Siddik Bakir, Energy Analyst, Middle East and South Asia, IHS World Markets Energy explores the implications of Turkey’s growing commercial ties with the Kurdistan region of iraq
Only a week after Turkey’s prime minister Recep Tayyip Erdogan’s announcement that a state-owned Turkish company will join ExxonMobil to explore for oil and gas, Turkish officials are in talks with executives at Chevron and Russian companies (possibly including Gazprom Neft) to discuss potential oil exploration deals and the construction as well as financing of new oil and gas pipelines in Iraqi Kurdistan.
Erdogan’s plan to become a partner with the KRG and ExxonMobil was made before he embarked on a visit to the US last week. Over the last months, the US position has been cautious if not critical vis-à-vis Turkey’s increasingly pro-active engagement in Kurdistan’s oil and gas sector.
Washington is wary of the potential disintegration of the Iraqi federal state structure – a fear that the KRG and Turkey believe is exaggerated and unwarranted given that neither Erbil nor Ankara support such political objective (leaving the occasional Kurdish nationalist rhetoric aside).
In fact, upon return from the US, Turkey’s Energy Minister Taner Yildiz, who was part of Erdogan’s delegation, said that the discussions with President Obama and his team were very positive and fruitful.
Yildiz stated, in quotes carried by Reuters: “We are likely to be involved with Russian and American companies in northern Iraq for different projects like oil and gas exploration. And this year, state-owned and private companies could sign commercial contracts with northern Iraq.”
From Ankara’s perspective, Turkey cannot remain indifferent to potential projects in Iraq. Yildiz stated that the Turkish delegation discussed with its counterparts in Washington what the ideal model for partnership should be in order to respect the Iraqi constitution.
“These partnerships could be done through state companies, semi-state companies and sometimes completely private ones,” he said.
In addition, Yildiz reiterated Turkey’s right to participate in Kurdistan’s hydrocarbons sector by stating: “Thirty-nine firms from 19 countries are currently doing business in Northern Iraq, it’s quite natural for us to do so as well…our energy needs are continuously growing.”, as quoted in Today’s Zaman.
He added: “It isn’t possible for us to stay out of a region that has a 200 km shared border with us.”, highlighting that Turkey produces just 45,000 barrels of domestic oil a day and that it must import around 97% of its fossil fuel from abroad.
Chevron’s stake in Iraq and Kurdistan
Before the US major Chevron farmed into the Rovi and Sarta licences in 2012 (and the Qara Dagh licence in January 2013), the company had invested in an Iraqi technical assistance programme in 2003 and had been exploring opportunities to develop the 4.4-billion-barrel Nassiriya oilfield alongside the development of a 300,000-b/d refinery.
As a consequence of Chevron’s entry into Kurdistan last summer which also saw Total and Gazprom Neft farm into Kurdistan’s largely untapped blocks, however, Baghdad blacklisted the US company from future investments in federal Iraq.
Before its investment in Kurdistan, Chevron pre-qualified for Iraq’s fourth licensing round in May 2012. But it declined to bid given the risks involved in investing into unknown hydrocarbons blocks in federal Iraq with unattractive technical service contract terms on offer.
Chevron’s entry into Kurdistan therefore carries fewer immediate risks to its existing portfolio than those of ExxonMobil and Total which hold stakes in West Qurna-1 and Halfaya oilfields in southern Iraq, respectively.
It is thus far not clear, however, whether Turkey’s interest in Chevron involves a farm-in, or whether the deal will focus on a deal in building oil and gas export infrastructure, or possibly a combination of both.
Chevron’s Qara Dagh license is located 60-km southeast of the Taq Taq oilfield and 60-km east of the giant Kirkuk oilfield, and it is adjacent to Kurdamir, Baranan and Halabja blocks in the south of the Iraqi Kurdistan region.
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Production Era
Turkey’s trajectory in Iraqi Kurdistan’s energy sector over the last year is remarkable. From being the main political supporter of the KRG’s independent energy policy in the hope of becoming a key consumer and transit hub for oil operators in Iraqi Kurdistan one day, despite Baghdad’s and Washington’s opposition, Turkey is on track to become a key oil and gas producer in Iraqi Kurdistan.
Not only does Turkey want to consume Kurdish oil and, more importantly, gas to meet the growing energy demand at home. Ankara is also seeking to diversify its hydrocarbons import-dependence on countries such as Russia, Azerbaijan, and Iran.
But with the latest move, Turkey’s objective seems to be to commercialise its political engagement in Iraqi Kurdistan by directly monetising Kurdish oil and gas reserves on world markets via its state-owned Turkish companies; TPIC – a subsidiary of Turkey’s state-controlled TPAO is reportedly in talks to join ExxonMobil’s stakes in Kurdistan.
This scenario will please the KRG and IOCs alike. The presence and investments of supermajors (such as ExxonMobil, Chevron and Total) and of small and medium-sized IOCs (e.g. Gazprom Neft, Gulf Keystone, Western Zagros, and Genel Energy) in Kurdistan’s hydrocarbons sector are commercially too attractive for Turkey to be ignored.
The Norwegian independent DNO, for example, just announced today (23 May) that the Tawke oilfield, which it operates in Kurdistan, has produced an output of more than 100,000 b/d of crude over the last 72 hours– a significant development in Kurdistan’s oil and gas sector that Turkey hopes will benefit Ankara’s energy policy in the region.
Yet, while the ‘win-win-win’ situation between Turkey, the KRG, and IOCs will reinforce Turkey’s political and commercial ties with Iraqi Kurdistan, it will most likely worsen the ongoing dispute between the central Iraqi government in Baghdad and the KRG in Erbil.
The two administrations seem to accept living with the different legal and contractual terms in Iraq’s oil and gas industry. Neither administration agrees with the other side when it comes to interpreting the 2005 constitution and discussing the legal rights and political authority over how to explore, develop, and export Kurdistan’s oil-riches.
Last November, Baghdad showed some teeth by expelling Turkey’s state-owned explorer TPAO from Block 9 in southern Iraq, an exploration contract that TPAO won alongside Kuwait Petroleum and Dragon Oil during Iraq’s last bidding round in May 2012.
Another public embarrassment followed shortly after in December when Baghdad barred a plane carrying Turkish Energy Minister Taner Yildiz from landing in Erbil to seal a much-speculated energy deal between Turkey and the KRG in Iraqi Kurdistan.
From a customer and transporter, Turkey is on track to becoming an active explorer of Iraqi Kurdistan’s hydrocarbons wealth.
Despite Baghdad’s political deadlock with the KRG over a long-delayed national oil law, an ongoing oil-payment dispute and the increasing militarisation of Iraqi federal troops and Kurdish Peshmerga forces in northern Iraq, Kurdistan has driven its independent energy policy forward.
This, and Turkey’s timing to sign oil deals this year, comes at an important juncture in Kurdistan’s oil and gas export planning. The last stretch of the KRG’s 300,000-400,000 b/d capacity pipeline, built by local operator Kar Group and Urmiye Boru, to link the Anglo-Turkish Genel Energy-operated Taq Taq oilfield to the metering and pumping station at Fish Khabour on the Turkish border is just 20km away.
From there it remains to be seen whether the pipe will be connected to a pipeline on the Turkish side of the border to export Kurdish oil directly to a Mediterranean port and from there straight to the markets.
Meanwhile, Kurdish oil exports are being trucked to a second terminal in Turkey as crude exports are expected to reach around 60,000 b/d by the end of June with the oil-laden trucks expected to unload at the neighbouring Dortyol terminal in southern Turkey.
In addition, following Ankara’s agreement with ExxonMobil, the KRG plans to build a second 500,000 b/d throughput capacity pipeline from Akree, Sheikhan, and Bardarash oilfields for oil exports to Turkey, according to Ali Balo, oil adviser to the KRG.
Turkey continues to toe a fine line, as Ankara is keen not to upset the Iraqi central government too much. It has offered to help federal Iraq build more pipelines as it knows that the OPEC member’s oil production is increasing over the years to come (although the existing pipeline carrying oil from Iraq’s Kirkuk fields to Turkey’s Mediterranean hub of Ceyhan has yet to reach full use).
How Baghdad will react to Turkey’s double-strategy in Iraq characterised by investments in Kurdistan’s promising geology on the one hand and making overtures to Baghdad to improve Iraq’s national oil infrastructure on the other, is still unclear.
At this stage however Turkey’s ambitions in Kurdistan represent a major setback for Baghdad, especially as the US seems less inclined to support the Iraqi position in this game of crude any longer.
In numbers:
– 97% hydrocabons Turkey must curently import around 97% of its hydrocarbon energy
About the author:
Siddik Bakir is the lead energy analyst, Middle East and South Asia for IHS World Markets Energy. IHS is a leading source of information, insight and analytics in critical areas that shape today’s business landscape.
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