A version of this article with references is available on request as a PDF. Please email: firstname.lastname@example.org
Between February 2017 and mid-October, Rosneft signed a number of deals with the Kurdish Regional Government (KRG) that established for it, and by extension for Russia, a major position as both an investor and stakeholder in the Kurdish Region of Iraq (KRI)’s hydrocarbon resources and infrastructure.
The move was interpreted, especially by the KRG, as implicit support for the KRG in its bid for independence, especially in light of the latest deal signed following the reassertion of Iraq’s federal control over Kirkuk and other disputed territories. While there is an element of truth to this thinking, the deals are part of a wider geopolitical positioning for Russia as a major gas supplier to Europe and as an emerging power in the Middle East.
The deals provide Rosneft, and by extension Russia, effective control of the KRG’s Oil & Gas infrastructure, and a controlling stake in the region’s finances in more ways than one.
Within the oil space it has established this in three ways. The first was by providing USD 1.5bn in financing via forward oil sales payable over 3-5 years. This would be payable in kind from the KRG’s exports, until recently at about 550,000-600,000 barrels per day (bbl/d). However, the loss of the Kirkuk fields takes away about 430,000 bbl/d of production or eventually about half of the KRG’s exports. This leaves the KRG with a tiny revenue stream after payments to International Oil Companies (IOC)’s, from which to make payments on forward oil sales of up USD 3.5 bn including Rosneft’s USD 1.5bn. A complicating factor is the repayment of other KRG debt, estimated at over USD 21bn by end of 2017, which will have to be factored into debt payment sustainability.
The second dimension of Russia’s KRI move is the exploration and production of 5 blocks with an 80% working interest and a potential estimated 670 million barrels of oil reserves, although in recent years, such estimates have proven to be highly overstated in the KRI. Rosneft will invest USD 400m in an exploration programme with hopes of starting production in 2018. Although the blocks were not specified, until recently these were assumed to be in the disputed territories especially given the pipeline deal. However, the loss of these territories changes this assumption and presumably Rosneft would demand the best blocks within the KRI’s official borders but it is difficult to guess which would these be, given the large numbers of blocks relinquished by IOC’s since 2016 as a result lower oil prices and disappointing exploration results.
The third and the most important pillar of Russia’s entry has been in oil infrastructure through a 60% ownership of the KRG pipeline and an investment of around USD 1.8bn increasing its current capacity of 700,000 bbl/d to 1,000,000 bbl/d. Its 60% ownership would probably include a similar share in the pipeline’s tariffs collected on transported oil. However, the planned increased capacity is meaningless and the investment financially unfeasible without the exports of the Kirkuk fields reclaimed by the central government, as otherwise current capacity would more than cover the remaining exports and any that would be coming from Rosneft’s 5 blocks.
Iraq’s Oil Ministry has recently announced plans for repairing the old federal pipeline as well as asking BP to develop these reclaimed fields. BP’s response has been positive, and the ministry in the recent past had reported an initial agreement with Iran to build a pipeline from the Kirkuk fields to Iran. All of these point to further political and business agreements that need to be made, including a deal that Rosneft would sign with Iraq’s Oil Ministry for the resumption of Kirkuk oil exports. Production at Kirkuk’s fields is currently being re-directed to refineries across Iraq, including those in the KRI and in some cases production has stopped.
In the gas space, Rosneft is to participate in funding, around USD 1bn, in the construction of a natural gas export pipeline to Turkey. The plans are to initially supply the local market, then export to Turkey and ultimately to Europe. The capacity is significant at 30 billion cubic meters annually (BCMA) which are equal to 6% of total European gas demand. It would be logical that it would have similar dynamics to the oil pipeline, in that Rosneft would have at least 60% control as well as a similar share in tariff charges.
Currently, the KRI’s gas comes from Pearl Petroleum operated Khor Mor field at 3.1 BCMA and associated gas from Khurmala Dome at 1 BCMA, both going to local power generation. The economic rationale for the proposed gas pipeline would come from (1) the expanded production at these two fields adding 2 BCMA and 1 BCMA respectively; and (2) primarily from developing Genel’s Miran and Bina Bawi fields. The challenge though is that both producing gas fields are within the disputed territories while Genel lacks the financial resources to develop its promising fields without attracting partners into the project. It’s logical to conclude that Rosneft could very well be one of the partners that would work with Genel to develop these fields.
This could dovetail with the 2011 pipeline deal to export Iranian gas to Europe via Iraq and Syria which initially had a capacity 40 BCMA. Given Russia’s main role in any future settlement in Syria, it is conceivable that this could be routed through Turkey further cementing Russia’s relationships with Turkey and Iran which grew significantly over the last two years.
Irrespective of the potential for the Iranian gas, the KRG gas deal increases Russia’s importance as an exporter of gas to Turkey & Europe which currently import over 55% and 35% respectively of their gas from Russia which is likely going to increase meaningfully going forward. It’s ironic that Russia would control the infrastructure that could provide Europe and Turkey with non-Russian gas, which was supposed to increase their energy security and lessen their dependence on Russian gas.
The combination of the gas and oil deals will provide Russia with a strong voice and influence on the KRG and its future, but it is now likely that this influence will not be what the KRG was hoping for. More likely is that there will be a strong Russian voice in shaping the future relationship between the KRG and the Federal Government of Iraq (FGI) which implies that Russia would have a major seat in the future negotiations over disputed territories in addition to the US and Europe. Given Russia’s revived leading role and strengthening relationships in the Middle East it would imply that it would use its position with the KRG to ensure that it remains with a federal Iraq, a very different approach to its previously ambivalent stance towards an independent KRI.
Ahmed Tabaqchali is the CIO of Asia Frontier Capital (AFC) Iraq Fund and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets.
Ahmed Tabaqchali’s comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.