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Looking Beyond the Gulf and Russia:
Kurdish Energy on Europe's Doorsteps
1.4.2012
By Shwan Zulal
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ekurd.net |
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April 1, 2012
LONDON, —
While crude oil is hovering above $100 per barrel,
the rhetoric against Iran is ratcheting up, followed
by the US and EU sanctions against the regime. With
Iranian exports are being halted, global oil spare
capacity is being squeezed. The Iraqi oil supply is
on the increase and Libya is returning to near
pre-war production levels. For the time being, the
gap left by the Iranian sanctions has been filled by
swing suppliers like Saudi Arabia but any
interruption or further unrest in the Arab world, or
elsewhere, will send oil prices at even higher
level, with foreseen consequences for the world
economy.
There are many on-going deep-water drilling projects
and shale oil is becoming economically viable to
extract. Nevertheless, the lack of Iranian oil will
affect the market. Although Iran is finding other
buyers and even giving favourable terms and
discounts to buyers like Pakistan, EU and US
reliance on the Gulf region for oil is also
increasing, making the Saudis even more influential
in the market.
The Kurdistan Region of Iraq has been described as
the last onshore oil and gas frontier in the world;
and it is on Europe's doorsteps. While Iraq has the
potential to be one of the largest oil producers, or
only second to Saudi Arabia in the future, the
country and its oil policy is still in turmoil as
the ethno-sectarian divide and its consequences hold
back the promised rapid development of its energy
sector.
Kurdistan has been autonomous and has its own
government and parliament separate from Iraq but it
is still within Federal Iraq. It receives 17% of the
Iraqi annual budget and since 2003, Kurdish
authorities have started to grant Production Sharing
Contracts (PSCs) for exploration and production. To
date, 47 PSCs have been signed with mainly European
companies, such as OMV, MOL, Repsol and Genel,
resulting in an extensive exploration programme
which has yielded large hydrocarbon discoveries,
like the Shekhan oilfield by the petroleum giant
Gulf Keystone and Heritage's massive Miran gas find.
Kurdish PSCs have attracted a variety of companies.
These contracts usually stipulate a
five-year-exploration phase and an up to 20 year
production period in which the company receives a
share of the revenue after recovering the costs.
Furthermore, the production cost is minimal apart
from some initial infrastructure challenges, but the
companies involved can capitalise on high oil
prices.
In contrast to the service contracts awarded by the
Iraqi Government for the existing oil and gas
fields, the Kurdish PSCs offer much more generous
terms. While Baghdad contracts on average pay the
oil companies around $2 USD a barrel as a royalty,
whatever the oil prices are, the Kurdish PSCs allow
the IOCs a much higher profit, in return for taking
a higher risk.
As Iraq is embroiled in political disagreements and
deadlock, the Kurdistan region passed its own oil
and gas legislation in 2007 and has since then
managed to attract many big names like BP's former
Chief Executive Tony Hayward and his investment
vehicle, Vallares, which merged with Turkish Genel
energy and is now listed in the UK's FTSE100, as
well as more recent entrants, like the US supermajor,
ExxonMobil.
ExxonMobil's entry has created an intense political
atmosphere, with the Iraqi government feeling that
it has been undermined. In the past, the central
Iraqi government has threatened to blacklist the
companies agreeing PSCs with Kurdistan area;
therefore, it now assumed that the US oil giant is
taking sides and has thus stepped over the Iraqi oil
ministry's toes. Meanwhile, the Kurds feel
triumphant and many believe that the acquisition of
six exploration blocks by ExxonMobil can be a
catalyst for more deals and will open up the market
for consolidation, putting Kurdistan on the world
oil map.
The Kurdish government is eager to develop the
infrastructure and its ultimate goal is to become an
independent state, although not stating the fact in
public. While this will be difficult to achieve at
this moment in time as the regional geopolitics and
the economics of independence is not aligned.
Nevertheless, it is a matter of when rather than if
Kurdistan would be an independent oil and gas
producer.
Therefore, the EU energy policy makers must surely
have a plan as to how to approach this friendly but
fledgling democracy which is known to be the most
friendly nation towards the west in the whole of
middle east region.
Kurdish institutions and infrastructure is still in
its early stages of development therefore the EU
must not miss this opportunity to adopt the region.
Not only to make sure a democratic entity flourishes
at Europe's south easterly borders but to
participate in developing its oil and gas industry
and make it a important strategic energy partner.
According to the US Geological Survey, Kurdistan has
an estimated 45bn barrels of conventional oil
reserves and around 60 TCF of gas.
The geopolitics of the region and the bitter
disagreement over oil policy as well as the power
struggle in Iraq over the control of the hydrocarbon
sector, has stalled the development pace of the
Kurdish oil and gas.
The Kurds are in control of their natural resources
but because of Baghdad's opposition to this, many
infrastructure and pipeline project have stayed in
the sidelines and waiting for the dispute to be
resolved. Ashti Hawrami, Kurdistan Natural resources
minister, was quoted on the 7th march in Huston CER
Week 2012 conference saying that Kurdistan can
produce 1m bpd by 2014 and can build a pipeline to
facilitate that within 18 month.
Moreover, the EU has a memorandum of understanding
with the Iraqi central government committing to only
buy hydrocarbon from the Baghdad and not enter any
deal with the Kurdish autonomous region of Iraq.
The lack of political consensus over oil policy in
Iraq and the Kurdish government not having the
legitimacy of a state, therefore, consortiums or
countries would find it hard to make any deals with
a none state entity like Kurdistan region.
Kurdistan has the energy resources which is easily
accessible less than 400 miles to the Mediterranean
shores. The region may not been seen as reliable as
a Norway for energy supplies but it has the
potential to become a reliable EU partner, given the
right policies perused. The current Kurdish
government has shown eagerness to form such
relationship, but so far, the EU has not engaged it
directly.
While the plans for the much hyped up NABUCCO
project-the trans Caspian gas pipeline connecting
Asia to Europe through Turkey- is in turmoil and
hope is fading,www.ekurd.net
mainly dues to the politics of the project and
partly to the issue of the supply. Kurdistan has
shown the wiliness to commit to the project but
because of indecision and lack of clear vision by
the consortium controlling the project, the plans
are on halt.
The Turkish minister for energy recently discussed
the possibility of integrating the rival TANAP-alternative
Trans Caspian gas project- project with NABUCCO, at
the same time the Iraqi ministry of oil has made
comments regarding the possibility of supplying
NABUCCO.
Details will still needs to be worked out and, the
statement from Iraq and the possibility of a merger
of the two projects may yet be a lifeline for
NABUCCO which many experts and analyst have written
it off and see little a chance of becoming a
reality.
If the EU policy makers are serious about
diversifying supply and breaking the Russian gas
monopoly, other unorthodox and new emerging players
like Kurdistan region is key to be included in the
new energy strategy. The Kurdish region is fast
becoming a big player in the energy world and the
sooner the EU includes itself in the bonanza the
more influence they will exert.
Turkey is a key player and it has foreseen the
potential of the region much earlier than Europe and
become an important partner to Kurdistan. With its
Kurdish population, Turkey is still overcoming its
reluctance to accept a more confidant and possibly
independent Kurdistan. However, the modern Turkish
state realises the importance of the region and see
the economic benefits.
However, lack of action by the EU and doing more
waiting for events to unfold only further weaken the
EU's influence in the region. UK listed companies
are taking a lead and Genel is one of the biggest
operator while the US supergiant is set to acquire
more interest.
Total CEO, Christophe de Margerie, has been quoted
saying that the Kurdish deal on offer is much better
than those from Baghdad and his company has been
tipped to make its first move out of the European
major energy players into Kurdistan and their
presence on the ground this could lay the foundation
for grater EU-Kurdish energy cooperation.
To make sure the EU energy policy of diversification
is a successful one, policy makers should not
overlook new potential resources and in this case,
at its doorsteps. There are challenges and
uncertainties, but active engagement with Kurdistan
at early stage of its development, would insure a
greater European influence and participation in the
making of potentially a new major energy producer.
Shwan Zulal, is a
political and security analyst. London &
Kurdistan/Iraq. oil and gas sector, specialising in Kurdish PSCs
and Hydrocarbon Law and advising investors in the
Kurdistan Region and Iraq with legal background.
Zulal is a regular contributing writer for ekurd.net.
He also runs a blog on to the same subject
http://kurdishviews.blogspot.com
This article first appeared on
EUCERS,
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