Fight Over Kurdish Oil Spreads to Texas Court

The dispute between Baghdad and Erbil over Iraqi Kurdistan's oil exports has steadily ratcheted up this year. Now they are fighting in court over $100 million of oil anchored outside of Houston.

The age-old dispute between Iraq's Kurds and its central government has found the unlikeliest of new battlegrounds: a Texas courtroom.

In a contentious lawsuit, Baghdad and its semiautonomous northern region are waging a legal battle that's nominally about the ownership of a million barrels of crude oil sitting in a tanker parked outside the Houston Ship Channel. The real issue, however, is the future of the Iraqi state.

Simply put, the hard-pressed Kurds are desperate to sell their oil to replace revenue they used to receive from the central government. But Baghdad is doing everything in its dwindling power to prevent such self-sufficiency. Its legal threats have cast a pall of uncertainty over Kurdish oil, which is discouraging potential buyers around the world. And that is inexorably pushing the Kurds further away from reconciliation with the Shiite-led regime in Baghdad and closer to open independence.

So far, the United States government hasn't done much to resolve the impasse. It urges the Kurds and Baghdad to work together and to maintain unity, especially in the face of the threat from rampaging Islamic militants. But Iraqi Prime Minister Nouri al-Maliki, a sectarian Shiite, isn't offering any political concessions to Iraq's other political groups, especially the Kurds, which is thereby inflaming tensions. For instance, earlier in July, Kurdish troops seized Iraqi oil fields after Maliki allegedly ordered the destruction of oil pipelines there.

The United States has somewhat sided with Baghdad by pushing the Kurds to market their crude through the central government, though it hasn't actually told prospective buyers to stay away from the stuff.

People close to the Kurdish regional government in Washington, D.C., said that the Kurds will share future oil revenues with Baghdad. They also say that Maliki's unrelenting stance on Kurdish oil exports is counterproductive for the whole country, especially during such a dire time.

Clarifying the legal status of Kurdish oil will only get more important: Goldman Sachs, the investment bank, said Wednesday that the Kurdish region could double its oil production to more than 500,000 barrels a day by the end of 2015 if it can sort out the legal quagmire.

The Texas case began when the United Kalavryta, one of four oil tankers filled with crude pumped in Iraqi Kurdistan this year, rounded the Florida Keys over the weekend and headed for Galveston, Texas. The ship, which had been wandering the waves for a month searching for a buyer for its cargo, seemingly had found one. Baghdad considers that both illegal and an affront to the nation's unity, and quickly pounced.

The Iraqi Oil Ministry filed suit Monday in the Southern Texas District Court against two co-defendants: "the 1,032,212 barrels of crude oil" -- worth $100 million -- and the Natural Resources Ministry of the Kurdistan Regional Government (KRG). According to the suit, the oil was stolen from the people of Iraq. Under the Iraqi Constitution, all oil produced in Iraq must be sold through the federal government.

"Accordingly, the cargo belongs to the people of the Republic of Iraq," Baghdad's lawyers argued before the court. They asked the U.S. judge to interdict the shipment. Late Monday, she did. U.S. marshals stand ready to seize the cargo as soon as the behemoth ship actually enters U.S. waters and tries to unload. As of Wednesday, the ship's cargo remained in limbo.

Not so fast, countered the Kurdish regional government in a letter to the court sent late Tuesday. The oil was pumped in Kurdistan. According to Erbil's reading of the Iraqi Constitution, that makes it Kurdish oil.

What's more, lawyers for the Kurdish government said, U.S. courts have no jurisdiction to determine who owns what, especially since Iraq's Supreme Court already smacked down the Oil Ministry's attempts to stop Kurdish oil sales until internal Iraqi political disputes are settled. The long-simmering fight between the central government and the restive northern region has no place in a Texas courtroom, they said.

"The Ministry of Oil is seeking to export this internal constitutional dispute," lawyers for the Kurdish regional government wrote. "Given its significance and political implications, the KRG believes that this dispute cannot be resolved by a foreign court without the KRG's consent."

The U.S. judge appeared to agree with that sentiment. "Seems to me this is not a matter for the U.S. courts to tell the government -- the governments -- of Iraq who owns what," said Judge Nancy Johnson. "This just seems way outside our jurisdiction," she said on Tuesday, according to the Wall Street Journal.

In the fight for the $100 million worth of crude, the Kurdish government is throwing down much, much bigger numbers at Baghdad and raising the stakes substantially.

Under the Iraqi Constitution, Baghdad must share revenue from oil exports with different regions of the country; the Kurds are entitled to 17 percent, which they say they haven't seen. The Kurds say that Baghdad owes them $27 billion in back payments, including $7 billion for this year.

What's more, the Kurds are still seeking compensation for damages incurred under the previous central government regime of Saddam Hussein, including "war crimes, genocide, and economic misery," their letter says. "The full damages suffered by the KRG and Kurdistan are not less than $384 billion."

Finding a way to finally sell its oil, especially the cargo in limbo, is crucial for the Kurds -- and the rest of the country. The Kurdish regional economy is in a bind since Baghdad cut off the oil-revenue spigot. The financial strain of caring for more than 1 million Syrian refugees and internally displaced persons from the Islamic State rampage through parts of northern Iraq is seriously straining Erbil's already precarious finances.

Safin Hamed - AFP - Getty


The Islamic State Is the Newest Petrostate

The Islamic State, the world's richest terror group, is reaping millions of dollars a day from selling stolen oil to shady businessmen across the Middle East.

The homicidal maniacs of the Islamic State, like many shady and not-so-shady groups before it, are apparently getting into the oil business. And it seems to suit them as they reportedly are making millions of dollars per day off of it.

The militants who have conquered broad swaths of Iraq and Syria are turning to good old-fashioned crime -- oil smuggling, in this case -- to underwrite its main line of work. The money it can earn from illicit oil sales further bolsters the group's status as one of the richest self-funded terrorist outfits in the world, dependent not on foreign governments for financial support but on the money its reaped from kidnappings and bank robberies. The group has also managed to steal expensive weaponry that the United States had left for the Iraqi military, freeing it from the need to spend its own money to buy such armaments.

But even the millions of dollars a day that the Islamic State seems to be raking in by trucking stolen oil across porous borders is not enough to meet the hefty obligations created by the group's own headlong expansion. Taking over big chunks of territory, as in eastern Syria and in northern Iraq, could also leave it forced to take on the sorts of expensive obligations -- such as paying salaries, collecting the trash, and keeping the lights on -- usually reserved for governments.

"They've gone from being the world's richest terrorist organization to the world's poorest state," said Michael Knights, a Middle East expert at the Washington Institute for Near East Policy.

As with much of what the Islamic State purportedly does, the group's actual role in trading illicit Syrian and Iraqi oil is hard to pin down. The Islamic State seemingly controls the majority of Syria's oil fields, especially in the country's east; human rights observers say 60 percent of Syrian oil fields are in the hands of militants or tribes. The Islamic State also seems to have control of several small oil fields in Iraq as well, though reports differ on whether most of those wells are capped or whether the Islamists are producing and shipping serious volumes of stolen Iraqi oil across the border.

In all, energy experts estimate that illicit production in Iraq and Syria -- largely by the Islamic State -- is north of 80,000 barrels a day. That's a tiny amount compared with stable oil-producing countries' output, but it is a lot of potentially valuable oil in the hands of a group that even al Qaeda considers beyond the pale.

If that oil fetched global market prices, it would be worth a small fortune: $8 million a day. But as the Sunni militant group's new neighbors in Iraqi Kurdistan have discovered, it's not easy to get top dollar for what many consider black-market oil. The Islamic State allegedly sells much of its production to middlemen in Syria, who then bring it to refineries in Turkey, Iran, or Kurdistan.

That oil is essentially fenced and likely fetches only about $10 to $22 a barrel, said Valérie Marcel, an oil expert at Chatham House in London. Crude trades just above $100 a barrel in New York and London.

In Iraq, the Islamic State apparently cut out middlemen and uses its own fleet of tankers, which means it can reap between $50 and $60 a barrel, Marcel said. Other reports put the terrorist group's Iraqi oil proceeds as low as $25 a barrel.

"They're taking a massive discount, and they're only achieving a small fraction of the value" of the oil, the Washington Institute's Knights said. Altogether, the group's oil smuggling could be generating on the order of $1 million to $2 million a day. Other analysts say the Islamic State's oil income could be as much as $3 million a day.

The United Nations is taking notice. On Monday, July 28, it warned countries against buying oil from militants in Iraq or Syria, saying that such purchases would violate U.N. sanctions on the terrorist group.

With the Islamic State at the helm, that oil boom certainly won't last forever. The old oil fields in Syria and Iraq need lots of care, such as injections to keep the pressure up and output reliable; the lack of trained technicians and the frequent turnover have been a nightmare for proper reservoir management and will ultimately lower future output at those fields, Marcel said.

Still, all else being equal, that kind of control over oil fields, oil revenues, and petroleum products would be a financial shot in the arm for any terrorist outfit. Control of oil products, from gas canisters needed for cooking to fuel needed for transport, gives the group additional local leverage. And the revenue bolsters the Islamic State's ability to recruit and pay fighters and to buy weapons.

However, that money is also desperately needed to cover the salaries of public workers in places the militants now occupy. Providing basic public services to show that they can do more than conquer and crucify, but can govern to a limited extent, also costs money. Serving as an unelected proxy for ousted or absent governments has long been a way for Islamist groups, from Hezbollah to Hamas, to broaden popular support.

"They need to keep their war machine going, but they also need to govern, and that's costing them money," said Daveed Gartenstein-Ross, a terrorism expert at the Foundation for Defense of Democracies. He estimates that most of the oil revenue is quickly spent pacifying restless tribal leaders, bribing coalition partners, and paying to keep functional the basic sinews of daily life.

"If they don't make happen the things that people are used to see happening, their rule is going to look really, really bad," he said.

Here's the thing about the Islamic State's newfound oil wealth: Big money is not unique among terrorist groups, and in this case, it's probably not enough.

Oil money is just one slice of an illicit pie funding the group. In Syria and Iraq, protection rackets, extortion, local taxes, and other forms of smuggling all pour millions of dollars into the Islamic State's coffers. Brett McGurk, the State Department's point man on Iraq, told Congress last week that even before the militants captured Mosul, Iraq's second-biggest city, the group was raking in $12 million a month from illicit activities there.

And in the pantheon of terrorist groups, none of which has conquered the world, top-line illicit revenues of a few hundred million dollars a year are not unusual. The U.S. government estimates that more than a score of the groups on its list of designated foreign terrorist organizations are deeply involved in transnational criminal activities.

The Taliban in Afghanistan, for example, raked in between $100 million and $200 million annually from the drug trade and smuggling timber and minerals. Al Qaeda in the Islamic Maghreb took home dozens of millions of dollars a year from ransom kidnappings; over a decade, the group possibly netted as much as $200 million. Hezbollah took a page from The Sopranos and made a fortune off stolen or counterfeit cigarettes. Al-Shabab fueled its fight with proceeds from human trafficking, while cocaine money kept Colombia's FARC in the field for decades.

More importantly, the Islamic State's access to some oil revenues pales in comparison with its obligations and points to the group's longer-term vulnerabilities.

Part of its illicit empire, such as extortion and shakedowns in towns across northern Iraq, is crumbling after Baghdad froze public salaries for those areas. That's a double blow to the group: No local incomes to extort, and now the Islamic State has to pay the payroll tab itself. At the same time, the group's barbarity, lack of outreach to even like-minded Salafi groups, and territorial overreach may have sown the seeds of its own downfall.

"They're overplaying their hand everywhere they have a hand, and that's going to come back and hurt them," Gartenstein-Ross said.

Moreover, control of a few small oil fields that translates into heavily discounted smuggling revenues won't be enough to give the Islamic State staying power.

"They can bring power, fear, and intimidation, and they can even bring unsophisticated social services," Knights said. "What they can't do is bring the resources of the Iraqi state," a $120 billion national budget underwritten by the nearly 3 million barrels of oil shipped daily out of southern Iraqi oil terminals.

"Without that oil from Basra, then ISIS are just Palestinians," Knights added.

Photo by Fabio Bucciarelli - AFP - Getty