Will Oil in the End Divide Iraq?

March 31, 2013

BEIRUT, Lebanon — Crude oil is the cornerstone of the dispute between Iraq's central government and the semi-autonomous region of Iraqi Kurdistan. During recent months the tension between Erbil and Baghdad has consistently increased, especially after rumors about a possible energy partnership (ranging from exploration to export of crude oil) linking Turkey with the Kurdistan Regional Government (K.R.G.). It's esteemed that the K.R.G. has 45 billion barrels of oil reserves and more than three trillion cubic meters of natural gas.

   

For Ankara this proposed partnership has with no doubt an economic logic: It could provide Turkey with oil and gas in a time of hasty economic growth, when Ankara is paying Russia around $2 billion for fuel every month. Conversely, the United States — one of Turkey's most important allies — is deeply concerned about the consequences of this plan. In fact, Washington fears about the disintegration of Iraq, an event that could prompt Iran to additionally extend its influence over proper Iraq. "If oil from Kurdistan goes through Turkey directly, that will be like dividing Iraq. This is our big concern," Deputy National Security Adviser Safa al-Sheikh Hussein of Iraq said recently on the fringes of an Iraqi conference.

      

Last Friday, these rumors were well confirmed when Recep Tayyip Erdogan, the Turkish prime minister, in an interview with CNN-Turk, expressly said that Turkey is currently in the process of signing a trade deal with the K.R.G. And when he went on referring to the Baghdad-controlled oil pipeline to Turkey, he underlined that the pipeline was operating well below its capacity (70.9 million tons a year) and that something had to be done in order to utilize it in a more business-oriented manner, like, for instance, extending it with multiple oil and gas pipelines. When talking about the quarrel between Baghdad and Erbil, Prime Minister Erdogan affirmed that according to the Iraqi constitution the K.R.G. had the right to use part of its energy endowment with every foreign country it selected. "There is no article in the constitution [the Iraqi constitution] that can prevent [the K.R.G.] from making this trade contract with us" added Mr. Erdogan.

Prime Minister Erdogan's declarations are not easily accepted in Baghdad. Since long time Turkey has courted Iraqi Kurdistan while the K.R.G. relations with the Shiite-controlled government in Baghdad have been consistently deteriorating. Today, Turkey is a major trading partner for the semi-autonomous region. And in addition to energy issues, Baghdad has recently quarreled with Ankara with reference to Turkey's refusal to extradite Iraq's fugitive vice-president Tareq al-Hashemi, who took repair in Ankara in order to avoid Iraq's Central Criminal Court's sentence that condemned him in absentia to death.

On the energy side, Baghdad's position is very clear: thwarting all possible energy deals between Ankara and Erbil. For example, last November, Iraq strongly opposed Turkey's national energy company T.P.A.O. from bidding for an oil exploration contract in the K.R.G. Later, in December, the Iraqi government stopped an aircraft carrying the Turkish energy minister Taner Yildiz from landing in Kurdistan. The basic assumption was that the energy minister was en route to Erbil for signing one of these Turkey-K.R.G. energy deals that are so despicable for Baghdad.   

The K.R.G. used to ship the lion's share of its oil production through the Baghdad-controlled pipeline that connects Iraq's Kirkuk to Turkey's port of Ceyhan, but as a result of these energy wars, after last December's dispute with Baghdad over the payments to the companies operating in Kurdistan, this channel was quickly interrupted. In practice, some of the companies working in Kurdistan and then shipping oil abroad through the Kirkuk-Ceyhan Pipeline have at present not been remunerated for a good portion of what they have shipped abroad. The K.R.G. affirms that it has not gotten enough money to pay for the companies working in Iraqi Kurdistan. It seems that the problem arose after some changes in the way the central government calculates the procedures for paying the operators.

As a consequence of the non utilization of the pipeline, the K.R.G. is continuing to increase its crude oil deliveries by truck to Turkey. According to Kurdish sources, Kurdistan's export volumes were 12,000 barrels per day in October 2012, but deliveries are now continuing to increase. January's data spoke about 30,000 barrels per day of crude oil and condensate (the latter is a light form of oil). This trucking activity irritated Baghdad that menaced reprisals against the K.R.G. and the foreign companies involved in the oil exports. In December, the trading house Trafigura was banned from operations in Iraq. Baghdad when referring to the oil trucked to Turkey defines it as "smuggled oil" to well underline the illegality of this activity.

Things again escalated earlier this March when Iraq's 2013 Budget Law was passed into law with the absence of the Kurdish M.P.s (168 M.P.s were present and the quorum was 163 members). The result was a very anti-Kurd Iraqi budget law. The government expenditure for 2013 totals $118.3 billion with an increase of 18 percent over 2012 and exceeding 70 percent of G.D.P. The proportion allocated to Kurdistan is $12.5 billion according to the 17 percent quota (since 2007) set for the region minus a certain number of sovereign expenses that are deducted. If the K.R.G. now decided to pay by itself the foreign companies, it would immediately lose half the allotted budget.

   

Erbil requested $3.5 billion to cover the costs accumulated by the companies operating in Kurdistan in the last three years — among them ExxonMobil, Chevron and Russia's Gazprom Neft. But the central government considered some of these contracts illegal and consequently reduced the amount to be given to Kurdistan to $650 million. The shortfall is quite evident. The companies operating in Kurdistan need to be paid. The K.R.G. internal oil market and the export of some oil to Turkey is not a reliable solution. Budget Law 2013 is based on a $90 barrel price and on averaged exports of 2.9 million barrels per day including Kurdistan's production. An additional tough condition included in the law is that the K.R.G. has to resume crude exports at a level of 250,000 barrels per day before funds are released by Baghdad. As per the new budget law, the K.R.G. could only be able to cover two months of payments to the foreign companies. Some sources explain the low amount paid for by Baghdad with its intention to force these foreign companies out of Kurdistan.

   

Given the K.R.G. non utilization of the Kirkuk-Ceyhan Pipeline, it's quite improbable that trucking crude oil to Turkey could be any soon stopped although in no way may trucks transport the entire crude oil production of the K.R.G. In fact, Erbil should send by truck around 250,000 barrels of oil a day, which is not doable. To provide an example, K.R.G.'s Taq Taq crude oil is currently routed to Turkey's Mersin port and given the small amount trucked every day to fill up an oil tanker it may require up to two months. After the interruption of December, Iraq exported 2.4 million barrels per day in January mainly from the south.

One point should be clear: The future developments in the K.R.G. will have a huge impact in all the Middle East, a region where oil is politics and politics is oil. And surely, both Turkey and the K.R.G. have relevant interests with reference to the development of improved business relations. On the K.R.G. side, if Erbil were able to raise its production to 400,000 barrels per day of oil and to export it with a new Kurdish pipeline to Turkey, it could make $14.6 billion (considering a $100 per barrel of oil). This value is consistently superior to the budget allocation that Erbil should receive now from Baghdad. In other words, economic self-sufficiency could be a potent tool to declare independence from Iraq in the future.

For these considerations, the K.R.G. and Turkey are definitely set to build an oil pipeline to Turkey, notwithstanding the contrary advice of the United States. A new pipeline with a capacity of 200,000 barrels per day should be ready by the end of 2014 or the beginning of 2015. And according to the K.R.G. energy minister Ashti Hawrami, a gas pipeline could be easily converted to ship up to 200,000 barrels per day of crude oil by June. The British-Turkish company Genel Energy is as well planning another pipeline to ramp up oil exports to Turkey by 2014. This pipeline will link Iraqi Kurdistan's oilfields directly to Turkey, but it could also connect to the Baghdad-controlled Kirkuk-Ceyhan pipeline. And there is also a plan to build a parallel pipeline that would supply several hundred million cubic feet of natural gas per day to Turkey annually by 2014. Turkey’s national oil company (T.P.A.O.) would be involved in this deal, under which it would acquire the rights to five exploration blocks in Iraqi Kurdistan. In addition to all these planned pipelines, another scheme of cooperation involves energy swaps between Turkey and the K.R.G. with the latter pumping gas to the former's power plants, which in turn would send back electricity to Kurdistan.

On the Turkey's side, improved relations with the K.R.G. would have important economic and political consequences. And economically speaking, Turkey needs the K.R.G. energy resources. In this way, Turkey would really become a major energy hub connecting the Middle East with Europe. Already of two foreign businesses in Kurdistan one is Turkish, and this testifies the reciprocal economic interests between Ankara and Erbil. But politically speaking, the developments could also be very relevant. The initial point for understanding these evolutions is that at the moment Ankara is trying to resolve its domestic problems with its internal Kurdish minority. There is the necessity to end a conflict that has killed more than 35,000 people over thirty years. Turkey's foreign policy steered clear from the idea of having good relations with all the country's neighbors. The Syrian conflict put Sunni Turkey in direct competition versus the Shiite-dominated Iran, Iraq and Syria. For Turkey, obtaining peace at home with the Kurdish minority, would trim down the possibility that greater autonomy in the K.R.G. could represent a reignited spur to obtaining independence from Ankara for the Kurdish minority located in Turkey. And as a consequence, geopolitically speaking, the K.R.G. would gravitate around Turkey.

If the pipelines are built they will partially alter the geopolitical chessboard in the region. In fact, they are a real game-changer because they will give Erbil those economic resources that will permit it to sever the chain of Baghdad's political control. For Iraq, embittering the relation with the K.R.G. — for instance, drafting a very anti-Kurdish budget law — not only could not bring back the K.R.G. in line with the central government, but also it could rather force Erbil to try to get the opposite result: independence. There is no easy solution to this impasse because in any case both parties want to have under their control the ethnically mixed city of Kirkuk, which lies in the territory disputed between Erbil and Baghdad and which sits on one of Iraq's largest oil fields.

Kirkuk's Citadel - Source: Wikipedia

The U.S. would like to avoid a conflict that could subtract energy resources from energy markets while inflaming one more time the Middle East. Plus, the U.S. energy companies have interests in both the K.R.G. and Iraq. By contrast, Europe is desperate for energy resources and getting them from a Kurdistan gravitating around Turkey could be safer than negotiating with Iraq. At this regard, around ten days ago the K.R.G. prime minister Nechirvan Barzani participated to an international conference concerning energy security that was organized by Germany's Christian Democratic Party and presided by Chancellor Angela Merkel. On this occasion, Prime Minister Barzani stated plainly that the K.R.G. could well satisfy on a long-term basis Europe's energy needs, while at the same time help Europe to diversify its energy suppliers. He said that if the right infrastructure were built by 2019 more than three million barrels of oil per day could be flowing from the K.R.G. to the international markets. Last but not least, as a perfect corollary to his meeting in Germany, on his way back to Kurdistan he then stopped in Turkey. 



 

Internal Politics May Thwart the Development of Lebanon's Offshore Gas Fields

February 13, 2013

BEIRUT, Lebanon — The U.S. Geological Survey values that in the Levant Basin there could be around 120 trillion cubic feet (TCF) of technically recoverable gas. The countries that directly share the water of the Levant Basin are Cyprus, Israel, Gaza, Lebanon and Syria. In addition to them, Northern Cyprus — which is under Turkish control — claims part of the area under Greek Cypriot control. Turkey's aim is now to stop any explorations until its requests are acknowledged. Among all these countries maritime boundaries are defined to so poor a degree, like the well-known and strongly contested land borders.

When, on January 17, 2009, Israel discovered the Tamar Gas Field (containing around 9.7 TCF of gas) 50 miles off Haifa's coast, immediately neighboring countries began taking steps in order to explore consistently their areas in the Levant Basin. Since 2008, Lebanon has indentified some important gas deposits in the waters off its coast, but only after Israel's discovery Beirut realized that hadn't it speeded up its operations, it would have really risked being left out from the newly discovered gas riches. And considering that Lebanon was still technically at war with Israel — not to mention the existence of a wedge of sea of 850 square kilometers contended between the two countries — and that it had still some open disputes with Cyprus concerning maritime boundaries, it was absolutely mandatory for Beirut to explore extensively its part of the Levant Basin as soon as possible.

Lebanon is almost 100 percent dependent upon foreign energy sources in order to meet its energy needs. Fifteen percent of Lebanon's G.D.P. is destined to pay for the country's hydrocarbons account. In other words, gas self-sufficiency could provide a powerful boost to Lebanese economy. This dependence upon external energy sources has been until today a circumstance common to all the countries now involved in this gas rush in the eastern Mediterranean Sea. Some estimates calculate that having its own gas could permit Lebanon to right away save $1 billion just in transportation costs. Of course, Lebanon does not have the technological skills to develop it offshore gas fields and key to the development of its gas reserves is to bring in international energy companies, which do have the necessary expertise, but that at the same time could be driven off by Lebanon's political instability.

Notwithstanding a very difficult Lebanese political environment with increased sectarian affiliation and the current war in Syria with its spillover into Lebanon, Beirut understood immediately the importance of gas exploration for the development of its economy and in 2010 passed a petroleum law. Moreover, at the end of last year, when many of the energy companies desiring to bid in the future for the Lebanese gas were becoming very frustrated by the government's inability to name the six members of the Lebanese Petroleum Administration (L.P.A.), a solution was found and the authority was then established. This committee will now oversee the issuance of the licenses. According to recent estimates, Lebanon should have about 25 TCF within an area of 3,000 squared kilometers. Such an endowment is larger than Syria's and Cyprus' gas endowments combined.

According to Mr. Salah Khayat, C.E.O. of Lebanon's upstream oil and gas company Petroleb (established in mid-2011) "The 3-D data provided by Spectrum and Petroleum Geo-Services suggest that we have oil and gas resources valued in tens of billions of dollars when extracted over the next four decades". He then added that Lebanon could well have a gas endowment larger than Israel's. Lebanese gas reserves are located below the sea bed at a depth from 1,000 meters to 2,500 meters so that top-notch oil extraction expertise is required.

Beginning to develop these gas resources is also important because if some gas wells in the open sea could be operative in less than two years, building an industrial system capable of exporting the produced gas will require from six years to eight years. And of course, initially Lebanon will have to transform its domestic energy infrastructure. Electric power plants, which now run on diesel oil, will have to be modified and/or new ones have to be built in order to run on natural gas. Not to mention that given the strained relations among Levantine countries finding gas purchasers won't be an easy task.

The regional political contest doesn't help none of the Levantine wannabe gas producers. But Lebanon has to overcome also an additional hurdle: its internal politics, which, since the independence from France in 1943, has been a constant and destabilizing factor. For the Jameson Foundation, a U.S. think tank, it's probable that the country's sectarian rivalries and divisions will engender a dispute over the control of the newly discovered energy resources. Lebanon most relevant antagonism is between the March 8 coalition, dominated by Hezbollah, which is now in power, and the opposition represented by the March 14 coalition. Today's Lebanon has 17 recognized sects which all wrangle for power. With no doubt, an impaired government (no national budget has been passed since 2005) does not provide the best guarantees for a bidding process to which more than 40 international energy companies have showed interest according to Energy Minister Gebran Bassil. In addition, Lebanon has armed forces badly equipped and subjected to sectarian tensions. This overall combination could not be able to adequately protect the gas fields with reference both to military assaults or terrorist attacks. Presently, Lebanese naval forces mainly implement coast guard tasks (search-and-rescue and smuggling interdiction operations) and should be upgraded in order to well patrol Lebanon's maritime exclusive economic zone (E.E.Z.). Moreover, Lebanon's corruption is endemic and it's almost unthinkable that gas revenues, estimated initially at $40 billion, will not be subject to bribery.

The pre-qualification process for the international energy companies desiring to bid for the exploration licenses had to begin in the first week of February, after several months of delay linked to political issues. For the moment, nothing has happened probably because the Council of Ministers has still to issue a decree authorizing the bidding process. The scheduled timetable envisaged to award contracts in March 2014 and to start the activity in 2017.

According to Cesar Abi Khalil, an advisor to the Energy Ministry, exploration and production agreements (E.P.A.s) will soon, probably in April, be approved by the Council of Ministries and the companies will start bidding on May 2, but for the moment it is not clear which blocks will be auctioned to the foreign companies. Initially, international oil companies were obliged to have in any case a Lebanese partner creating a joint venture. Now, according to a government source, foreign companies do not need a Lebanese partner if they are able to propose a viable strategy. Successively, pre-qualified companies will be allowed to form joint ventures between themselves if they deem it useful. It seems that companies that want to participate in the auction must have at least $500 in assets to perform the role of non-operators.

Definitely, there is already the need to specify the fiscal and financial structure of the contracts. This point is very noteworthy because companies have the necessity to structure their investments. Failing to provide them with a complete picture could lately force the involved companies to reopen negotiations once their initial bids have been accepted.

Summing up, the big unknown is whether the new authority will be capable of being free from political pressures. With its members appointed after a lot of political bickering it won't be easy. But for a country that has suffered many years of war the possibility of developing its offshore gas fields is really an opportunity not to be missed.

ExxonMobil Caught Between Erbil and Baghdad

 

February 9, 2013

BEIRUT, Lebanon — On January 21, the Iraqi prime minister, Nuri al-Maliki met in Baghdad with Rex Tillerson, ExxonMobil's chairman, president and C.E.O., for the first time since October 2011, when U.S. ExxonMobil and the semi-autonomous Iraqi Kurdistan signed an oil deal aimed at developing six Kurdish exploration blocks. During this meeting, one more time, Prime Minister al-Maliki  ruled out the possibility of implementing in Iraq production sharing agreements (P.S.A.s) similar to those currently signed by the Kurdistan Regional Government (K.R.G.). It seems that in occasion of the meeting the prime minister proposed to ExxonMobil some improved (still unknown) contractual terms in order to permit the U.S. company to continue its operations in southern Iraq.

In practice, Baghdad still wants to continue signing  technical service agreements (T.S.A.) with all the energy companies working in Iraq. The central government defines oil reserves as goods belonging to all Iraqi people — as it is written in the country's constitution. Mr. al-Maliki affirmed that all Iraqi people were partners in relation to the oil discovered in any parts of Iraq and that Iraqis could not, for instance, be partners in Basra but not in other areas of the country. According to some industry sources, the offered incentives have only one precondition: forfeiting the contract signed by ExxonMobil with the K.R.G. Two days after this meeting, in Switzerland, Mr. Tillerson met with the president of the K.R.G., Massoud Barzani to discuss about ExxonMobil's activities in Iraqi Kurdistan.

After the meeting in Baghdad, it seemed the U.S. energy company would take important decisions concerning its operations in southern Iraq. In fact, three years ago, in January 2010, ExxonMobil and Anglo-Dutch Shell signed a deal related to the development of the giant oil field West Qurna-1, which is located in southern Iraq. When in October 2011 the U.S. company struck a deal with the K.R.G. in order to develop the six Kurdish exploration blocks, ExxonMobil bypassed the central government, which is the only authority capable of approving energy deals with reference to all Iraq, the K.R.G. included. To make things worse, at least two of the six exploration blocks (the Qush and Bashiqa blocks) are within the territories disputed between Erbil and Baghdad. In specific, the two blocks are technically part of the Nineveh Governorate, but since 2003 this territory has been administered by the Kurds, who occupied these lands at the beginning of the war against the regime of Former President Saddam Hussein.

Immediately after the signature of the deal, started ExxonMobil's quarrel with Baghdad, with the latter threatening the cancellation of the U.S. company's 20-year T.S.A. related to the development of the giant West Qurna-1 oilfield. Later, last year, ExxonMobil announced that it wanted to sell its $50 billion stake in West Qurna-1, tilting its energy interests toward the K.R.G. The quarrel between ExxonMobil and Baghdad is only one of several possible disputes that have arisen as a consequence of other energy contracts between Erbil and other international oil companies (I.O.C.s). All these contracts have been signed by the K.R.G. without Baghdad's green light. But, with no doubt, the quarrel between ExxonMobil and the central government is the most important because ExxonMobil is the largest of the world's six oil supermajors and is easily a trendsetter with reference to energy diplomacy.

A week after the al-Maliki-Tillerson meeting in Baghdad, the Iraqi oil minister, Abdelkarim al-Luaybi restated one more time that ExxonMobil had to choose between working in southern Iraq or in the K.R.G. He went on expressly saying that there was no formal time-limit, but that now ExxonMobil had to take a final decision about how it intended to operate in the whole Iraqi territory, the K.R.G. included. "Of course, it cannot go on with the two contracts. Thus, it must choose either to cooperate in southern Iraq or in Kurdistan" said the minister.

And Baghdad is now quite positive about a possible ExxonMobil's about-face against the K.R.G. This about-face should be based on economic and political considerations as well. Economically speaking, the West Qurna-1 oilfield alone well exceeds the current the K.R.G. oil production. Consequently, Erbil is quite reasonably worried about the future developments in relation to the large oil fields in southern Iraq. Indeed, ExxonMobil's full support during almost all 2012 was an important game changer for Erbil. In practice, every oil company — the first one was ExxonMobil but later followed suit also Russia's Gazprom Neft, U.S. Chevron Corp. and France's Total — that decided to sign a deal with the K.R.G. (with better contractual terms and a safer environment than Baghdad's) was an additional step for Erbil toward at least an economic independence from Baghdad.

Were now ExxonMobil en route to Baghdad, it would be indeed a relevant setback for Erbil, which for more than a year used the American company in order to become a petro-player. A big problem, especially if the American company could get from Baghdad improved terms, which could then be a catalyst also for other companies which for the moment have forgone investing in proper Iraq. Politically speaking, the U.S. is discouraging Erbil from developing its own energy policy because the U.S. fears that this could be the first step toward the fragmentation of Iraq. In essence, Washington, desiring to avoid Iraq's fragmentation, is at least in political terms well in line with Baghdad. Some analysts point out that since its deal with Erbil, ExxonMobil would have negotiated with the K.R.G. in order just to force Baghdad to improve its contractual terms for the energy resources located in proper Iraq. In other words, the idea was to use Erbil for defying Baghdad to implement contractual improvements in the south. Time now is running out and probably ExxonMobil cannot continue to keep a foot in both camps. Recently, the U.S. company hired as a consultant Mr. James Jeffrey, a former U.S. ambassador to Iraq. Given Jeffrey's past experience, he could be closer to Baghdad than to Erbil. But it's too early to get to this conclusion.

To complicate an issue already well intricate, in mid-January British Petroleum (BP) signed a preliminary deal with Baghdad aimed at developing the Kirkuk field, which is located west of one of the blocks pertaining to ExxonMobil within the contested area. Kirkuk is an ethnically mixed city and it lies exactly at the center of the disputed area between Baghdad and Erbil. And of course, the latter is claiming oil rights with reference to the area assigned to BP. The British company up to now has developed its operations only in southern Iraq. A good reason for this behavior, without risking illegal (according to Baghdad) deals in the K.R.G., is linked to the fact that BP is the operator of the giant Rumaila oil field (17 billion barrels, i.e., around 12 percent of Iraq's oil reserves. This field, located in southern Iraq, approximately 20 miles from the Kuwaiti border, as of October 2012, produced around 1,330,000 barrels per day. BP's bond with Rumaila dates back to several decades ago and in specific it was the British company that discovered it in 1953. Rumaila is owned by the Iraqi government and it's subcontracted to BP and China National Petroleum Corporation (C.N.P.C.) under an Iraqi technical service contract. The field is operated by BP (38 percent), C.N.P.C. (37 percent) and Iraq's State Organization for Marketing of Oil (SOMO, 25 percent). Also ExxonMobil was interested into this field, but it was not successful during the bidding process.

It's obvious that a solution should be found very soon. It's not possible to have I.O.C.s supporting either the K.R.G. or proper Iraq in their Iraqi energy operations. This a condition — although it's not as dangerous as last December's deployment of the K.R.G.'s and Iraq's armies along the contested border — still adds insecurity. And in an area where politics is based on crude oil and crude oil is based on politics, I.O.C.s' commercial ventures have relevant geopolitical consequences especially when dealing with a country like Iraq, which has proven reserves of 143.1 billion barrels of crude oil and 3.2 trillion cubic meters of gas. A new legislation — if accepted by all the involved parties — could well define Iraq's energy sector, in this way partially de-escalating the current political crisis. But the problem is that this legislation has been caught up in political struggles between Sunnis, Shiites and Kurds.

The point that needs to be understood by the government of Iraq is that also losing the ExxonMobil's deal would not stop — although it would be a relevant setback for Erbil — the K.R.G. from getting more autonomy from Baghdad. The Kurdish region is now on a drive toward developing an energy sector in a much more autonomous way than just two years ago. In fact, other companies are interested in getting Kurdish acreage. This means that for a company that leaves the K.R.G. surely there will be some other valid replacements. This current situation surely presents Erbil a completely new political leverage, but at the same time risks bringing Iraq towards its political fragmentation.

 

Is Iraq on the Brink of Another Civil War?

December 20, 2012

 

BEIRUT, Lebanon — At the beginning of 2013 ExxonMobil will be getting ready in order to conduct some surveying activity in the Iraqi area that is disputed between Erbil and Baghdad. This move may easily be the straw that breaks the camel's back, i.e., the event that may drag Iraq down again into the scary coils of another civil war.

Right now along the contested border are stationed on one side, the Peshmerga forces, i.e., the Kurdish armed forces, and on the other side, the Iraqi Army. Notwithstanding the fact that currently both sides are scaling back — although with no defined timetable — from this dreadful standoff, there is always the risk of the occurrence of a simple provocation, which could precipitate inadvertently the situation. Following the orders of  Prime Minister Nouri al-Maliki of Iraq and President Massoud Barzani of the Kurdistan Regional Government (K.R.G.), the troops are stationed along the border and, according to some estimates, they are as many as 60,000 soldiers. In some locations they are as close to each other as 100 meters. This proximity is risky and for the stability of the whole Middle East, which is already plagued by the Syrian events, any additional Arab-Kurdish skirmishes have been avoided.

In October 2011, ExxonMobil signed oil deals directly with Iraqi Kurdistan for six exploration blocks. ExxonMobil bypassed the central government, which is the only authority capable of approving energy deals with reference to all Iraq, the K.R.G. included. To make things worse, at least two of the six exploration blocks (the Qush and Bashiqa blocks) are located within the disputed territory that is technically part of the Nineveh governorate, but that since 2003 has been administered by Kurdish people, who occupied these lands at the beginning of the war against Former President Saddam Hussein of Iraq.

Immediately after the signature of the deals started ExxonMobil's quarrel with Baghdad, which threatened the cancellation of the American company's 20-year technical service agreement (T.S.A.) related to the development of the giant West Qurna-1 oilfield located in the Basra province in southern Iraq. Complicating the already strained relations between Erbil and Baghdad, ExxonMobil is willing not only to stop its operations in Iraqi Kurdistan, but also to plan exiting its $50 billion stake in West Qurna-1. The U.S. company has taken this decision after a careful assessment, which has shown that Erbil's contracts are much more interesting and valuable for the company's balance sheets. And similarly, other international oil companies like U.S. Chevron, Russia's Gazprom and France's Total are all giving their preference to the K.R.G. energy deals than Iraq's.

Since last November, tensions have been increasing after some clashes between forces belonging to Erbil and forces belonging to Baghdad. The initial episode (on November 16) was linked to an unpaid gasoline check (oil for a strange twist of fate is always at the core of many issues in the Middle East) in the small town of Tuz Khurmatu located in the disputed areas. It's noteworthy  to underline the futility of the episode from which severe consequences followed. In fact, in this small town a serious conflict exploded when some federal forces tried to arrest a Kurdish gasoline seller who asked protection to some Peshmerga soldiers. The futility of this event well testifies that tensions between the two parties had been simmering for months before this episode. The last of these clashes happened on Tuesday, December 18 ,when troops from Iraqi Kurdistan fired shots against an Iraqi Army helicopter north of the ethnically mixed city of Kirkuk. And it's worth remembering that in the previous two days (Sunday and Monday) at least 30 people had been killed during these clashes. The disputed areas are a strip of ethnically mixed land that separates Iraq from the Kurdish-administered territory in the north. Disputed areas include the city of Kirkuk, which has more than 10 billion barrels of proven oil reserves. 

 

 

Iraqi officials clearly stated that if ExxonMobil began its operations in the disputed area, the Iraqi Army would start hostilities because it would judge these oil operations alike to a declaration of war. "The prime minister has been clear: if Exxon lays a finger on this territory, they will face the Iraqi Army" told the Washington Post Sami al-Askari, an Iraqi M.P., who is also close to Prime Minister Nouri al-Maliki. Similarly, Deputy Prime Minister Hussain al-Shahristani of Iraq reaffirmed one more time that if ExxonMobil decided to operate in the disputed territories it would be doing a serious mistake.

The situation might with no doubt scale back. ExxonMobil won't drill until next summer, although in early 2013 it will initiate some surveying operations. The Iraqi government in the last months has tried to convince the American government to discourage ExxonMobil from starting operations in 2013 in the K.R.G. (The company's past operations show that ExxonMobil always adheres to the letter of its contracts and that the company well respects the agreed schedule). In reality, without being too much involved into ExxonMobil's deals, American officials have partially tried a difficult mediation between Erbil and Baghdad.

Last week, President Jalal Talabani of Iraq, a Kurd, with American help was able to negotiate an agreement between Mr. Maliki and Mr. Barzani. The basic idea was first of all to lower the tone of their public speeches and then to form a committee with the goal of making safe the disputed areas. Up to now, neither site has demobilized its forces; and President Talibani is currently recovering in Germany from a stroke he suffered two days ago. This is indeed a very bad news for the appeasement process.

The real issue is that both Mr. Maliki and Mr. Barzani have some reasons not to retrench. For Mr. Barzani the existence of a common threat is useful in order to compact and unify the fractious parties within Iraqi Kurdistan, while for Mr. Maliki it's of paramount importance that all the K.R.G. energy riches are controlled by Baghdad. Erbil's budget is still very dependent upon federal funding. A good power lever for Baghdad could be to cut the 2013 federal funding envisaged for the K.R.G. And it this regard, Maliki-aligned politicians are building up a Parliament coalition oriented toward this end.

In Baghdad there is the idea that Erbil has more to lose from a civil war than Baghdad. This assumption is based on the fact that Big Oil companies are swarming into the K.R.G. because of its excellent security and improved business environment. Instead, for Baghdad a civil war won't change consistently its difficult relations with oil companies because those companies investing in the Basra region already have to compute costs linked to political instability. This assumption concerning who lose more between the two contenders is very debatable to say the least. Stability is useful for both Iraqi Kurdistan and Iraq. Energy companies operating in Iraq have already difficult challenges to overcome: daring contract terms; risk of violence; lack of infrastructure (for instance: pipelines; oil pumping; and storage facilities); and red tape. Honestly, hypothetically while waging a civil war in the north it's not very clear how Baghdad could improve the attractiveness of its energy sector in the south.

For sure Baghdad needs to change its energy policy given the recent failures it has experienced. Negotiations between Ankara and Erbil are moving ahead and there is the will to sign a massive oil deal following which a Turkish government-backed new company could be drilling for oil and gas in Iraqi Kurdistan, while at the same time it could be constructing a pipeline to transport energy riches from Kurdistan to Turkey — without utilizing any Iraqi infrastructure. If implemented this plan means no other thing that a real economic independence of Erbil from Baghdad's federal funds. And today the main linkage between the K.R.G. and proper Iraq is based on just economic transfers from Baghdad to Erbil. And as usual: Forewarned is forearmed.

     

 

Does Lukoil Enter the Fray for Kurdistan's Oil?

November 29, 2012

 

BEIRUT, Lebanon — Lukoil, Russia's second largest oil company and its second largest producer of oil, has recently bought condensate (very light oil) from Iraqi Kurdistan, notwithstanding Baghdad's position centered around the pivot point that only the central government has the right to negotiate oil deals in all Iraq. For the time being, the Russian company has not been the target of any economic reprisals by Baghdad and it maintains intact its desire of developing Iraq's southern oil fields.

Currently, Lukoil's Geneva-based trading arm, Litasco is the third company that has bought Kurdish condensate. The company has followed the two Dutch companies Trafigura and Vitol, which started their operations in October 2012. According to a spokesman with the Kurdistan Regional Government (K.R.G.) talking with reference to Trafigura's and Vitol's deals, the Kurdish condensate is swapped for refined products with a private Turkish company, with no cash transactions between the involved parties. Given the fact that there are no pipelines between Iraqi Kurdistan and Turkey, Kurdish oil is trucked from Iraqi Kurdistan to Turkey where it is loaded onto cargoes.

Up to now, it's not clear what will be Baghdad's reply to Lukoil's deal, especially bearing in mind that Lukoil was considered by the Iraqi government the most plausible purchaser of ExxonMobil's stake in West Qurna-1 oil field, which is located north of the Rumaila oil field, west of Basra (southern Iraq). ExxonMobil is now in talks for selling its stake in West Qurna-1 because of its energy deals with the Kurdish authorities. Deals that Exxon signed without having previously gotten the authorization from the central government. In fact, Baghdad considered ExxonMobil's Kurdish deals illegal and dismissed the American company's contract for West Qurna-1. Other companies that are facing the ire of Baghdad following their relations with the K.R.G. are U.S. Chevron, Russia's Gazprom and France's Total.

Also Trafigura's and Vitol's deals motivated harsh responses from Baghdad, but according to some Iraqi sources it seems now that this time with Lukoil Baghdad will be obliged to maintain a different stance. In any case, the involvement of both Trafigura and Vitol already means that Baghdad would have serious difficulties retaliating because it depends on these two firms for quite a substantial proportion of its refined oil imports (gasoline and diesel). Not buying from these two companies would immediately imply that Baghdad has to pay much higher prices for similar products on the market. Iraq has an insufficient oil refining capacity and suffers shortages of electricity. For this reason, gasoil is used to generate power. Following the war, internal riots and scarce investments, the country is now forced to import fuel for its energy requirements, and it's nowadays one of the biggest buyers of oil products in the Middle East.

"After checking with concerned parties, we got confirmation that LUKOIL has not purchased any kind of crude for the benefit of the K.R.G." said an official from Iraq's state oil marketer State Oil Marketing Organization (SOMO). Until now, the Iraqi government has not released any comment. Another hint that Iraq's position with reference to these oil deals could be softened is linked to the fact that last week it was announced that SOMO had finalized a term deal with British Petroleum (BP) and Vitol (the latter company is a regular supplier of gasoil to Iraq). The deal was related to the purchase of up to 1.097 million tons of gasoil for deliver in 2013. The two companies are likely to ship the gas either from Bahrain or from Kuwait, two countries where they have term contracts.

Industry sources told Reuters that Litasco had chartered the tanker "Cielo di Napoli" to load about 19,000 tons of Kurdish condensate from the port of Toros at Ceyhan in Turkey. The tanker "Cielo di Napoli" sailed on November 21. Lukoil's trading company won its contract outbidding competing bids from Trafigura and Azerbaijan's Socar and bought the condensate in a public tender (with a $3.00 discount to naphtha prices) thanks the intermediary role played by Powertrans.

The condensate trade with Turkey started last July following an agreement with Ankara. The basic idea was to augment the quantity of refined products (kerosene and diesel) for Erbil. Notwithstanding Ankara's blessing, these truck deliveries were immediately considered illegal by Baghdad. According to Kurdish sources, Kurdistan's export volumes were 12,000 barrels per day in October 2012, but deliveries seem now to have increased and to continue to increase. Obviously, it's a tiny fraction of Kurdish oil in comparison to Kurdish oil exports to Iraq, which following last September's agreement between Baghdad and Erbil were set at 200,000 barrels per day during the last quarter of the year. Iraqi Kurdistan obtained an agreement with Baghdad and was  entitled to receive 17 percent of refined products in Iraq. Trade with Turkey should come under that specific quota.

Summing up, there is no doubt that Vitol's and Trafigura's role is very important with reference to Iraq's fuel imports. But Lukoil's role in Iraq has — and according to Baghdad should have in the future — a much more relevant responsibility for the development of the country's oil sector. In fact, Baghdad, following the quarrel with ExxonMobil, which had invested into Iraqi Kurdistan, started promoting the takeover of West Qurna-1 by Chinese and Russian energy companies. The American company seems rather to be more interested into the contractual terms offered by the K.R.G. and into pulling out of Iraq's $50-billion West Qurna-1 project. Lukoil's move into Iraqi Kurdistan — the Russian company is already one of the largest investors in Iraq — could be a real attempt at winning contracts in the semiautonomous region of Iraqi Kurdistan (three governorates out of eighteen for the whole Iraq) without Baghdad's preventive authorization, but especially without losing contracts in the other energy-rich areas of the country.

Energy analysts point out that up to now the difference between Erbil's oil contracts and Baghdad's was very noteworthy for a company's balance sheet and that it was difficult to resist Erbil's calling. And being Lukoil Baghdad's preferred candidate for substituting ExxonMobil in southern Iraq, the company could be successful in signing up to contracts with Erbil's government without real possibilities of economic reprisals with reference to its southern contracts.

In fact, in December 2009, Lukoil together with Norway's Statoil was awarded the rights to develop the West Qurna-2 giant oil field. Lukoil is planning to invest about $25 billion during a timeframe of twenty years. This field according to current estimates should be able to produce 500,000 barrels per day in 2014, and then, in the following years, should raise its production up to 1.8 billion barrels per day. No doubt that it would be difficult for Lukoil to work to another big project like West Qurna-1 replacing ExxonMobil while it is also developing West Qurna-2. In this regard, despite a certain interest toward West Qurna-1, the Russian company last week declared that it would decide about its possible involvement in West Qurna-1 by the end of the year. In brief, the company is taking time. Together West Qurna-1 and West Qurna-2 could be producing around 6 percent to 7 percent of world's oil production.

Having closed the doors of southern Iraq to ExxonMobil and the other Big Oil companies involved in Kurdistan could really jeopardize Baghdad's production targets unless valid and reliable substitutes are found quite soon. The exploration auction held in May 2012, which had very few takers in the licensing round, is a clear reminder that current the technical service contracts (T.S.A.s) offered by Iraq are not so appealing for Big Oil companies, which prefer Kurdistan's production sharing agreements (P.S.A.s). The latter contracts offer to an oil company a defined share of the production, which may be added to the company's balance sheets. Thanks to this, a company's valuation increases and the company may obtain more easily bank loans. The offered share stays the same, either if project costs and/or oil prices move upwards or downwards. Instead, Baghdad's T.S.A.s are not very attractive and companies have to undertake the exploration projects while it is much more difficult to raise debt to finance their operations. In this case, only large companies are able to undertake these projects, but, given the fact that it's possible to find better alternatives on the market, it goes by itself that Iraq's T.S.A.s are not easily subscribed right now. Moreover, the business environment and bureaucracy are less chaotic in Iraqi Kurdistan than in Iraq. In the end, Big Oil's moves in Iraqi Kurdistan are much more understandable and rational than it could appear at first sight.