Written evidence from John Roberts, Founding Partner at Methinks Ltd, a UK-based energy security consultancy, and Senior Fellow, Atlantic Council of Washington DC (KUR0019)

Oil and Gas prospects in Kurdistan Region of Iraq

Kurdistan-Iraq, as regional officials designate the territory, is fast emerging as a major force in oil and gas development. Indeed Erbil, the seat of the Kurdistan Regional Government (KRG), is sometime dubbed “the exploration capital of the world.”[1] With more than 50 international companies operating there on terms that allow them to share in the profits of any oil or gas that they discover and can exploit, a region neglected, held back and brutally assaulted in the Saddam Hussein era is almost literally bursting at the seams with newly discovered hydrocarbons. It is a region containing abundant oil and gas resources, despite its former image as a backwater. One field alone, Shaikan, contains at least 12 bn barrels of oil-in-place; and six other fields – Taq Taq, Tawke, Akri Bijeel, Barda Rash, Garmian and Kurdamir – contain between them a further seven billion barrels of oil-in-place.[2] And in gas one field, Miran, contains at least 6.8 tcf while another, Khor Mor, holds at least 1.8 tcf. Kurdish officials speak of the region containing up to 45 billion barrels and between 100 and 200 tcf (2.8 to 5.7 tcm).[3] Such figures may be vastly greater than discoveries to date, but the point is that what has already been found is clearly sufficient to provide considerable volumes of both oil and gas for export as well as for domestic use and, particularly in the case of gas, as prospective feedstock for power stations to serve districts in Federal Iraq.

The problem Kurdistan-Iraq faces is getting these resources to market and that, in effect, means it needs new pipelines to Turkey to carry its oil to the Turkish Mediterranean terminal at Ceyhan and its gas to customers within Turkey or on to European destinations beyond Turkey. In physical terms, it’s not particularly complicated. Iraq’s main oil pipeline from Kirkuk to Ceyhan already passes through Kurdistan-Iraq and, just before it crosses the border into Turkey at the main border point of Fish Khabur, a small feeder line has for some years connected the Kurdish oilfield of Tawke to the Kirkuk-Ceyhan line. But this feeder line has a capacity of just 150,000-200,000 b/d, whereas the companies developing such newly discovered fields as Shaikan and Taq Taq, Gulf Keystone and Genel Enerji respectively, reckon they need a system capable of carrying one million barrels a day. As for gas, ever since 2007 when, virtually unnoticed by the rest of the world, the KRG witnessed the construction of a 180-km gas pipeline through the heart of its territory, the authorities in Erbil have been working out how to get it extended into Turkey as and when its initial role of providing gas to power stations in the KRG is completed.

In late 2012/early 2013, the situation changed radically as it became clear that although the final domestic leg of this system had been laid, with actual delivery of gas expected imminently to a power station serving the city of Dohuk, just 50 kms from Fish Khabur, the line would in fact be used to carry oil, not gas. On 13 December 2013, oil from the KRG began flowing across the border into Turkey and, although this flow was interrupted for several weeks from late January 2014 onwards, as of May 2014 oil produced in the Kurdistan Region of Iraq was not only flowing into the oil storage tanks at Ceyhan but Turkey’s Tupras was making arrangements for its actual sale, even in the event of Federal Iraqi opposition to such sales.

Crossing the Iraq-Turkey border – whether for oil, the prime consideration for companies operating in the KRG, or for gas – is an issue fraught with difficulties. Essentially, it boils down to a very stark choice indeed: is the sale of hydrocarbons across an international border to be achieved as a result of agreement sanctioned by the Federal Iraqi Government in Baghdad, or as a result of a bilateral agreement between the KRG in Erbil and the government of Turkey?

The answer to this question has major implications for regional energy security. On the pure hydrocarbons front, it furnishes the timeframe for Kurdish oil to reach world markets and for Kurdish gas to reach Turkey, and possibly markets in Europe and, as LNG from Turkey, the world beyond. In a more political context it has major implications for both regional and global energy security as there is a major risk that the construction of cross border pipelines without the express approval of Baghdad would lead to outright military conflict between the Federal Government in Baghdad and the Kurdish regional government in Erbil. Under such circumstances, with Turkey looking to protect both prospective oil and gas supplies and some $8bn worth of Turkish investments in Northern Iraq, it is not ridiculous to envisage this leading to a de facto extension of Turkey’s security perimeter several hundred kilometres south to the current KRG-Federal Government line of control.

For companies operating in northern Iraq, a solution to the general oil and gas export pipeline dilemma is already overdue. For every year the decision is delayed the actual production of both crude oil and gas will be delayed. And for companies, that means a minimal return on capital already exceeding $10bn in major hydrocarbon production ventures. Ever since international companies discovered that northern Iraq was in itself a genuine energy province (whereas lack of exploration in the Saddam Hussain era led to the concept that it was an oil and gas backwater) there has been a furious dispute between the Federal Government in Baghdad and the Kurdistan regional government in Erbil concerning the production and export of oil and gas in the KRG area. The KRG, wanting to see rapid development, negotiated – and continues to negotiate – a string of agreements with international companies based on the production sharing principle, under which a company’s reward for investing in a project is directly related to the amount that it invests in that project and with the reward largely determined by the value of the actual oil or gas produced. Baghdad, which favours service contracts under which companies are paid a fee for their services (usually measured in terms of specific fees per unit of oil or gas produced), argued that this was barred by the Federal Constitution; the KRG considered the region’s autonomous status gave it the right to make such awards.[4] Such agreements also earn considerable sums payable directly to the Kurdistan Regional Government’s Ministry of Natural Resources. Between 2007 and 2013, the MNR secured $3.85 bn in PSC payments, making it the second largest element in the region’s finances. Sales of oil and, more importantly, oil product earned the KRG $4.9 bn over the same period.[5] 

A series of disputes concerning the production sharing issue and the handling of both oil revenues and disbursements back to the producing companies ensured that exports from the Kurdish area – and thus production within the Kurdish area – was erratic at best. These exports were normally piped (through a local connecting line) or trucked to loading points on the main Kirkuk-Ceyhan pipeline, the prime artery for Iraqi oil deliveries to Mediterranean and Atlantic markets since the 1970s. Once they were in the line, they came effectively under Federal control. Almost all the line, to within a few kilometres of Fish Khabur, is supposedly under Federal Government control and at the border crossing itself the exports are monitored by Federal officials. In effect, even though a few kilometres approaching Fish Khabur are under KRG control, oil exports from the KRG area to Turkey remained subject to Federal control. At one stage in late 2012, the Kirkuk-Ceyhan line was carrying around 250,000 b/d of oil produced in Kurdistan-Iraq to world markets.

But core issues remained intractable, disrupting pipeline operations. The Federal Government considered it was right to withhold payments to producers operating as they saw it in violation of the Federal constitution; the KRG authorities complained that changes in the way the Federal budget was drawn up were leading to the KRG receiving a reduced share of oil revenues.[6] From the very start of oil exports from Kurdistan-Iraq on 1 June 2009, the issue of whether producers in the KRG area would be able both to access the Kirkuk-Ceyhan line and receive reimbursements for their input was highly problematic. The Federal authorities secured all export revenues but ongoing financial disputes routinely resulted in the Federal authorities delaying or restricting payments back to producers (who they continued to argue were operating illegally) and led to persistent closures of the system.

In December 2012, as the payment dispute worsened, KRG exports through the Kirkuk-Ceyhan line were halted. In January, the KRG gave Genel Enerji, a UK-Turkish venture which is generally considered Turkey’s biggest investor in northern Iraq, permission to export oil to Turkey directly – by truck. By 8 January, small quantities of crude from Genel’s Taq Taq oilfield had arrived in the Turkish Mediterranean port of Mersin. This was not quite the first cargo of hydrocarbons to be exported from Kurdistan-Iraq without Baghdad’s permission (there were some gas condensate exports in October 2012) but because it was crude, it went to the heart of Baghdad’s concerns that the KRG was flouting Iraqi law.[7] Baghdad immediately condemned the move as illegal and, in subsequent negotiations intended to resolve the immediate dispute, secured an apology from Genel Enerji for its mistake in arranging the truck exports. But the dispute did not end there. Baghdad and Erbil failed to reach an accommodation despite at least one intervention by US Secretary of State John Kerry in March 2013. Finally, in December 2013, the KRG authorities resorted to direct transport of oil to Ceyhan without Baghdad’s approval, whilst holding back in actual sales of the oil.[8]

This led to storage problems at Ceyhan, and to months of so far unsuccessful negotiations to secure Baghdad’s specific approval for the sale of the Kurdish crude that had reached Ceyhan. As of 3 May 2014, with Iraq in a complex post-election and pre-government formation hiatus, no less a figure than Turkish Energy Minister Taner Yildiz said that oil flows had been resumed at a rate of 100,000 b/d, that some 1.8 million barrels of oil from northern Iraq was currently in storage at Ceyhan, and that “sales may begin within three days or a week."[9] Yildiz also noted that Ceyhan’s storage capacity was 2.5 million barrels.

It should be noted that major civil unrest in predominantly Sunni districts of northern Iraq have led to persistent closures of the Iraqi section of the main Kirkuk-Ceyhan pipeline.  This meant that oil exported from the KRG via the Turkish section of the Kirkuk-Ceyhan line could be both pumped and stored separately from oil previously pumped by SOMO, which handles all of Federal Iraq’s oil exports. The peculiar complexity of the Federal Iraq relationship with the KRG concerning both oil development and exports is epitomised by the fact that while Baghdad wants to ensure supervision of KRG exports and actual handling of consequent revenues, throughout the early months of 2014 it also persistently mentioned the possibility of constructing a new pipeline to connect those sections of the Kirkuk field operated by Federal Iraq to the border crossing point at Fish Khabur by means of a new pipeline through Kurdistan, rather than relying on further efforts to secure, repair and upgrade the existing line which gas so often been subject to bomb attacks.

The core issue in dispute, however, is very straightforward. To the Federal Government, the export of crude oil – or gas – abroad, without the express approval of the Federal authorities, is simply illegal and threatens the very sovereignty of Iraq. To the KRG, it is an issue that threatens the region’s autonomy for, if it cannot rely on the Federal Government to enable it both to produce and export its hydrocarbons, then its ability to promote economic growth is enormously restricted, if not obliterated outright.

One major key to these elements is the role played by Genel Enerji in developing both oil and gas pipelines from Kurdistan-Iraq to Turkey. The KRG has great hopes for the production of both oil and gas. Moreover, it looks as if these hopes will be very largely achieved. It is quite possible, indeed probable, that the KRG’s hopes will have to be deferred in some instances, but the trajectory of oil and gas development is such that delays are likely to be no more than a year or two. That is, of course, so long as there are export facilities available to carry the anticipated large volumes of oil and gas to market, given the KRG’s own relatively limited requirements.

The KRG’s oil production

In October 2012, KRG Natural Resources Minister Ashti Hawrami declared “We believe that by 2015 we will safely reach one million b/d and by 2019, two million b/d.”[10] The same expectations were re-stated in December by KRG Prime Minster Nerchivan Barzani. In practical terms, the KRG possesses both the resource base and the physical and financial investment in field development to produce a million barrels a day, with a particular focus on 15 fields which it considers the road to reaching this goal by the end of 2015.

The 15 fields comprise four truly major fields, expected to produce at least 150,000 b/d apiece, and 11 considered capable of producing between 20,000 and 60,000 b/d by end-2015. The four major fields are: Khurmala, which the KRG authorities hope will produce 150,000 b/d for export and 100,000 for local refining; Taq Taq, slated for 175,000 b/d for export and 50,000 b/d for local refining; Tawke, with 150,000 for export; and Shaikhan, also with 150,000 b/d for export. The eleven other fields are: Akri Bijeel, Atrush, Barda Rash, Bina Bawi, Garmian, Khor Mor, Kurdamir, Miran, Sameen, Sarsang and Topkhana.

In the long run, the biggest prospect is Shaikan, where the US’ Gulf Keystone has some 12.4 billion barrels of identified reserves of oil-in-place.[11] Gulf Keystone CEO Todd Kozel has said that our future production volumes from Shaikan are projected to be more than 400,000 b/d.”[12]

Such figures run counter to the far more sceptical estimates of the International Energy Agency which, in a major report in October 2012, concluded that, so far as output from Kurdistan-Iraq was concerned, “the outlook is for production of between 500-800 kb/d in 2020 and between 750 kb/d-1.2 mb/d in 2035.”[13] The IEA, whose report was primarily focussed on Federal Iraq, appeared to have significantly underestimated the pace of development in the KRG. For example, the first major production in the region, by Norway’s DNO at Tawke, began in June 2009 just five years after it had signed its production sharing agreement with the KRG authorities. By the end of 2011 it was producing 75,000 b/d; in 2012 it was approaching 100,000 b/d; and in May 2013 DNO said it was aiming to produce 200,000 b/d by the end of 2014. At Shaikan, the process was even faster. Gulf Keystone signed its PSA in November 2007, test production began in October 2010 and by the end of 2012 production capacity had already reached 20,000 b/d. The ubiquitous Genel Enerji is likewise developing the Taq Taq field at a rapid pace. This field, although discovered as far back as 1961, was underexploited in the Baath party era. In 2012, Genel initiated a six-well development programme intended to produce as much as 200,000 b/d by the end of 2013, with 110,000 b/d specifically slated for export.

These projects, and the work carried out by later entrants into Kurdistan, make it far more likely that the overall oil production trajectory will reflect the hopes of the KRG far more than the assumptions of the IEA. The key is the reliance on production sharing contracts which mean that foreign companies investing in Kurdistan-Iraq share both the risks and rewards of developing hydrocarbons in the province: the former by bearing the cost of discovery and development; the latter by benefitting from a share in the value of how much (or how little) is produced. Thus the companies have every incentive to optimise whatever formula will enable them to encourage both the speed of development and the maximisation of volumes to be produced.

This does not, of course, necessarily mean that Kurdistan-Iraq will attain its target of producing a million barrels a day in 2015; but it does mean that it possesses the capacity to do so, and that such levels of production can realistically be anticipated in 2016 or 2017, so long as the infrastructure is present to carry the bulk of such output to the all-important export market.

The KRG’s gas production

In gas, the story is quite similar. One pair of fields, Khor Mor and Chamchamal, were discovered as long ago as 1928 and 1930 respectively. After serving as the basis for an initial burst of production to provide gas to feed new power stations at Sulaymaniyah and Erbil, they have provided enough gas to power a third plant, the 500MW power station at Dohuk. All three plants were configured to operate on either gas or diesel/light fuel, and, as of early 2013, gas supply to the Dohuk power station, whose first units opened in March 2011, was imminent. The three plants were expected to consume around 5 bcm of gas in 2013, but with Khor Mor and Chamchamal deemed capable of producing around 8 bcm, the question of what to do with the surplus – in effect, how to export it to Turkey – was an issue from at least 2010 onwards.

In gas, as in oil, Hawrami was ever the optimist. In 2010, Hawrami was quoted as saying: “The location of gas reserves in the Kurdistan Region of Iraq makes them ideally placed to gain access to the secure and profitable European gas market. Transporting this gas – up to 20 bcm a year – through the Nabucco pipeline is a priority for us, and will also serve to cement our already good relations with Europe and Turkey”.[14] He had some justification for such comments. In August 2010 RWE, then a member of the Nabucco consortium, signed an agreement with the KRG aimed at transporting as much as 20 bcm/y to Europe via the planned Nabucco system. As for the timing, Jeremy Ellis of Nabucco partner RWE said in early 2011 that “Nabucco should be able to take Kurdish gas from 2016 onwards.”[15] This did not happen; Nabucco collapsed.

But the optimism remained. In June 2012, Hawrami declared: “Within two years we should see some gas flowing to Turkey,” specifically saying this would be to supply nearby Turkish power stations with possible re-export of energy, in the form of electricity, back to Iraq. He added: “In the longer run we see 10 bcm flowing to Turkey and maybe some gas flowing to Europe, assuming the infrastructure exists at that time.”[16] Within a few months, however, the minister was somewhat more cautious, speaking in Erbil in December he said: “I believe by 2015-6 we will be ready for gas exports.” This time, his comment was largely underpinned by Genel Enerji’s development of the Miran Field, where it expected to produce 4 bcm/y by end-2014 and 8 bcm/y by end-2017. With Khor Mor already on line and in the process of expansion, and with other new fields producing lesser volumes, such comments appeared did appear realistic, so long as Kurdistan-Iraq could overcome the twin problems of stranded production and lack of uninterrupted access to reliable export systems.

As of May 2014, the bottom line is that the KRG continues to suffer from stranded production rather than stranded resources. Its oil and gas fields were – and are – ready not just to produce at previous levels but, as a result of investments already made, to increase output rapidly. The KRG might not produce as much oil or gas as Hawrami anticipates by the dates he has announced, but any delay is more likely to be caused by ongoing disputes with Baghdad and lack of alternative export infrastructure, rather than by lack of either a resource base or production facilities.

The pipeline issue

In early 2012, Hawrami said: “A twin pipeline is needed in order to reach the one-million-barrel a day target. Tenders for this pipeline have already been received and I am confident that it will be built by the end of 2013.” By December 2012, Hawrami was intimating that, as was subsequently borne out by events, 2014 would be a more likely start-up date. But it should be noted that the Khurmala-Dohuk-Fish Khabur line currently plugged into the Kirkuk-Ceyhan line only constitutes the first element in the overall infrastructure system the KRG is seeking to develop – and does not even constitute the largest piece of that infrastructure.

The oil companies developing the fields in northern Iraq require new export infrastructure, both because the existing infrastructure via Federal Iraq and the Kirkuk-Ceyhan pipeline is insufficient for their needs, and because of concerns that they cannot count on uninterrupted access to this pipeline. In gas, any exports require wholly new infrastructure, since Kurdistan-Iraq has only limited gas pipeline connections with Federal Iraq (one small line from Taq Taq to Kirkuk) and even Federal Iraq has only one gas export pipeline, a line connecting its southern gasfields with Kuwait.

Current oil pipeline developments – assuming they are not held up by actual failure to sell oil currently stored at Ceyhan – are aimed at developing a 400,000 b/d export system primarily intended to serve four main sets of producers: the Tawke field in the north, Shaikhan in the centre, Khurmala Dome, and Taq Taq. But there are limitations. In order to maintain the overall quality of crude in the pipeline, the volumes of heavy crude from Shaikhan that can be included have to be strictly limited. In effect, these means a completely separate export system for heavy crude from Shaikhan, the region’s biggest discovery, has to be developed.

Various specific projects are already underway. Genel intends to construct its own 250-km oil pipeline from the company’s fields at Taq Taq to Fish Khabur. By April 2012, Genel had completed front-end engineering and design for the pipeline, which would be capable of carrying at least 200,000 b/d, and had issued actual tenders for construction. As of early 2013, the intention was to start construction work in the first half of 2013, with a view to completion in late 2014 or early 2015. But lack of either a tripartite agreement or understanding between Ankara, Erbil and Baghdad meant that, as of mid-2013, actual pipelaying had yet to start.

There is a distinct possibly that this would, in effect, constitute an initial element in what would eventually be a one million b/d system for light oil. The KRG would like the line from Taq Taq to have a capacity of around 400,000 b/d for its first 50 to 60 kilometers, which would enable it to serve the fields of Bina Bawi and Safeen as well as Taq Taq. Near Khurmala, this line would join up with a proposed 500,000 b/d pipeline connecting major new discoveries at the Kurdamir and Garmian license areas in southeastern Kurdistan-Iraq and which would also serve oil produced at such fields as Khor Mor, Topkhana and Miran. Kurdamir and Garmian are known to contain some 1.75 billion barrels of oil (or 2.1 bn barrels of oil equivalent, if gas and condensate are included) in mean prospective resources that have been independently audited. With test wells flowing at 5,000 to 9,000 b/d, the prospects are good that these two fields possess the resource base to support production of at least 100,000 b/d, and may well wind up producing a lot more than that.

The two streams would meet near the Khurmala Dome, one of the three giant domes of the long-established supergiant Kirkuk oilfield. Between Khurmala and Fish Khabur, the line would be able to serve such fields as Akri Bijeel, Atrush, Barda Rash and Sarsang. Overall, with more than 50 international companies engaged in exploration and production activities in Kurdistan-Iraq as of mid-2013 and with at least 18 of around 50 licensed blocks already yielding discoveries, there should be no shortage of prospective customers for this main trunkline.

For its part, Gulf Keystone, is focussing on building a 122-km pipeline connection, with at least a 440,000 b/d capacity, from Shaikan to Fish Khabur to carry its own output, which is much heavier (and vastly more sulphurous), than much of the crude produced elsewhere in Kurdistan-Iraq. Although separate from the proposed 1 mb/d system, it would probably follow the same route as the other line for the last 100 kms or so to the Turkish border.

In seeking to break the current deadlock over oil exports, the KRG has one significant card: Iraq’s three-way political split between Shia Arab, Sunni Arab and Kurd at least gives the KRG some leverage in post-election negotiations in Baghdad itself on such issues as Federal Government formation, strategy and policy in which at least a modicum of Kurdish support may well be required for the functioning of effective government.

Gas pipeline plans

So far, there have been two distinct phases concerning the KRG’s approach to gas exports. The first, from 2008-2011, revolved around the prospect of supplying gas from the first fields to be developed , Khor Mor and Chamchamal, into the proposed Nabucco system. But by 2011, when the classic Nabucco concept had to be abandoned as Azerbaijan’s Socar began its push for its own dedicated pipeline across Turkey, not only did the KRG authorities have to re-think their approach to gas connections across the border, but they had also to bear in mind the changing dynamics of prospective gas output from Miran and other new gasfields prompted consideration of both near-term connections into the existing Botas operated system in Turkey and the long-term construction of dedicated systems.

As of mid-2013, a dual approach was under way. KRG and Turkish officials continue to discuss an extension of the existing Khor Mor-Dohuk gas line into Turkey, while Genel Enerji was working with the KRG authorities on development of a quite separate project for a new gas line to carry output from fields operated by a number of companies, including its own Miran concession.

An extension of the existing line from Dohuk would require some 65 kms of new pipeline, coupled with a 10-km extension on the Turkish side to a new power plant at Silopi, opened in 2009 and currently being expanded. That same year a joint venture of between foreign companies operating in Iraq and a Turkish gas facility construction company applied for a licence from the Turkish Markets Regulatory Authority to import of substantial volumes from northern Iraq by means of a 336-km pipeline from Kurdistan-Iraq Iraq to Turkey at a cost of around $800-900 million. The companies involved were Crescent Petroleum and its affiliate Dana Gas – developer of the Khor Mor field, holder of the Chemchemal licence and (at the time) builder of the first 180-km section of the internal Kurdistan-Iraq gasline from Khor Mor to Erbil – together with Turkerler, a Turkish company which had built a number of major gas facilities for Turkey’s state gas company, Botas, and which had the previous year established the İnci Natural Gas Import & Export & Transmission Company to import gas from Iraq. Botas, for its part, backed the licence application, a crucial element since it would be for Botas to handle the onward transmission of any gas entering Turkey through such a line. At the time, first deliveries from Kurdistan-Iraq were projected for 2011, with the joint venture envisaging delivery of 3 bcm in 2012, of 5 bcm in 2013, of 8.5 bcm in 2014 and of a minimum 10 bcm from a year over a 23-year period from 2015 to 2038. If nothing else, the submission demonstrated the partners’ belief that they could access substantial gas reserves to justify such a line.

There were, however, alternative proposals for prospective gas exports utilising the Khor Mor-Dohuk line. For some years, the KRG and the Turkish authorities have discussed a project to feed KRG gas into a power station in Silopi which would then, in effect, re-export the gas as electricity to Mosul and other northern cities in the Federal Government’s direct area of responsibility. The importance of this project lies in its ability both to provide power for a region of Iraq in which electricity is generally available for only a few hours a day and in the presumption that once any KRG gas crosses the border, the way is paved for much more to follow. In April 2013, Turkey’s Kartet, a subsidiary of the Karadeniz group, was reported to have secured an agreement to provide 200 MW a year to Mosul from Silopi, apparently as part of an agreement with the KRG. This would now appear to be the front runner for utilising whatever gas is left over from Khor Mor after Kurdistan-Iraq’s internal requirements have been met.[17]

For Genel, with a much bigger project in mind, a fundamental driver for Miran is the ability to access attractive gas markets, with Turkey as its main focus. Gas from the Kurdistan Region of Iraq, says Genel, would enable the Turkish Government both to meet its demand requirements and to achieve its stated goal of diversifying sources of supply. As of late 2012, Miran was already known to possess 12.3 tcf (0.35 tcm) of gas-in-place with this figure expected to increase considerably as further appraisal wells were spudded in 2013. Genel should be in a position to start producing gas for export in 2014-

Gas – The European Dimension

Gas is – or at least was – generally of lesser concern than oil. However, there are two good reasons why gas may come to the fore as and when the current (May 2014) oil sale issue is resolved. The first concerns Genel Enerji, since its fields are predominantly gas, not oil. Since Genel is the biggest single investor in the Kurdistan region and is well positioned to secure sales within Turkey, its interests will have to be accommodated. The second concerns the Ukraine crises of 2014 and whether European gas consumers need to look at alternative sources of supply ether to complement or to replace Russian supply. The ramifications of continued European reliance on Russian gas in the context of the ongoing crises in Ukraine are beyond the scope of this presentation. But it is worth noting that considerable work has already been done on how gas from Kurdistan-Iraq might feed into pipeline systems designed to carry Caspian gas to Europe. Thus the last formal statement by Nabucco International before it effectively shelved its Classic Nabucco plan in favour of the abbreviated Nabucco West project was the presentation to the Turkish authorities on 12 April 2012 of an environmental impact assessment for the proposed 733-km leg of the original Nabucco system that would have carried Kurdish gas from Silopi to a junction with the Nabucco entry line from the Caucasus at Sivas. The TANAP line is now planned to go through Sivas. 

As for Genel Enerji, as of early 2014 it had ordered physical pipe in order to lay a line to the border at Fish Khabur. It was anticipating being able to export some 4 bcm/y to Turkey from Miran after 2016, and it was also testing what it called a highly prospective 1,600 meter gas column at Bina Bawi.  This makes it quite reasonable to suppose that, if the infrastructure was available, the KRG would be able to export some 5-10 bcm/y to Turkey and/or Europe in the next 3-8 years.

In Turkey, Kurdish gas will find a ready market. Turkish demand reached 43.1 bcm in 2012 and is expected to climb to 62 bcm in 2020, to 64 bcm in 2025, and to 69 bcm in 2030.

Genel’s CEO, former BP chief Tony Hayward, said in December 2012 that “by the end of the decade it is reasonable to suppose that northern Iraq will be supplying Turkey with some 10 bcm of gas.”  As to whether that gas might then travel further afield, a BOTAS official said in 2012 that in the long term, “of course, we’d love to see Iraqi gas in the TANAP.” 

For Baghdad, Kurdish exports poses a particular problem. The Federal Government officially supports the idea of Federal Iraqi gas exports to the European Union with EU Energy Commissioner Günther Oettinger saying in June 2011: “We are in contact with the new government in Baghdad to develop a new pipeline from Iraq, (to become) a part of our infrastructure.”[18] This gives the European Commission the ability to assert that it cannot be expected to take delivery of gas from the Federal areas alone and not from the KRG or, to put it more bluntly, that since some of the Kurds’ anticipated gas exports might well be targeted for delivery to into the EU-backed Southern Gas Corridor, for Baghdad to block such exports would be an affront to the EU. However, Baghdad needs to ensure it retains some degree of control over the issue of exports from the KRG, since local authorities in other provinces, notably Anbar and Diyala, are citing Kurdish control over hydrocarbon resources as a reason for saying that they too should be partners in future oil and gas development in their jurisdictions. One way in which these issues overlap is the giant Akkas gas field in Anbar province, which lies outside the KRG domain. As far back as 1996 – during the Saddam era – the Turkish Government identified Akkas as a prospective source of supply for Turkey, considering it could form the core of some potential 10 bcm/y of gas imports from Iraq. The memorandum of understanding signed that year was never implemented, but it was not forgotten. Akkas again came to the fore in August 2007 when Turkey and Iraq signed another MoU and set up a steering group to initiate feasibility studies into a gas transit pipeline to carry Iraqi gas to Europe via Turkey. The following January, Turkey’s state pipeline company, Botas, agreed to conduct feasibility studies into a gas transit pipeline to carry Iraqi gas to Europe via Turkey.

But while Baghdad was at this stage clearly viewing Akkas as its best hope for large-scale, new field gas production, three years later its attitude seems to have changed. When it signed an agreement with South Korea’s Kogas on 1 June 2011 to develop the 5.6 tcf (157 bcm) field, it said that while production was expected to peak at around 4.0 bcm/y, exports would be limited to just two or three years, pending construction of two local power stations to utilise the gas within Iraq itself. Somewhat surprisingly, the gas was to be exported via Syria. This latter point, which appears to have been made by a senior official in the Iraqi Oil Ministry’s Licensing and Petroleum Contracts Department, indicates how wary Baghdad appeared to be about exporting via the KRG, since Syria was already in the grip of considerable turmoil as a result of widespread protests against President Bashar Assad’s Baathist regime.[19]

The presumed market for such short-term exports was Turkey itself, with transit being arranged via Syria and the Arab Gas Pipeline. But that was before it became clear that the unrest in Syria was a precursor to full-scale civil war. What was not quite so clear is how Turkey’s Botas, a partner in the similarly sized Mansuriyah field northeast of Baghdad, would arrange for export deliveries. One potential outcome for the overall issue is that Baghdad would settle for allowing the KRG to export its gas to Turkey so long as this was eventually accompanied by exports from Akkas and gas from other fields, notably associated gas from its new and revamped oilfield operations. Turkey might reasonably be expected to take a similar view, not least because it was Akkas to which Ankara previously looked when interim agreements were signed for up to 10 Bcm/yr of Iraqi gas exports in December 1996.

In the longer-term, from around 2017 onwards, two factors are likely to result in a significant change of attitude in Baghdad regarding gas exports. As of mid-2013, the emphasis was very firmly on providing gas for the domestic market, not least in order to end the appalling situation whereby the KRG is able to utilise its gas (and hydropower as well) to ensure that most of its population enjoy roughly 23 hours of electricity a day, whereas the rest of Iraq gets a daily average of just three hours. But as major programmes to tackle wasteful flaring of associated gas at the country’s oilfields take root – not least through programmes such as Shell’s giant $12bn South Gas Utilization Venture for the giant Rumaila, West Qurna-1 and Zubair fields in southern Iraq, which started up on 1 May 2013 – and as Iraq finally starts to achieve a steady ramp up of oil production and thus a steady increase in associated gas production, so will the potential surplus gas for gas exports start to accumulate. Oil output has already touched levels as high as 3.2 mb/d in late 2012 – and with output expected to average as much as 3.4 mb/d throughout 2014, production is finally equalling levels attained before the invasion of Kuwait in August 1990 and the consequent imposition of UN sanctions on Iraqi oil exports.[20] As Iraq moves to take production towards its targeted level of 6.1 mb/d by end 2020, gas production will likewise rise significantly, with some analysts estimating that for every one million b/d increase in oil output, production of associated gas will rise by 5 bcm/y.

There is little doubt that in the decade from 2020-2030, Iraq will be a very significant gas exporter indeed, but while some of it may well head north, becoming an integral element of the Southern Corridor throughput, much of it will probably head either to regional markets in the Gulf or, as LNG, to South and East Asia. There is a major need to develop gas gathering infrastructure, distribution systems and regional gas-fuelled power stations, so producing sufficient gas to achieve a real surplus for export will take time. But there is also the argument that if some of the increased gas output is earmarked for export from the start, then the revenues generated can be directed into improving power supplies for Iraqi homes and industry. Thus one external analyst, Azfar Shaukat, Director of Oil & Gas at Mott MacDonald, considered July 2011 that it was quite possible that Iraq, which produced just 1.2 bcm/y in 2010, might be producing as much as 70 bcm/y from around 2017-2020, while an independent Iraqi consultant, Asri Mousa, has argued that it is reasonable to expect Iraq to produce close to 8,000 bcf/d (around 80 bcm/y) by 2017. Shaukat has also said that Europe seems to be counting on receiving 15-30 bcm/y from Iraq by 2030. Again, in July 2011, Iraqi Prime Minister Nuri al-Maliki told the EU’s Ambassador to Iraq: “Iraq is ready to supply Europe with energy, oil and gas in the coming years, as Iraq will have a high export capacity.”[21]

CONCLUSION:

The fact that the Kurdistan-Iraq is home to stranded production of oil and gas, and not just stranded resources as is the case with various other landlocked territories, means that there has to be a resolution of the export pipeline problem. As Tony Hayward, the former BP CEO who became head of Genel Enerji in 2011, phrased it in December 2012: "Over the next year or two, Kurdistan production capacity will grow towards 1 million barrels a day - that's too much oil to be shut in as a consequence of a political dispute. So one way or another, it's going to get resolved."[22]

Given the slow pace of policy change in Baghdad, the three occasions in which it has halted regional oil exports, and its reluctance to approve new pipelines to Turkey it seems likely that Kurdish producers will both continue to use the Turkish section of the existing Kirkuk-Ceyhan line and to proceed with the construction of new cross-border pipelines without Baghdad’s formal approval. This will have profound consequences. In effect, any decision by Erbil and Ankara alone to approve cross-border pipelines is tantamount to saying that Baghdad’s writ concerning any aspect of hydrocarbons development no longer runs in Kurdistan-Iraq.

Whether Baghdad will accept this is quite another matter. There have been plenty of occasions in which tension between Federal and Kurdistan forces have almost led to full-scale clashes, and it would not take much to trigger an actual war in the oil-and gas-rich territories of the north. The unresolved issue of the status of Kirkuk, a city uneasily administered by both sides and under the practical control of neither remains a particular flashpoint. So if Erbil and Ankara do implement a bilateral pipeline solution – quite possibly, in the next few days of May 2014 – that means that Erbil will have to look to Ankara for aerial defence should the Federal Government decide to launch air attacks on the territory. The KRG has no air force of its own. Nor can Ankara expect to be able to look in turn to Washington for support on this issue. Secretary of State John Kerry was widely reported by the Turkish media as conveying a message to the KRG in March 2013 that they should not go ahead with a bilateral pipeline to Turkey. Diplomatic sources say that while the US Government respects Turkey’s stance on Kurdish issues, it has no wish to be a party to any move that might be interpreted as signalling acceptance of a formal partition of Iraq.

And yet that is what the development of cross-border pipelines operated without the consent of Federal Iraq effectively amounts to. In practice, a bilateral agreement on pipelines across the border means Ankara will have to extend its own security frontier to the southern boundaries of Kurdistan-Iraq, a particularly complex issue in view of ongoing disputes between Erbil and Baghdad as to just where those southern boundary lines should be in the Kirkuk area.