Thirteen days after the Kurdistan Regional Government (KRG) revealed that, as a goodwill initiative towards the Iraqi federal government, it would resume oil exports from the semi-autonomous northern region, there are rumours Baghdad may be willing to return to the negotiating table with Irbil.
“Serious and direct negotiations are supposed to start between Baghdad and Irbil soon. It’s a bit late but still necessary, it must be transparent,” Mahmoud Othman, former head of the Kurdistan Socialist Party and now an independent Iraqi MP, tweeted on Friday.
The KRG will initially restart exports at 100,000 barrels per day (b/d). If Baghdad makes the payments owed to the international oil companies (IOCs) operating in Kurdistan, which amount to $560 million, exports will be increased to 200,000 b/d; if not, they will be halted.
Iraqi Kurdistan has delivered 116,000 b/d since it restarted oil pumping on 7 August, Iraq’s Deputy Prime Minister Hussein al-Shahristani said on Sunday. “This quantity is below the agreed amount of 175,000 b/d in the budget. They should pump more than that total to compensate for the period of time when they halted exports,” he told reporters.
“[KRG Natural Resources Minister Ashti] Hawrami is attempting to push Baghdad into compliance with KRG’s wish for renegotiation of the oil power-sharing arrangement,” Justin Dargin, president of Globalcore Energy, told Interfax. “[Whether Baghdad is willing to pay the outstanding $560 million] could serve as a test to [Iraqi Prime Minister Nouri al-Maliki, showing] whether Baghdad is ready for negotiations. If Baghdad is to accede to KRG’s demands, it could give Irbil a carte blanche to pursue an even more autonomous oil exploration regime.”
Blacklisted by Baghdad
Over the past nine months, the KRG has signed exploration contracts with several of the oil majors operating in southern Iraq, including ExxonMobil, Total and Gazprom Neft, as well as Chevron, which has not signed any contracts with Baghdad. The federal government has condemned the contracts as illegal, and blacklisted the companies from signing future agreements with Iraq.
On Sunday, Baghdad gave Total an ultimatum to withdraw from Iraqi Kurdistan or be forced to sell its stake in the Halfaya oil field in the south. “[Total has] a certain period to end this case by selling its share to another company or by ending the contract with Kurdistan,” Shahristani told Agence France Presse.
Pressing for autonomy over oil and gas fields in the north has yielded over 40 lucrative oil and gas contracts for the KRG. However, “Baghdad still holds the monopoly on oil export routes, which makes KRG’s production capabilities vulnerable to the central authorities,” said Dargin. Moreover, negotiations on the expansion of the Kirkuk-Ceyhan pipeline and new oil and gas export agreements with Turkey are still dependent on Baghdad’s willingness to cooperate with Turkey, he added.
Luring international oil and gas companies into exploration and production agreements would give the KRG more influence on oil decision-making in Baghdad, including on these export agreements.
However, as much as the KRG is still reliant on Baghdad for access to the key oil export routes, Baghdad is dependent on the cooperation of the KRG if it is to retain control over the north, or suppress calls for further regionalisation in other parts of the country. Inspired by the KRG’s success, many of Iraq’s resource-rich governorates are also pushing for greater autonomy from the central government.
“Both [international oil companies and the KRG] realise that KRG’s political support, on the one hand, and the companies’ investment and technology, on the other, are crucial for Baghdad if it is to preserve the territorial integrity of the country and to rapidly boost oil production several-fold, as is its stated goal,” said Dargin.
However, while Baghdad is relying on Total, Gazprom Neft and Exxon to raise oil production in the south, it also comes from a strong bargaining position; as well as controlling all the pipeline export routes that go into the south and from there to the world, it holds 148 billion barrels of proven oil reserves, dwarfing even the sizeable 45 billion bbl of reserves estimated in Iraqi Kurdistan.
“Baghdad could find alternatives to the status-quo players, especially for the fields controlled by Total. On the bidding stage is China, which tends to conclude agreements on good terms for the government,” said Dargin.
“Ultimately, while there is political risk in dealing with the KRG, the investment terms are much more attractive. In the south of the country, Baghdad has kept to its somewhat strict investment terms,” he added.
Turning to Turkey
If Baghdad refuses to cooperate with Irbil, the KRG can still pursue its independent oil and gas export contracts with Turkey, which offers a large and growing energy market.
Turkish Energy Minister Taner Yildiz has expressed Ankara’s desire to build a new 1 million barrel per day pipeline from Iraqi Kurdistan to the port of Ceyhan. Hawrami has mooted the possibility of building a gas pipeline to run alongside.
Increased oil and gas imports would help Turkey further its ambitions of becoming a regional energy hub. The new exports “would not only feed its growing energy consumption, but will also increase its geopolitical stance in the Greater Black Sea area”, said Dargin.
Furthermore, it would offer Ankara the opportunity to access cheaper gas. Turkey pays $418 per thousand cubic metres for Russian gas, which provides 58% of the country’s supply.
“This is the price that Turkey pays after Russia decreased natural gas prices in exchange for Turkey’s support of the South Stream pipeline,” said Dargin. “The potential price for Kurdish gas is not yet known, but it is expected to be far less than the one charged by Gazprom. The reason is twofold: unlike Russian exports, Kurdish gas will not accumulate transfer fees along its transport route [as the pipeline will not pass through third party countries], and the KRG is attempting to build its international profile in the global energy sector and has created attractive investment terms to attempt to lure energy companies.”
“Turkey should be able to receive KRG gas at a lower price than from Russia or Iran because it has political leverage over the KRG, and because they have [as yet] no other plausible export outlet,” said Robin Mills, head of consulting at Manaar Energy Consulting & Project Management.
Import costs are also likely to be kept low because of the short distance between Iraqi Kurdistan and the hub at Ceyhan, which means the fixed cost of the gas pipeline infrastructure is relatively cheap.