On Wednesday afternoon, EA’s Scott Lucas joined Reuters Global Oil Forum for an hour-long question-and-answer session on the Iraq crisis:
MODERATOR: I seem to remember some raised eyebrows last week when I mentioned “Caliphate”? What happened?
SL: To put this in perspective. It’s a marketing ploy by the Islamic State to try and gain political traction in both Iraq and Syria and project itself beyond.
It’s still a relatively small group, compared to the range of factions in both countries. It needs to recruit and to build alliances. That is problematic because it has “alliance of convenience” with Sunni groups against the al-Maliki Government, and in Syria, they are fighting insurgents, rather than the Assad regime.
See also Iraq Video Analysis: Why Islamic State’s “Caliphate” Is a Marketing Ploy
Q: Is Al Qaeda now Pepsi to Islamic State’s Coke? – or is their marketing plan working, to put it another way?
SL: Well put. But Al Qa’eda may now be Mr Pibb. It is being pushed to the side by Islamic State, and indeed has arguably been pushed aside for some time by IS and other factions elsewhere.
If IS thinks it can get recruits and finance with its own operations. Why should Al Qa’eda matter?
Q: Looking at the current position of the Islamic State and the other Sunni forces aligned with it, does a military attack on Baghdad still look likely?
SL: Not an assault. The front lines have settled between Samarra and Tikrit to the north, Haditha to the west, and near Baquba to the northeast.
Again, ISIS and its allies are still numerically small compared to Iraqi forces. Risk in Baghdad is more from “asymmetric” attacks, e.g., bombings.
Q: I have been hearing that Islamic State is now “self-financing”, meaning it funds itself by doing its own looting. Is this true?
SL: Yes, that is generally correct. Most of Islamic State revenues going back to 2004 come from smuggling, “protection” of local businesses, and ransoms.
There is some support from private donors, but it is minority of Islamic State revenues.
See also Iraq Analysis: “Who Funds the Islamic State of Iraq?” — The Surprise Answer
Q: Now the Baghdad-aligned forces/Iraqi military have had time to regroup, should we expect them to be successful in any attempt to push IS back?
SL: Not so far. The assault on Tikrit failed to establish presence in the center following insertion of snipers and special forces.
Iraqi forces are still regrouping after taking a battering early this month
Q: From an oil market point of view — ever concerned with the safety of the southern oilfields and terminals — isn’t the worry that the insurgents will establish a defendable base, from which to launch forays further afield? On southern oil facilities, for example?
And pipelines?
SL: I don’t see specific risk to southern oilfields right now. As long as battlelines are in current position (see above), southern fields are out of the frame.
Q: What’s the latest on the Baiji refinery?
SL: Still in flux. Insurgents hold part of the complex, but Iraqi forces maintain a foothold and are carrying out airstrikes nearby to try and weaken the insurgents.
Q: Is the refinery completely shut?
SL: Refinery is still shut and no prospect of reopening soon.
REUTERS FORUM MEMBER: The one thing we know with certainty on Baiji is that it’s not producing refined products. It’s very difficult to get security updates from that area, for obvious reasons, but last I heard Government forces still had a presence at the plant.
SL: Greater risk than Islamic State today may be the implosion in Iraqi Parliament. A 30-minute session on Tuesday was apparently quite nasty and only highlighted divisions between Shia (pro-Maliki), Shia (anti-Maliki), Kurdish, and Sunni blocs.
If this continues: 1) It reinforces prospect of Kurdish breakaway; 2) It elevates prospects of Sunnis deciding they will take steps outside process for “unity” Government.
Q: What did you make of Iraqi Kurdistan leader Barzani’s comments to the BBC yesterday about holding a referendum on independence in “a matter of months”? Did you take that seriously?
SL: Yes. It’s his second comment to the BBC in a week and goes farther than the first, in which he talked generally about Kurdish people being able to express their wishes.
The Iranians were worried enough to publicly hit back on Tuesday. I’m not sure what the US approach is — it appears to be muddled right now.
Q: The Kurds seem to want to walk a tightrope right now. It was noticeable in Erbil last week that the rhetoric around independence died down in the lead-up to and aftermath of (US Secretary of State) John Kerry’s visit.
But then they’re also very keen to make it clear that they’re in a “post-Mosul” world (after the fall of Mosul to insurgents on June 10) and that Baghdad now needs to play by their rules.
SL: At the least, I think Barzani is pressing the US to up its commitment to working for Kurdish security, and of course they are getting leverage on oil question and Kirkuk.
Q: I wonder whether Barzani’s comments came after they didn’t get enough of what they wanted from Kerry and then British Foreign Secretary William Hague on Friday.
SL: That would be my speculation. Kerry and Hague both told Barzani to play it cautious and not inflame situation, which didn’t really address his concerns.
Q: I still get the impression the Kurds want to play a long-game here — keeping the US and other western powers/regional allies onside, but with a few caveats.
SL: I generally agree, but longer the crisis continues, the more I think that they may go on front foot and act unilaterally over Kirkuk, oil, and political status: “The best defense is a good offense.”
Q: They want to see some support relatively quickly — especially around oil sales — and there’s a sense that they can’t waste this opportunity. There’s still a huge sense of regret over acquiescing to US demands on Kirkuk back in 2003.
But given Kirkuk under Kurdish control appears to have been accepted as everyone as the “new reality” (at least as far as I can tell) — is the incentive there to really try and rush for independence?
SL: Paradoxically, not if rest of Iraq stabilizes politically. But if Baghdad is in medium-term disorder, then Kurds may decide they can’t rely on working within an Iraqi system.
What of Turkey in the Kurdish question? Could Ankara give support to Barzani re independence?
REUTERS FORUM MEMBER: I can’t see Ankara going that far at the moment, though they’re clearly providing some support and legitimacy. Kurdistan is a big trade partner and (arguably) a handy buffer state between them and western Iraq.
It’s also a big vote winner in the Kurdish regions of Turkey for (Turkish Prime Minister Recep Tayyip) Erdogan.
But full independence? I still can’t see them backing it. But then the very idea of them backing the Kurds at all 7-8 years ago seemed very unlikely, so who knows?
Q: How is Saudi Arabia responding?
SL: With concern and caution. There have been declarations of priority of internal security. Further moves, linked with maneuvers for succession to King Abdullah, with Deputy Defense Minister moving to head intelligence and the return of Prince Bandar (the former head of intelligence).
I think they want focus on defeating the Islamic State — and that may mean a new push for support of Syrian insurgency.
Q: With Kurdistan declaring independence and ISIS controlling west and central Iraq, what will happen with the rest of the country? Will it become a protectorate of Iran?
SL: If that happens, I wouldn’t say “protectorate”, but I would say Tehran has more leverage over some Shia factions — and definitely al-Maliki. Notice al-Maliki’s declarations that he will turn to Russia and Iran if US doesn’t help him.
Q: Do you think Maliki can hold onto power?
SL: I’m still sceptical. His base inside Iraq has shrunk and he’s increasingly reliant on Iran and Russia for outside backing.
But he might be able to disrupt the formation of a new Government, which in effect would keep him in place, albeit weakened.
His enemies have to decide if their priority is 1) replacing him or 2) fighting each other.
Q: Do you think the Iranians want to keep him in place?
SL: At this point, yes. They don’t see a reliable alternative, and a vacuum in power undercuts their priority to shore up Iraqi security forces.
Q: Is a military solution in Iraq in any way viable? I’m struggling a little to see how even a re-motivated and armed Iraqi army can restore “order” to the Sunni regions in the long-term…yet a diplomatic solution seems even further away.
SL: Military and political “solutions” go hand-in-hand. Without military shoring up lines of defense, no space for political settlement. Without a political settlement, no reliable base for military operations.
Q: Agreed. But who does Baghdad try to reach a settlement with?
SL: You have to get a “unity” agreement 1st which includes some of the Sunni and Kurdish leadership as well as Shia factions. Then you might be able to reach out beyond Baghdad to local/regional groups.
Q: What does this all mean for investments in the Iraqi oil sector? Iraq accounts for two thirds of the OPEC supply growth by 2020, based on current IEA estimates. Is this realistic anymore?
SL: Generally I think short-term in southern fields is secure. But investment beyond short-term? Problematic if these circumstances continue.
I might be putting my $2 into Kurdish ventures.
REUTERS FORUM MEMBER: I’d say the outlook for Kirkuk output (from an international/Kurdish perspective, if not Baghdad) has improved in the medium-to-long-term. Unified Kurdish control of the city and the surrounding areas may help them juice production there in a way that they’ve struggled to achieve under joint control.
But the word is that, initially at least, they’re looking to continue to work with Baghdad on Kirkuk (who handled production at two of the three Kirkuk oil domes).
Again Baghdad needs to play by the Kurds’ rules.
The sticking point re: Kurdish investment is whether they can get an agreement to openly sell their crude + find a way to rapidly increase the infrastructure to get it to international markets.
Q: To flip this around a little – given the tensions in Iraq + a plausible threat to supplies, what do we see the Saudis doing?
SL: I don’t see them taking assertive action right now.
Q: Does Riyadh feel isolated right now, with the US making overtures to Iran?
SL: Not as much isolated as infuriated by US caution and indecision. They think that US failure to back them on support for Syrian insurgency created conditions for Islamic State to flourish, and I don’t think they feel secure with US approaches to Iraq at the moment.
