Issue Number: 110   July 2014

Religious Violence and Oil:

The Long-term Impact of ISIS on International Oil Companies in Iraq

Researched and written by Nico Cottrell.

News about the striking military successes of a group of jihadist militants called ISIS in northern Iraq has dominated international news over the last month. The speed with which ISIS has managed to gain control over a large areas of Iraq to add to its control over parts of Syria, and fears about its extreme Islamist ideology have sent shockwaves through the world, raised serious questions about the West's previous military involvement in Iraq, and prompted controversial intervention from American military advisers.

Amid concerns about the human cost as a result of this group, there is an economic factor. There is anxiety that the ISIS movement could affect oil production and exports from Iraq, and have an impact on the market prices of oil. Indeed, Brent Crude oil prices have already been affected, probably rising in response to fears about the future of oil in Iraq, the second largest member of OPEC (Organization of the Petroleum Exporting Countries).

Whilst it is likely that short-term oil prices have increased in response to events in Iraq, the greater significance of the ISIS movement is that oil companies may scale back investments in the region in the long-term.

Figure 1: Brent Crude Oil prices. [1]

ISIS in Northern Iraq

ISIS is the Islamic State in Iraq and the Levant. It was formed in April 2013 and is an offshoot of al-Qaeda. It was subsequently rejected by al-Qaeda apparently because its tactics, beliefs and vision of Islam were too extreme. ISIS is one of the main jihadist groups fighting Syrian government forces. Its ultimate vision is to redraw the Middle Eastern borders and create an extremist Islamic state. In doing so ISIS is exploiting the huge religious faultline within Iraq and the Middle East between Sunni and Shia Islam. In Syria largely Sunni rebels have been fighting against President Assad's Shia-dominated regime. In Iraq the current Nouri Maliki-led government is perceived to have favoured the Shia majority and discriminated against the large Sunni minority, a sore bone for Sunnis after the fall of Saddam Hussein's Sunni-dominated reign. So far, the ISIS-led militants have been widely active only in the northern region of the country, where they have taken control of Mosul, the second largest city in Iraq.

To date, the ISIS movement has not physically affected oil production and exports in Iraq. It has, however, been successful in gaining control over Iraq's main oil refinery at Baiji, which is a source of oil for the country's domestic consumption, and not used for export. Oil exports take place in the southern region of the country, particularly in Basra area. The radical group has yet to make inroads in the southern region and it is widely thought that ISIS will not make it this far. But, in reality, it is impossible to know how ISIS will develop. A key issue is the extent to which the insurgency remains supported by wider Sunni groups, angry at the central government's perceived indifference to their needs.

Religious-fuelled violence in Iraq is not new. In 2007, an ISIS predecessor issued a fatwa (a religious decree) that ordered the death of a minority religious group called the Yazidis who live mostly in northern Iraq. Following this, there were coordinated truck bombs in the Yazidi areas that killed more than 500 people and wounded over 1,500 people. Admittedly, this is in the north of the country, away from where the oil companies are working.

Past Religious Instability in South

There has also been growing religious tension in the south of the country. In August 2013, there was a truck bombing in a Basra port. Basra is the heart of Iraq's oil industry and its port is where the majority of oil is exported. A month later there was a bombing at the large Daura refinery complex in Baghdad, although the main target was the mosque inside.

In November 2013, BP evacuated 90 of its expert personnel from its company headquarters in Rumalia after violent spillovers from violent anti-Shia incidents. The incident involved a man removing a Shia Muslim flag that was commemorating the Shia holy day Ashura. The accused was then beaten and sent to hospital. Two days following this event, another man did a similar act, which resulted in attacks and looting. [2]

Current Religious Instability

In response to the recent incident with ISIS in the north, BP removed 20% of its staff and ExxonMobil carried out a 'major evacuation'. Shell is monitoring the situation to see if it deteriorates.
These precautionary measures undertaken by BP and ExxonMobil occurred despite their oil fields being, in the words of Bob Dudley, CEO of BP, 'a long way from the troubles' afflicting the north of the country. Despite being physically unaffected by the events in the north of the country, the religious and social upheaval in the north was still major enough to prompt a significant evacuation of staff. The map below shows the distance of ISIS-led Mosul from the oil-exporting region of Basra.

Figure 2: Map of Iraq's oil infrastructure. [4]

The history of socio-religious unrest in the south has sent a clear and disturbing message to international oil companies that their operations are far from being immune from religious violence. This poses potential risks to current security. Harry Tchilinguirian, BNP Paribas' head of commodity markets strategy, has suggested that any long-term deterioration of security could make international oil companies scale back operations. [5]

Given the previous volatility in the area, it is possible that international oil companies may reconsider their position in Iraq in the future. Additionally, the dramatic upheaval in the north where 30,000 Iraqi troops were sent running in the face of a tiny group of 800 ISIS fighters has created uncertainty over the future of Iraq. Investors hate uncertainty and it raises several serious questions. Will the country become more religiously violent? What are the aims and ambitions of ISIS, and how might this affect the operations of oil companies? In particular, will the sectarian conflict spread to the south where oil is exported to international markets?

The ISIS movement may turn out to be of limited long-term impact. It is uncertain how long it can retain control over the huge area it has gained, and to what extent its loose coalition with other Sunni forces will hold under pressure from government-forces and internal challenges. However, it may have a huge and long-lasting impact, increasing sectarian division in Iraq, undermining government authority, and perhaps ultimately leading to the dismemberment of Iraq itself, conceivably into a three states - Shia, Sunni Arab and Sunni Kurd. International oil companies operating in Iraq will be monitoring the situation very closely.






July 2014 MZINE