October 12, 2017

Kurdish Referendum and Oil Leverage

Vadym Volokhov

The referendum in Iraqi Kurdistan, despite all the intimidation and threats, did take place. In addition to political aspects, it has economic consequences in the region. What exactly?

In Iraqi Kurdistan, about 50 billion barrels of oil is concentrated, accounting for about 3 % of its world reserves, or 30 % of Iraq's oil reserves. Of these, 80 % are controlled by the government in Baghdad, and 20 % — by Kurds. Apart from oil, Kurdistan has explored reserves of gas estimated at about 45 billion cubic meters. And they are not just associated gas deposits, but gas fields.

According to official Iraqi media reports, about 900 thousand barrels of oil per day are produced in Kurdistan. But its extraction can be significantly increased, if proper security measures are guaranteed, new export channels are created, and investments are larger.

Meanwhile, Kurdistan exports up to 650,000 barrels of oil daily through the Turkish port of Ceyhan. In fact, today it is the main corridor that provides currency inflows to the provinces of Iraqi Kurdistan.

Note:

The Deir-ez-Zor district in SyriaThe Deir-ez-Zor district in Syria is considered strategic because it contains the main deposits of oil.

Through this area, go the main roads connecting the Kurdish provinces of Iraq and Syria with the seaports of Jordan and Israel.

In the future when the old Kirkuk — Haifa pipeline is restored, this part of Syria, as well as the Kurdish part of Turkey, will become the key to oil exports from the Iraqi Kurdistan.

 

Consider the parties' positions from the point of view of the economy of the region. As expected, nobody will fight with Kurdistan, even Turkey. Turkey's volume of trade with the Iraqi Kurdistan is about 7 billion US dollars per year. If Ankara is a “window into the world” for Kurdish oil, then for Turkey the Iraqi Kurdistan is “an enabler in creating a powerful economic hub”.

While the countries of the region and the world are considering their further steps about the creation of a Kurdish independent state, “Rosneft” has already offered Kurds to finance the construction of a gas pipeline with a capacity of 30 billion cubic meters from Iraqi Kurdistan to Turkey.

According to “Reuters”, after two years of suspension, the American oil company “Chevron” began drilling two wells in Kurdistan.

The British “Genel Energy” has taken up the development of two deposits in the region, and the “Pearl Petroleum” consortium (Iraq and the UAE) is actively implementing the project for extraction of 3.2 billion cubic meters of gas a year.

Other energy players, such as Iran, European multinational companies and China are also ready to join promising oil and gas projects.

The question arises: why of all companies, Russians have started to offer their services to the Kurds so actively? The answer, so to speak, lies on the surface: the appearance of Iraqi Kurdistan in the markets of the EU and Turkey with 20 billion cubic meters of gas production per year would mean a collapse of the Russian “Gazprom” and the end of the Russian gas monopoly.

It is exactly this volume of gas that Turkey needs to become its main supplier to Europe. The matter is that Ankara does not have sufficient gas storage facilities to maintain a stable pressure in its gas transportation system. Turkey cannot (for political reasons) use for this purpose gas storage facilities of Greece or Iran. Therefore, the only alternative to creating a “Turkish gas warehouse” is precisely the Iraqi Kurdistan. And to this end, it is necessary to create a network of low pressure gas pipelines that would be connected to the Turkish gas transportation system.

At first glance, “Rosneft”'s contract with the Kurdish Erbil on the construction of a gas pipeline from Kurdistan to Turkey looks illogical, but it's only at first glance. Firstly, “Rosneft” understands well that it will deal not with the Iraqi government, but with the Kurds, regardless of the form of independence they will have.

Secondly, from the geo-economic point of view, now of all times, Kurdish gas is needed both in the Turkish and in European markets, and so far there is no alternative to it.

For example, Azerbaijan, as an active gas player in the region, lacks the resources to meet the needs of European countries. The Trans-Caspian project NABUCCO, which has to deliver gas from Turkmenistan to Europe, has remained a PR project.

There is a lot of gas in Iran, but firstly, this country is under economic sanctions. Secondly, the main gas deposits are on the Gulf shelf (“South Pars”) and there are no gas pipelines that could transport gas from southern Iran to Europe. In the North of Iran, there are not enough gas reserves, and Tehran imports 8 billion cubic meters of gas annually for its needs from Turkmenistan.

One thing remains — the gas of the Iraqi Kurdistan. That is why the struggle for the Kurdish gas market is fueling.

“Rosneft” is trying to sign a contract with the Kurds by the end of this year, and to start gas exports already in 2020.

Future and existing pipelines in the Turkish region
Future and existing pipelines in the Turkish region

According to the official representative of the Kurdistan Democratic Party in Moscow, Hoshavi Babakr, the new gas pipeline will run from Kirkuk and will join the Southern Gas Corridor (TAP and TANAP), which is under construction. It is assumed that the pipeline to Turkey will be receiving 6 billion cubic meters of gas from Azerbaijan and another 10 billion cubic meters by transit to Europe. The first gas should come to Turkey in 2018, and to Europe — in 2019.

Among other unimplemented projects, one should mention the 2013 agreement between Ankara and the Kurdish autonomy, according to which the Kurds had to export 2 million barrels of oil per day and to 10 billion cubic meters of gas annually. The gas pipeline was planned to be constructed by the British “Genel Energy” together with “Turkish Energy Company” (TEC), but the parties could not agree on this.

In 2016, “Genel Energy” announced contracts with American companies “Fluor” and “Baker Hughes” for operations on Kurdish fields Miran and Bina Bawi. The gas reserves, according to expert estimates, amount to 350–400 billion cubic meters, and in total in the north of Iraq — about 5 trillion cubic meters. The investments at the beginning of production were estimated at 2.9 billion US dollars, into the pipeline network — 2.5 billion US dollars.

As for Moscow's intentions regarding Kurdistan, it should be remembered that today it does not have enough influence on the political elite there. In the light of events in the Middle East, Moscow is trying to take control of energy supplies to Europe.

So, no one, except Tel Aviv, recognizes the referendum, but no one is in a hurry to cancel relations with Kurdistan, and the distribution of Kurdish oil and gas continues. When Erbil has new routes to export energy carriers, the time will come for recognition of independent Kurdistan.