyhan.

But it has been US diplomatic muscle behind Baghdad that has appeared key to largely halting large-scale Kurdish exports in their tracks, say analysts and oil industry hands. From the start, the US State Department urged big oil firms to stop working in Kurdistan and, since exports began, US officials have repeatedly opposed any sales circumventing Baghdad. In shows of open emotion in private and at public conferences, exasperated US diplomats have sometimes seemed close to stomping their feet in describing how the oil majors’ defiance of Baghdad is bad for a united Iraq.

The Kurds have shipped about six million barrels of oil belonging to the government through a dedicated pipeline to Ceyhan, but have managed to sell just one million of them—a tanker sold and unloaded at the Israeli port of Ashkelon a month ago. But the United Leadership, which left Ceyhan on May 22, has languished at sea northwest of the Moroccan city of Rabat.

The oil in the United Leadership was supposed to go to a Saudi buyer after being refined at the Samir refinery in the Moroccan city of Mohammedia, according to news accounts and oil industry sources. But Morocco called off the deal after a conversation with a State Department official, an oil industry source said.

The Kurds and oil companies have bitterly complained about the Baghdad legal threats and US support for them.

According to the sources with knowledge of US thinking, the State Department intends to continue passive policy action, meaning that potential buyers—if they call and ask for an opinion—will be advised of the threat of legal action by the Iraqi government. But a decision has been made to stop proactively calling potential buyers and issuing warnings, the sources said. The US belief, they said, is that buyers will continue to stay away even if the US is not proactively tell them to do so.

But industry sources say that, if the reports appear to be true, Iraqi Kurdish and small oil-trading firms are likely to test the waters with a shipment or two. If they are sold with little kerfuffle, Kurdish exports will proceed at full bore, or one million barrels a day by the end of next year.

In a July 21 piece in the Wall Street Journal, State Department spokesman Edgar Vazquez said the US would continue to warn buyers of Iraqi Kurdish crude that they face potential legal risk. Amos Hochstein, deputy assistant US secretary of state for energy diplomacy, told Quartz that he could not discuss diplomatic conversations but said “there is no change in policy.”