Iraq’s Kurdistan Regional Government (KRG) has reportedly signed a major energy package with Turkey despite repeated warnings from the central Iraqi government.
IHS Energy perspective
A Turkey-Iraqi Kurdistan deal was expected. The facts on the ground, including the completion of an oil pipeline in Kurdistan, and the KRG's vigorously pursued independent energy policy have been key indicators that the mutual energy interests between Ankara and Erbil would lead to a major energy deal.
However, the deal follows a recent sign of rapprochement between Turkey and the central Iraqi government, which are seeking to work together politically, economically, and in the energy sphere.
Despite Baghdad’s opposition to an energy deal between Turkey and the KRG, it has limited room to act. Baghdad may ask how it can benefit from potential incoming additional oil export revenues from Kurdish oil exports to Turkey. Therefore the idea of a Turkish escrow account to collect Kurdish oil revenues and allocate them to both Baghdad and Erbil could be the next area of contention in the Ankara-Erbil-Baghdad triangle.
The semi-autonomous Iraqi Kurdistan Regional Government (KRG) signed a significant energy deal with Turkey during a three-hour meeting between Prime Minister Nechirvan Barzani and his Turkish counterpart Recep Tayyip Erdogan and Turkey's Minister for Energy and Natural Resources Taner Yildiz in Ankara on Wednesday (27 November).
Turkey-Iraqi Kurdistan energy deals
As part of the deal, Turkey and Iraqi Kurdistan have reportedly confirmed a contract that the state-backed Turkish Energy Company (TEC), which Ankara has established earlier this year to operate in Iraqi Kurdistan, will explore and develop Kurdish hydrocarbons in 13 blocks. Interestingly, the deal also confirms that TEC will partner with ExxonMobil in Iraqi Kurdistan. The US supermajor holds 80% stakes in six blocks and is currently starting exploration at the Pirmam Block. Moreover, the deal also cements the plan to build a new Kurdish oil pipeline as well as a gas pipeline in a bid to help Kurdistan increase its oil exports to 1 million b/d by 2015. Iraqi Kurdistan has plans to start exporting oil via a newly built pipeline to Turkey before the end of the year. The pipeline has been connected to a new metering station built by the KRG in order to control exact contributions of Kurdish oil volumes to the Iraqi-Turkish Kirkuk-Ceyhan pipeline, which the Kurdish pipeline will tie into.
The KRG is expecting an initial flow of 150,000 b/d from its Taq Taq and Tawke oilfields – operated by Genel Energy and DNO International, respectively – before ramping up oil exports to Turkey to 300,000 b/d in early 2014 and 500,000 b/d in mid 2015, according to Genel Energy. The initial export volume is higher than the 250,000 b/d of oil that Kurdistan had committed to pump via the Baghdad-controlled Kirkuk-Ceyhan pipeline last year as its contribution to Iraq’s overall exports and revenues, although Kurdish oil flows came to a halt in December 2012 because of a payment dispute with Baghdad which remains unresolved. In order to reach the higher oil export volumes, the KRG is also planning a second major oil pipeline with a 1-million-b/d capacity to carry Kurdish oil to global markets via Turkey’s Mediterranean, which could be up and running within two years, according to Kurdish officials (see Iraq: 1 November 2013: Iraqi Kurdistan plans to build second oil pipeline via Turkey).
In addition, Iraqi Kurdistan and Turkey have reportedly also signed an agreement that confirms earlier plans to export 10 billion cubic metres of Kurdish gas to Turkey by early 2017 – this volume is equivalent to the amount Iran currently exports to Turkey (see Iraq – Turkey: 16 September 2013: Turkey issues first licence to import gas from Iraqi Kurdistan). The deal also envisages that revenues from Kurdish oil exports would be collected in an escrow account by a Turkish state bank as originally proposed in April this year. Turkey would take on the task of allocating the contractor fees first and encouraging the KRG and Baghdad to reach a deal on revenue sharing in line with an existing accord to divide oil export revenues by a 83%/17% basis between Baghdad and Erbil respectively (see Iraq - Turkey: 18 November 2013: Turkey reiterates proposal to create escrow account to solve Kurdish oil revenue debate in Iraq).
The Ankara-Erbil-Baghdad triangle
The agreement between Turkey and the KRG did not come as a surprise as the sides have developed close relations over the past year to prepare the ground for the deal, which was initially expected to take place in December (see Iraq - Turkey: 8 November 2013: Turkey and Iraqi Kurdistan prepare comprehensive oil and gas deal to be finalised in December).
The Iraqi government warned Turkey on Wednesday that the opening of a new oil export pipeline from the autonomous Kurdish region would seriously harm relations. Baghdad sent a strong message to the press immediately after the meeting, before news of the deal was released, warning that “in case this signature happens, bilateral relations between Baghdad and Ankara will be damaged severely," according to Ali al-Musawi, spokesman for the Iraqi prime minister Nouri al-Maliki's in quotes carried by the newswire AFP. Meanwhile, Iraq’s Deputy Prime Minister and top energy official, Hussain al-Shahristani, warned Turkey’s ambassador to Iraq, Faruk Kaymakçi, yesterday (28 November) about Ankara going ahead with any direct oil and gas deals with the KRG. Shahristani reiterated that “the only entity authorised to export [oil and gas] is the central government”. Baghdad claims that independent exports by the Kurdistan region would be illegal under the Iraqi constitution. Yesterday evening, the Iraqi energy ministry stated that a Turkish energy deal with Kurdistan would be "an encroachment on the sovereignty of Iraq".
Deepening ties or further rifts?
Iraq has been largely powerless to prevent the deepening of KRG-Turkey ties and the construction of the new Kurdish oil pipeline. As such, the likelihood of Baghdad significantly obstructing further energy developments is low. Although some Turkish companies operating in Iraq may be penalised, the extent of this is likely to be minimal. In fact, Ankara has offered Baghdad the use of Turkey as a conduit for shipments from Iraq’s oil-rich south. Turkish energy minister Yildiz said on 20 November that Turkey is envisaging the development of a 1.4-million-b/d oil pipeline from southern Iraqi through Turkey as Iraq needs alternative oil export routes as its production capacity increases, knowing that the Basra oil terminal in the south of Iraq is not suitable to handle the country’s growing oil export capacity in the short to medium term.
Politically, Iraq is struggling to contain a growing Sunni insurgency within its borders and can ill afford to open up a second front against a Turkey-backed KRG – especially in the context of the ongoing civil war in neighbouring Syria. Indeed, Turkey’s influence over Sunni politicians aligned against Maliki means that Ankara is in a position to help Baghdad begin to improve its engagement with these communities. Moreover, Maliki is likely to emerge victorious from Iraq's parliamentary elections in April 2014, but requires support from Sunni Arab and Kurdish political blocs to form a coalition government. As such, significant punitive measures and a massive political rift against Turkey are rather unlikely.
Outlook and implications
Ever since Turkey first glanced Kurdish hydrocarbons in 2009, Ankara has supported the KRG’s active and independent energy policy. Turkey and the KRG have somehow created a common political and economic sphere in the region, with Turkey becoming not only an energy consumer but also a key investor in Kurdistan’s economy and hydrocarbons sector. However, this Turkish-Kurdish alliance has angered the central Iraqi government and may slow down the cautious rapprochement between Baghdad and Ankara.
While some observers see in the KRG-Turkey energy deal a further indicator for the fragmentation of political authority and a shift of power from the centre to the periphery, others believe the potential revenue stream coming from Kurdish oil and gas exports could bring Erbil and Baghdad closer to the negotiation table. Both administrations, so the argument goes, could benefit significantly from the Kurdistan region’s role as a new oil export source. Yet, in the absence of a national Iraqi hydrocarbons law and revenue-sharing law, the question of sharing proceeds remains a problem in the next future.
The underlying issue here is whether the semi-autonomous KRG can independently sign oil and gas deals with another country without the approval of the central government of Iraq. From a legal standpoint, the KRG believes it is acting in accordance with the Iraqi Constitution. However, the federal government is rejecting Erbil's interpretation, claiming that the exploration, production, and exports of Iraqi hydrocarbons fall under the authority of the central government. According to this interpretation, Ankara would have to negotiate any oil and gas deals with Baghdad directly as it has done, for example, regarding the Turkey-Iraq pipeline tariff agreement renewed between the countries in 2010 to supply Iraqi oil via the Kirkuk-Ceyhan pipeline for 25 years (with a 10-year possible extension).
However, from a political and energy-policy point of view, things have changed. A few years ago, Turkey was accusing the KRG of hosting Parti Karkerani Kurdistan (PKK) insurgents in the Qandil Mountains in Iraqi Kurdistan, and Erbil was therefore viewed as a supporter of the Kurdish separatist organisation. In fact, Turkish military incursions into the KRG-controlled region were common. However, the increase of Turkish investments in Iraqi Kurdistan over the past decade and the prospect of Kurdistan becoming a more secure source of oil and gas supply to Turkey's burgeoning economy have changed Turkish attitudes to Iraqi Kurdistan. In addition, Turkey's external neighbourhood is increasingly hostile, especially with the ongoing civil conflict in Syria, which means Turkey's energy-fuelled relations with the KRG are a last political and economic anchor in its immediate vicinity. Turkey's political support for Iraqi Kurdistan's independent energy policy against the complaints of the central Iraqi administration has resulted in Turkey becoming the KRG's closest regional partner.
However, energy policy is a key driver in Turkey's romance with the KRG. It is likely that Turkey will be able to extract a much higher price for Kurdish gas supplies to Turkey compared to the price Ankara currently pays for gas imports from Russia, Iran, and Azerbaijan, which fluctuate between USD300/thousand cubic metre (Mcm) and USD500/Mcm of natural gas.
On the other side, Kurdistan's landlocked geographic status demands that it must look towards Turkey to access the Mediterranean Sea to sell particularly its oil internationally. Without it, neither the KRG nor operators including supermajors have a route to monetise Kurdish crude. However, significant above-ground risks will remain. The KRG's political quarrel with the central Iraqi government about authority over the disputed territory, independent oil deals, and budget allocations will remain a key factor of political tensions in Iraq. Moreover, operators in the region are not acting on legal certainty but rather political decisions driven by accomplished facts on the ground.