Kurdish oil and a value vacuum

Asia Times Online (Hong Kong) June 11, 2014

By Chris Cook *

Few observers have picked up on the importance of the dispatch in late May from Ceyhan, Turkey to an unidentified European destination and buyer of a cargo of 1 million barrels of Kurdish crude oil, but one who did was J Millard Burr in a recent article « Kurdistan Oil Export: A Game Changer ».

According to Burr: « What appears almost certain is that the movement of Kurdish oil through Turkey bypassed the TBI [Trade Bank of Iraq] and the DFI [JP Morgan Chase’s Development Fund of Iraq account] arrangements that had existed for years. Thus, it is not surprising that, in underscoring its regional independence, the KRG [Kurdistan Regional Government] has managed to anger simultaneously the central government in Baghdad, Foggy Bottom, and the United Nations bureaucracy. »

and Burr concludes…..

« It is clear that the recent shipment of Kurdistan oil is but the first of many sales to come. However, many questions regarding its financing remain unanswered. Mete Goknel, a former director of BOTAS, the Turkish state-owned crude oil and natural gas pipeline company, has noted the long-standing mistrust that exists between Iraq’s regions. In doing so, he raised the quintessential question which is yet to be resolved: ‘Both Baghdad and Washington are concerned [in] which account the revenue from the oil sales will be deposited, [and] how it will be shared and be controlled’.  »

Big Oil vs Big Money

The US State Department (« Foggy Bottom ») has long been an extension of JP Morgan Chase and their acolyte banks such as Goldman Sachs which ruled the world for decades using debt and derivatives as weapons. This « Big Money » complex in the financial world has long constituted a power center in the US in competition with a « Big Oil » military/industrial complex in the real world exemplified by the mighty Exxon Mobil.

In recent years, the US presidency has see-sawed between Big Oil (Bush Snr) to Big Money (Bill Clinton) to Big Oil (Bush Jr) and now back to Big Money (Barack Obama) again. But the problem faced by the Big Money complex is that since October 2008 they have been only nominally in control of the US dollar system because at that point the US private banking system to all intents and purposes died, and the steering wheel of interest rate policy came off in the hands of the Federal Reserve Bank.

So it has become increasingly difficult for Big Money to apply their old trick of swapping deficit-based new dollars for valuable oil resources since other nations now have plenty of existing dollars to spend and prefer to buy real resources rather than T-Bills yielding 0% per annum.

But in Iraq, all is not what it was for Big Oil either, and they have had to change their business model. Now the Chinese take the financial risk while Big Oil siphons out an increasing proportion of profits from oil development by getting into the service business. As in the California Gold Rush, it wasn’t the miners who got rich, it was the merchants who sold shovels to the miners.

The big International oil companies are now squeezed between a national oil company, resource nationalism rock and the spiraling contractor costs of a hard place. So Big Oil is either merging and becoming Smart Oil; getting into the natural gas business (eg Shell); or getting into the service business, since, as the head of exploration of a second-tier oil major agreed in Baku last year, to provide knowledge and know-how requires little capital but gives great returns.

Filling the vacuum

It is said that nature abhors a vacuum, so the fate of Kurdish oil payments is of desperate interest to the US State Department on behalf of Big Money, who fear that a disastrous precedent is being set.

Big Oil is more pragmatic. Exxon Mobil, for instance, is all over Kurdistan like a cheap suit and its primary interest does not lie in shoring up the US banking system, but rather in obtaining value in exchange for its entitlements to oil. It understands that this value need not be US dollars, provided it is easily convertible into dollars as necessary via a suitable value clearing system.

The question is, what value clearing system could it be?

Value Clearing

According to Burr, Turkey’s Halkbank was well placed to carry out a payment clearing role until firstly, it fell foul of the US in relation to payments to Iran, and secondly, it became embroiled in a domestic Turkish faction fight. But there are some who advocate gold-backed credit clearing based in Istanbul, and it is possible to imagine such a regional clearing system on a transitional basis.

Iran, on the other hand, has for some time been developing an « energy diplomacy », which is as yet not clearly defined but is becoming increasingly visible. Iran’s energy swap concept began with what became known as the « Caspian Oil swap » consisting of an exchange of crude oil delivered into Iran via the Caspian port of Neka in exchange for prepaid rights over Iranian crude oil delivered in the Persian Gulf. Since then, Iranian energy swaps have included Iranian gas swapped for Armenian electricity, and there are several other swaps under negotiation.

Finally, Iran is about to recommence delivery of natural gas by pipeline into Iraq, and it is not difficult to imagine how a regional energy clearing union could now emerge within which energy swap transactions may be priced in dollars – which everyone understands as a pricing unit of account – but actually settled with swaps of prepay energy credits that may then be exchanged in turn for goods and services.

Energy diplomacy

Extending as it does into Iran, Kurdistan is as sensitive a subject for Iran as it is for Turkey, but as Burr points out, it’s amazing how the presence of energy resources concentrates the political mind.

Turkish Prime Minister Recep Tayyip’s Ergogan’s « direct involvement with the KRG has occurred despite the fact that Erdogan has for years opposed a rapprochement with the Kurds of Turkey, Iraq and Syria. Incredibly, Erdogan has begun to use ‘Kurdistan’ to designate those lands occupied by the Kurdish people. It is a testament to the importance energy plays in resource-poor Turkey’s foreign and domestic policy. »

Having embarked upon a program of energy co-operation and diplomacy, it is unlikely that Iran would fail to apply it in dealings with Kurdistan, and the best way to begin might well be to assist KRG in filling their value vacuum.

* Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.