Results of a referendum held in Iraq’s semi-autonomous northern Kurdish region indicated vehement support for independence from Baghdad (93%, with a turnout of 72%). The polls have caused a general uproar within Premier Haider al-Abadi’s government and its close ally, Iran’s Shia regime, for they both fear potential border destabilization. The outcome of last Monday’s ballot also gives neighboring Turkey a cause for concern, as it seeks to assuage the restive minority in its largely Kurdish southeast. In an attempt to avert escalation of tensions in a country still healing open wounds from the three-year-long expansionism of the so-called ‘Islamic State’ group, US deemed the plebiscite illegitimate, according to Secretary of State Rex Tillerson. However, it was Russia’s reaction to the vote that proved to be the most highly anticipated, given recent efforts to boost its presence in the energy market of the hydrocarbon-rich Iraqi Kurdistan, where American, Turkish and European firms have already consolidated their positions, licensed either by the Ministry of Oil in Baghdad, or by the Kurdish Ministry of Natural Resources in Erbil.
Even though Moscow officially expressed respect for Kurdish national ambitions, it maintained that Iraq’s territorial integrity must be preserved. Such a stance, notably divergent from the one adopted towards the 2014 referendum on Crimea’s secession from Ukraine, is justified by some of the biggest Russian energy companies’ indisputable economic interests in that politically turbulent part of the Middle East. Within this scope, the impact of the Kurdish referendum became expeditiously evident.
On Thursday, Gazprom Neft Middle East, a subsidiary of Gazprom Neft, announced it is abandoning development of Halabja oil field, located in a mountainous area close to the border with Iran. Gazprom Neft owns an 80% stake in the field, while remaining 20% is held by Kurdistan Regional Government. The existence of planted land mines, as a result of the ongoing regional conflict, on top of the lack of the necessary infrastructure, hinder access to the oil block creating high risks that the company is not prepared to take, director Sergey Petrov admitted. Gazprom Neft runs three projects in Northern Iraq, the other two being Shakal (Gazprom Neft: 80% - KRG: 20%) and Garmian (Gazprom Neft: 40% - WesternZagros Resources Ltd: 40% - KRG: 20%), whose total geological reserves are estimated at 1.3bn tonnes of oil. At the moment, Garmian is the only commercially exploited field, with production reaching 9.6bnbbl/d in 2017. Despite quitting from Halabja, the company doesn’t seem overawed by the current geopolitical circumstances. As stated by Petrov, Gazprom Neft has come to terms with local authorities to explore additional blocks, intending to drill one new well per year until 2022.
But it is the large-scale plans of another key energy player that the independence referendum is thought to be putting at stake. Russia’s state-owned oil giant Rosneft has lately emerged as the major energy investor in Iraqi Kurdistan, having placed around $4bn in the region’s oil and gas sector. Following an earlier pre-finance accord on the sale of Kurdish crude to Rosneft from 2017 to 2019, PM Nechirvan Barzani and Rosneft CEO Igor Sechin reaffirmed mutual trust in the course of June’s St. Petersburg International Economic Forum. In accordance with the fresh 20-year agreement, Rosneft gains access to the regional oil transportation system, which has a throughput capacity of 700.000bbl/d. The company eyes to increase the system’s output up to 1Mbbl/d by the end of 2017. Furthermore, oil purchased by Rosneft will be refined in Germany, a country who has been arming and training Kurdish Peshmerga soldiers in the fight against ISIS for the past two and a half years. As part of the same long-term deal, a series of PSAs were also inked for the exploration and development of five oil sites said to be situated in the disputed Kirkuk province, a fact that, if confirmed, might reignite rivalry with the Baghdad-based central government.
The latest piece in the Russian foreign energy policy puzzle in Northern Iraq was added in September, as soon as Rosneft disclosed plans to finance a gas pipeline project with initial export capacity of 30BCM/y towards Turkey, and from that point onto the EU market via the existing infrastructure of the Southern Gas Corridor. The construction of the $1bn pipeline is set to begin in 2019, with exports due from 2020 onwards. Nevertheless, this venture could be as well put into danger if Ankara opts for direct military confrontation with Erbil over the independence referendum. Thus far, President Erdogan has threatened to disrupt flows from the Kirkuk-Ceyhan oil link, but that might not prove an easy task given the 970 km-long pipeline has the ability to operate at an average capacity of 300.000-500.000bbl/d, or else at about a quarter of Iraq’s overall exports. Taking into account that the energy factor has been shaping bilateral relations between Iraqi Kurdistan and Turkey since the commissioning of the Kirkuk-Ceyhan line, back in the 1970s, a scenario where the Turkish President might simply ignore the referendum results and continue negotiating with his Kurdish counterpart, Massoud Barzani, recognizing him as the leader of a region constitutionally guaranteed by a specific quasi-autonomous status, cannot be ruled out. Moreover, as shown by the rather prompt Turkish-Russian energy rapprochement through the Turkish Stream project agreement, in the aftermath of the downing of a Russian warplane on Syrian border and the assassination of ambassador Karlov in Ankara, Turkey is unlikely to block another Russian-led pipeline route, especially since projected to cross the country’s energy-thirsty territory.
In the meantime, expansion of Rosneft’s investment portfolio to high-risk natural gas projects comes as no surprise. As of 2016, the company has evolved into the largest independent natural gas producer in Russia and, by 2020, it aims to conquer a 20% share of the domestic gas market. Its promising entry on to the Kurdish energy sector, at this stage, can be interpreted as a direct challenge of Gazprom’s established monopoly in the southern export corridor to Europe. It is already known that Gazprom will seek to use the TAP line to carry either Turkish Stream or ITGI supplies to the EU, as soon as the pipeline’s capacity increases up to a further 10BCM, in 2020. Providing the proposed gas pipeline from Northern Iraq achieves the desirable export capacity by that year, Rosneft would be equally eligible to put in a bid for TAP’s open season. Hence, two Russian companies will find themselves facing the opportunity to use EU regulations, originally intended to curb monopolistic practices, to their own advantage.
Finally, subsequent implementation of the pipeline deal achieved by Rosneft and KRG automatically augments the number of competing suppliers for the SOCAR-operated TANAP, whose capacity is expected to reach 23-31BCM/y by 2023-2026. Presently, interest for the utilization of the intermediate branch of the Southern Gas Corridor between Asia and Europe has been declared by Turkmenistan and Kazakhstan (via the proposed Trans-Caspian Pipeline project), Iran (either via a half-finished LNG plant or a planned $6bn pipeline from South Pars field to the Turkish border) and Israel (via a politically difficult, regarding its realization, undersea pipeline from Leviathan field). Whether Rosneft will, in the end, contrive to get Kurdish gas flowing together with Shah Deniz reserves in TANAP still remains to be seen. However, what can be deduced with certainty, as for now, is that what started out as a project of energy cooperation primarily between the EU and Caspian littoral states, namely the Southern Gas Corridor initiative, has gradually managed to attract a wider spectrum of willing regional supplier states.
Available online at: http://www.caspianpolicy.org/energy/caspian-energy-insight-october-5-2017/#7