By Samuel Cisuk and Zoe Grainge
Having the Reserves
Crescent and Dana have spent about US$605 million in developing the Khor Mor field and—it would seem—appraising the old Chemchemal field discovery that was never developed, but have hit a wall with the project and its profitability, as the second development phase has been rendered impossible by the global economic downturn and continued political uncertainties in the wider Iraq.
The two U.A.E. companies had been hoping to develop further gas for one or two “Gas Cities” (integrated industrial zones for petrochemical factories or other energy- and hydrocarbon-feedstock-intensive facilities) in the region, a project which has been unsuccessful in finding investors given the reluctance to invest in long-term downstream projects in Iraq and —increasingly in the current economic climate — worldwide. Nevertheless, this phase was initially thought to provide most of the venture’s profit, as the margins on the integrated gas-to-power deal are low.
Hence Crescent’s and Dana’s attempt to export additional volumes — especially if they prove to be far larger than could be absorbed within the KRG — makes economic sense, as well as their farm-out of 20% to OMV and MOL, both of whom have exploration experience from the KRG where they have invested in upstream acreages in defiance of the Iraqi government over recent years.
One question, however, is whether there are reserves supporting the development of up to 3 bcf/d of production capacity by 2014 as claimed. Given OMV’s and MOL’s enthusiasm the companies must have seen new Crescent/Dana appraisal results from the Chemchemal field, which is officially thought to hold 2.2 tcf — it has long been speculated to hold possibly up to 4 tcf of gas, though this has never been proved.
It is understood that deliveries of 1.5 bcf/d (15 bcm/y) of gas to the Nabucco pipeline could be enough to feed its initial phase, while the offering of up to 1 bcf/d of gas to Turkey could not only answer its own call on Nabucco volumes—and take away one bone of contention between the consortium and Turkey—but also make it more favourably inclined towards strengthening the KRG’s autonomy vis-à -vis the Iraqi government in the capital, Baghdad.
Geopolitical Risks
For Iraq, the deal is perhaps the largest single threat against its attempts to re-introduce the state’s sovereignty over the KRG’s oil and gas resources, as it threatens to involve European governments—and perhaps Turkey—in support for the KRG’s autonomy, tempting them to sacrifice their aim of Iraqi unity for the larger goal of diluting their own energy dependence on Russia.
Hence the Iraqi government is likely to become increasingly vocal about this deal, making it clear that it is illegitimate as long as it is not done under the auspices of the Oil Ministry, converted into a technical-service contract (TSC), and monetised through the State Oil Marketing Organisation (SOMO) or some similar Oil Ministry institution.
Turkey for its part might not be as easily swayed, given the perceived threat to its own national and territorial integrity from latent Kurdish separatism, which it fears could be strengthened by the emergence of a strong and increasingly autonomous Iraqi Kurdistan region. This has been its reason behind hitherto refusing to even mull any new oil export pipelines directly from the KRG over its territory to the Mediterranean, recognising only the Iraqi government’s right to export oil from the country and working hard to support Iraqi prime minister Nuri al-Maliki in his efforts to re-centralise the country.
In fact, this deal goes against the notion that some tentative feelers have been put out between the KRG and Syria over the past few years, for the potential routing of Kurdish exports to itself, the Mediterranean, and even Europe (to which the Syrian pipeline network might soon be connected), thought to have happened by tacit Russian encouragement.
Russia has been unsuccessful in reviving old pre-2003 war contracts in Iraq proper and has, according to some observers of the region, concluded that facilitating KRG exports to Syria might serve its regional interests maximally. This may be far-fetched, nevertheless, not least given the territorial disputes between the KRG and Iraq proper, as well as because of old animosities between the Kurds and the Syrian regime.
OMV, MOL, Crescent, and Dana are in these circumstances a group of relative lightweights, whose pushing of the Nabucco project increasingly forces them into more and more risky terrain. Large-scale geopolitics aside, the Iraqi Kurdistan gas is secured under contracts disputed by the Iraqi government, forcing European buyers to effectively take a stand against the rebuilding of Iraqi government authority and perhaps even against its territorial integrity—a choice likely to be hard to stomach for most of Nabucco’s hoped-for European clients.
Outlook and Implications
The 15 bcm/y by 2014 could be over-estimating European demand. If Nord Stream comes online as planned within the next two or three years, and certain LNG terminals are finalised, then it could only be well after 2014 that Nabucco’s supplies are needed by a recession-hit Europe. Nevertheless, Nabucco is an important means of diversification of supply and should prove essential to certain central and south-eastern European states.
Getting gas from Iraq would be beneficial to Turkey in two ways: it might prove a useful bargaining chip in the seemingly endless negotiations with Azerbaijan over gas from Shah Deniz; and it helps secure Turkey’s potential position as an energy hub for Europe, which would be under threat should South Stream prove the outright winning pipeline.
This move comes after the energy summit in Prague (Czech Republic), where the European Union (EU) signed an agreement between Turkey, Azerbaijan, Georgia, and Egypt to establish a “new Silk Road” for gas deliveries. Iraq was a no-show at the summit.
Nevertheless, the choice for Turkey is not ideal: a choice between siding with the KRG in order to benefit its aim to be an energy bridge for Europe, and strengthening the Iraqi central government in order to weaken and contain Kurdish separatist sentiments throughout the region. For the Iraqi Kurds the deal gives them a possible geostrategic role for the EU, although it looks as yet far-fetched, with more reserve data having to be made available for all sides to assess the actual potential of the two fields. The winners in this deal are Crescent and Dana, which have sold 20% at a value of more than has hitherto been invested, retaining their low-margin—but politically important—gas-for-power project but exchanging their—dead in the water—gas city venture for an opportunistic play at Nabucco participation.
Samuel Cisuk is the Middle East energy analyst and Zoe Grainge is the European gas analyst for IHS Global Insight
