The fight against Islamic State militant group may be the top priority for Iraq, but if success in 2016 turns into victory in 2017, Iraqi leaders will not be home and dry.
The financial crisis remains crippling, low oil prices require a curtailment of fields, and internal political disputes could create a zero-sum race toward national disintegration.
We have been here before. Iraqi leaders have repeatedly brought the country to the edge of the cliff and turned it around in a broad political agreement, though those deals themselves were not sustainable and often amounted to kicking the can down the road.
There is broad agreement, at least, that the threat of IS is top priority. The group has lost battles over the past year to the point where it holds only pockets of territory, including Mosul, over which a battle has become a bloody and treacherous slog. What remained of its control of oil infrastructure in Iraq --as opposed to Syria -- a year ago was neutralized by mid-year.
Formal federal Iraq security forces and semi-autonomous Kurdistan region forces working together with various government-sanctioned paramilitary forces, coordinated by and operating in conjunction with US-led air strikes and ground support forces, have largely held and extended the line.
That line, when IS is vanquished enough, will be a new front, at least politically, over control of a new Iraq in which multiple groups have multiple self-definitions.
CONTROL OF OIL FIELDS
In and around Kirkuk, as well as north of Mosul, there are five oil fields, currently under the control of the Kurdistan Regional Government but which officially belong to the federal Oil Ministry's North Oil Company. The KRG took the Bai Hassan field and Kirkuk field's Avana Dome in June 2014 to protect it from IS marauders who were closing in on nearly everything in north-west and north-central Iraq with the collapse of much of Iraq's army.
Bai Hassan is currently producing 195,000 b/d and Avana is producing 85,000 b/d, Baz Karim, president of KAR Group, the local energy company the KRG has contracted to develop the fields, told S&P Global Platts. He says he expects Bai Hassan to try to go over 200,000 b/d and is waiting for approval from the KRG's Ministry of Natural Resources of development plans for both fields.
KAR has also been given a contract by the KRG to develop the Sufaya oil field, which is producing as much as 5,000 b/d currently, as well as Ain Zalah and Butmah, all of which are north of Mosul and also belong to the NOC.
The federal government insists that it will be given those fields back when the security situation stabilizes and political talks over longstanding issues of oil rights and revenues are resumed. Neither side seems to want to budge, however.
The KRG relies on the production from those NOC fields, in addition to the more than 300,000 b/d under its official control, to make transfers to traders at the port of Ceyhan and ultimately obtain enough revenues to pay down debt -- including to civil servants who are not being fully paid their salaries.
Amidst this financial stress, the Kurdish parties are all fighting, and the dominant Kurdistan Democratic Party remains firmly in control of both security forces as well as the regional presidency and prime minister's office, though the regional parliament hasn't met in over a year and the presidency's term has been legally lapsed for more than three years.
The federal government also would face myriad consequences if it gave into Kurdish demands for oil independence. It would lose out on legal and financial authority, which could further hit its own budget calculations. Prime Minister Haider al-Abadi would face political pressure that could topple his weak hold on the government -- he has already had three ministers over the past year forced out of their position by opposing parties as well as some within his party.
Basra province, which accounts for the bulk of Iraqi oil production and exports, could use so-called special treatment of the Kurds as a rationale to move forward with vague plans to create its own region and control oil revenues as well.
GLIMMER OF OPTIMISM
However, Iraq has significant potential to chart a steady course through rough waters.
For one thing, oil exports remain at record highs, production is steady, and the world's largest oil companies have invested throughout the country. Iraq faces a bottleneck for growth in that both domestic energy transfer infrastructure is underdeveloped and export infrastructure is at capacity.
This might be a good thing, because Iraq must cut 210,000 b/d from its overall production output to make good on its part of the OPEC and non-OPEC producer pledge to reduce global supply in an effort to increase oil prices.
It's too early to know just how close to the target Iraq will reach. Oil ministry officials have repeatedly assured Platts that it will not violate the quota deal, though any cuts to fields and exports risk triggering additional domestic political landmines. Iraq's petrodollar program, for example, that kicks back a per barrel production and refinery bonus to provinces in an effort to spur local development.
If Iraq, and its fellow producers, succeed, oil prices may rise to a point it will more than make up for reduced production. That will give Iraq more revenues, which could ease the financial crisis, though would also give Iraqi political leaders more to fight over.http://www.platts.com/latest-news/oil/baghdad/outlook-2017-iraqs-oil-challenges-stretch-beyond-26634458