A Ghost in the Gulf

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By Matthew Philips,

from Bloomberg Businessweek,

A mysterious oil tanker Sitting off the coast of Texas might hold the key to Kurdish independence.

On July 23 a Greek-owned oil tanker named the United Kalavryta came around the tip of Florida and into the Gulf of Mexico. For the previous month, as it crossed the Atlantic, its destination had been Brazil. Now it was headed for Galveston, Texas, a gateway to some of the biggest refineries in the U.S. What made the Kalavryta special was that its cargo was from Kurdistan, the semiautonomous region in northern Iraq that boasts an estimated 45 billion barrels of oil reserves. The Kurds contend it’s theirs to produce and sell as they choose. The government in Baghdad disagrees.

By the time the Kalavryta reached the edge of U.S. waters, the Iraqi government had filed a lawsuit in Houston federal court to block the tanker from unloading any oil. Iraq asked the U.S. to seize the ship’s cargo and put out the word that anyone who buys or offloads oil from the Kalavryta would be charged with possession of stolen goods. A magistrate judge in Houston issued an arrest warrant and ordered U.S. marshals to seize the oil if the Kalavryta came into U.S. waters. Then, after the Kurds appealed the decision, a district judge named Gray Miller complicated matters. On Aug. 25 he ruled in favor of the Kurds, claiming he lacked authority to stop them from bringing their crude ashore. With the tanker’s legal status still unresolved, and the Iraqis quickly contesting Miller’s ruling, just before 5 a.m. on Aug. 26, the Kalavryta disappeared.

Landlocked Kurdistan is home to 5.2 million people, roughly 15 percent of Iraq’s population. Since the U.S. invasion in 2003, Kurdish leaders have played a double game, holding high-ranking positions in Iraq’s national government while also laying the foundation for an independent state. Kurdistan has its own parliament, president, and civil institutions. What it doesn’t yet have is the right to sell on the open market the oil that lies beneath its soil. Under Iraqi law, Kurdistan is supposed to sell all of what it has through the national oil ministry. In return, Baghdad is obligated to give the Kurds 17 percent of Iraq’s total oil revenue—about $1 billion a month. Some 95 percent of the Kurds’ budget comes from Baghdad, which in turn gets 95 percent of its budget from oil sales.

With Iraq teetering toward anarchy in recent months, this arrangement collapsed. In February, after the Kurds started sending test batches of oil through a pipeline they built into Turkey, Iraq’s then-Prime Minister Nouri al-Maliki cut off their funding, accusing the Kurds of violating the Iraqi constitution. Kurdish public employees went unpaid for months. Credit froze. Businesses went bankrupt. Kurdistan’s thriving economy, ripe with foreign investment, ground to a halt; in addition, the Kurdish militia, known as the Peshmerga, is trying to prevent Islamic State fighters from overrunning Kurdish cities in northern Iraq. Only if they’re allowed to export more of their crude, the Kurds contend, can they pay for the weapons and supplies the Peshmerga needs. Oil sales aren’t just about financing Kurdistan’s future independence; they’re critical to the Kurds’ survival.

In defiance of Baghdad, the Kurds have loaded more than 18 million barrels of oil out of the Turkish port of Ceyhan since May, according to data collected by Bloomberg. More than 13 million of those barrels are known to have been unloaded, either at a port or onto another ship. Although it’s unclear what sort of prices they’re fetching, the Kurds say that through September they made $1.3 billion from selling oil. And they appear to be getting better at it. Through the third week of October, the Kurds were loading an average of 200,000 barrels a day out of Ceyhan, three times their pace in July.

This poses a dilemma for the Obama administration, which is deeply invested in preserving Iraq’s unity. Every drop of oil the Kurds sell undermines U.S. efforts to persuade Iraq’s Shiite-led government to reconcile with the country’s minorities. At the same time, the U.S. is relying heavily on the Peshmerga to halt Islamic State’s advances on the ground.

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