Russia Joins US as a Key Player in Iraqi Kurdish Oil
Russia gets its hand into an American cookie jar, as Kurds hope Russia may counter-balance Turkey
Russia signed the first major oil deal with the Kurdish Regional Government in Iraq earlier this month. The deal is something of a godsend to the Kurds. Between the economic fallout from ISIS, costs of fighting the latter and, most importantly, the fall in oil prices in 2014 they've had some very lean years.
Russia has now agreed to prepay one billion dollars for their oil however, and pledged to invest another three billion more in their region. The oil fields Russia has now gained acces used to be controlled by the central Iraqi government, but were then taken over by ISIS and then by Kurds. This means the deal will not win Russia any new friends in Baghdad, but on the plus side it makes it a major oil player in Iraqi Kurdistan -- where previously only the US and Turkey were present.
(Russia was already an important partner for the central Iraqi government which controls 80% of Iraq's oil which is mainly found in the Shia Arab south around Basra, rather than in Kurdistan.)
The Kurds are also planning an independence referendum for September. If the vote goes forth it will certainly be overwhelmingly for independence, but even so the Kurds will probably not declare independence as they don't have international support for such a move.
Despite that however, they have seen it prudent that Russia should also have a stake in their region. Probably wisely seeing how Turkey is no friend of Kurdish statehood, and the US has been a very unreliable friend historically.
The Kurds are especially hopeful that the deal will lessen the clout Turkey has over them. It may also improve Russia's hand against Erdogan and help to keep the fickle Sultan true to his Russia reset orientation.
KRG Prime Minister Nechirvan Barzani signed a 20-year-long oil deal with Russia’s Rosneft. According to the June 2 agreement, Russia will buy Kurdish oil and refine it in Germany. As a first step, Russia will invest $3 billion in KRG territory.
The deal continues and reinforces one signed in February on the purchase and sale of crude for 2017-19, according to Kurdish news website Rudaw. The deal gives Rosneft access to regional transport with a throughput capacity of 700,000 barrels per day (bpd), which will be expanded to as much as 1 million bpd by the end of this year, Rosneft said in a statement.
Now Russia — along with the United States and Turkey — is also a key player in the Kurdish oil market. But does this new client signify more than just money for the region?
According to Jabbar Kadir, who had served as an adviser to former KRG Prime Minister Barham Salih, the Russians see the Kurds as key players in the future of the region.
“Russia believes Iraq will be divided, if not into three states, [then] at least into three federal regions. That is why [Russia] has slowed down working with the central government. If Baghdad opposes the deal, the KRG and Russians will tell them, ‘You are making deals with Americans. They explore oil in the Kurdish region. We will do the same,’” Kadir told Al-Monitor.
“You cannot ignore the political ramifications of all this. Until now, Turkey used to manage the oil affairs of Kurdistan and impose its own conditions. It won’t be able to do this with Rosneft. That is why this is a landmark deal for the future of Kurdistan. But there has to be transparency. People should be told what the deal is, how much the Russians will earn and how much the Kurds [will get],” he added.
And how will the United States and Turkey react to their shares of the pie getting smaller? Kadir believes the United States won’t be all that happy with the deal. The Kurds must have consulted Ankara and Washington in advance so as not to upset the Americans too much, as they know the United States has strategic ties with Iraq.
Aydin Selcen, a former diplomat and Turkey’s first consul general to Erbil, thinks Rosneft’s purchase of KRG crude oil is a significant move. He told Al-Monitor that the key aspect of the deal will be Rosneft’s use of the KRG pipeline and eventually increasing its capacity. Selcan doesn’t think the deal will lead to major tensions among Ankara, Baghdad and Erbil, though some repercussions are likely.
“We don’t know if Ankara had advance notice of the deal, but given Nechirvan Barzani’s frequent visits to Turkey and his friendly relations with [Recep Tayyip] Erdogan, this was likely. Now a heavy player like Rosneft is going to buy Kurdish oil and refine it in its Germany facilities. There have to be political consequences. It is likely that some in Ankara are already thinking about how it will all affect Turkey,” Selcen added.
The KRG doesn’t care who its customers are; it doesn't want to be limited to a single buyer. The more diversified the customers, the better for the Kurdish economy. There is no doubt that the Russian oil deal strengthens the hands of the Kurdish administration. If the controversial Kurdish independence referendum scheduled for September ends with a “yes” vote, the oil deal could play a major role toward independence.
The pact with Russia could actually encourage the Kurds to put aside their controversial goal of reaching the Mediterranean to market their natural resources, as the deal means their oil and natural gas will reach the sea regardless.
The latest developments in Kurdish-Russian relations might be indicative of even deeper cooperation and convergence between the two nations, as new petroleum deals will inevitably have political ramifications.
Rosneft and Gazprom Neft, Russia’s leading state-owned oil companies, seem very intent on increasing their presence in Kurdistan, with the former walking an extra mile by venturing into Kurdistan’s infrastructure segment.
The KRG (Kurdistan Regional Government)-Rosneft pre-payment deal, signed this February, has successfully laid the groundwork for future rapprochement. Under the conditions of the deal, Rosneft is reported to prepay $1 billion to the Kurdistani government in advance payments in return for Kurdish crude supplies for the next three years.
The first Kurdish cargo has already been delivered in April by Rosneft’s trading arm to Trieste, from where it was pumped up to Rosneft’s minority-owned German refineries (MiRO in Karlsruhe and Bayernoil in Neustadt an der Donau).
The recently held St. Petersburg Economic Summit brought along a new Rosneft-KRG deal, this time granting Rosneft access to E&P assets within Iraqi Kurdistan (the Russian company signed a preliminary PSA contract for unspecified 5 exploration blocks), as well as transportation infrastructure.
Until quite recently, most of Iraqi Kurdistan (excluding those parts which the Peshmerga retook from IS) was fully covered by exploration blocks. 2016 saw several relinquishments – most notably from ExxonMobil, Chevron, Genel, KNOC, Repsol and Total – and the Regional government has redrawn the licensing map of Kurdistan so as to offer 22 new blocks in 2017 to interested oil and gas companies. Yet judging by the KRG’s rhetoric, many offered blocks will be in territories which prior to the Syrian Civil War and the Islamic State’s emergence belonged to the federal authorities.
Fields around Kirkuk (Bai Hassan, Khabbaz etc.) are generally lighter (35° API) than other Kurdistani oil-producing regions and are currently managed by the Regional Government itself – given recent incidents, such as an explosion at Bai Hassan in February, Erbil might find it more convenient to delegate these fields to an external partner.
Rosneft is also bound to gain access to the main conduit of Kurdish exports, the Kirkuk-Ceyhan [Iraq to Turkey] pipeline, for expanding the pipeline’s capacity from the current 700 000 bpd to 1 000 000 bpd.
Albeit not made explicit, the Kurdish government might be also interested in foreign assistance in linking the region’s southern fields (including the Gazprom Neft-controlled Garmian block) to the existing transportation infrastructure, as currently these are deprived of pumping oil directly towards Ceyhan.
It is not only Rosneft which wants to increase its foothold in Kurdistan, but also Gazprom Neft. As opposed to Rosneft, Gazprom Neft is already present in Kurdistan, acting as an operator in three blocks in Southern Kurdistan. The Garmian field has been refurbished so as to allow for a swift production ramp-up in the next few years, as the company expects a hike from the current 10 000 bpd to 25 000 bpd by 2020.
The other two fields, Halabja and Shakal are expected to be brought onstream in 2018. Gazprom Neft might be granted new licences (KRG negotiations production-sharing agreements individually and on a case-by-case basis) in so-called disputed territories, recently reconquered by the Kurds from IS, possibly even the undeveloped 280 Mmboe Qamar field or other adjoining blocks.
Kurdistan, according to current estimates, holds 40-45 billion barrels of oil and in case the current territorial control structure remains intact, this might increase even further as one would also include the Kirkuk Area.
Moreover, Iraqi Kurdistan is also rich in gas (generally, gas fields are in the southern part of the region), with the KRG estimating its 3P gas reserves at 5.67 TCm. Kurdistan’s gas sector is significantly underdeveloped, also from the infrastructure point of view – even accounting for a stable rise in domestic consumption with gas gradually replacing oil in power-generation units. Erbil would have 10-15 BCm surplus production to export by the early-2020s.
Russian companies have so far been quite prudent in investing in gas projects abroad, however, the Rosneft communique does, in fact, mention that the strategic cooperation might move towards the gas sector, too. As surplus Kurdish gas is most likely to be marketed in Turkey, it would make sense for Russian companies to get involved to hedge against possible roadblocks with regard to TurkStream.
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