Iraqi-Kurdistan is on the verge of becoming one of the world’s major oil exporters. Second only to the shale revolution in the United States, the oil and gas explorations there have the potential to change the global (and European) energy landscape. The only shadow hanging over this prospect is the political strife between the Kurdish Regional Government in Arbil and the central Iraqi government in Baghdad. But recently the likelihood of a political agreement has increased markedly, writes Friedbert Pflüger, Director of the European Centre for Energy and Resource Security (EUCERS) at King‘s College London.
When Turkish Energy Minister Taner Yildiz addressed the Iraqi-Kurdistan’s Oil & Gas Conference in Saad Palace Convention Centre in the Kurdish Capital Arbil on December 2, following the announcement of a comprehensive package of energy agreements between Turkey and the Kurdish Regional Government (KRG) a week before in Istanbul, it was viewed as a fairly ordinary event by the audience. How quickly times have changed. A year ago, the Iraqi central government in Baghdad had not allowed Mr. Yildiz’ plane to enter Iraqi air space, preventing him from addressing the same conference. This time, Mr. Yildiz had talked in Baghdad before flying to Arbil.
The Turkish Minister’s presence at the Conference is a sign of the changing times. This year’s Oil & Gas conference in Arbil turned out to be a very special event, taking place as it did 25 years after the Halabsha massacre and 10 years after the Iraq war. Today, Arbil has become the “world capital of exploration.” The Oil & Gas Conference has, over the past few years, turned into a gathering of the “who is who” of international energy business.
One reason for this is the steady growth of oil production capacity in Kurdistan, which will increase to more than 300,000 barrels a day by the end of 2013, and will probably reach a million barrels a day as soon as 2015. With estimated reserves of 45 billion barrels of oil (which is more than e.g. those of the US or Kazakhstan, putting Kurdistan into the top-10 of the world) and, according to the KRG’s own account, 2.8 to 5.7 trillion cubic meters of natural gas, Iraqi-Kurdistan is set to become a major energy supplier – in a world, whose energy consumption will grow by a third until 2035.
The revenue-sharing proposal seems to have taken priority over the ongoing dispute regarding a hydrocarbon law
The second reason is that great progress has been made in preparing for the transport of Kurdistan’s resources. Perhaps even before Christmas, oil could be transported from Iraqi-Kurdistan via pipeline to the port city of Ceyhan in Turkey. The KRG has completed a 40-kilometer (25 mile) oil pipeline, which links to Iraq’s main export pipeline extending from Kirkuk to Ceyhan with a usable capacity of about 300,000 barrels a day. There are already agreements in place concerning a second oil pipeline to meet the growing output as several new fields are set to come online. Additionally, a new agreement between the Turkish Energy Company (TEC) and the KRG will likely lead to the construction of a new gas pipeline – with the first flow of gas targeted for early 2017.
“All Iraqi people”
The KRG intends to sell its exported oil independently and to set up an escrow account in Turkey for the revenues. While details of the concrete handling are still unclear, the KRG’s Minister for Natural Resources, Mr. Asthi Hawrami, told the Conference participants that the oil export revenues would first have to meet the financial obligations of the KRG including the production sharing agreements (PSA‘s) as well as the transportation costs. The remaining revenues would then be shared with the Iraqi central government while reserving 17% for the KRG as stipulated in the constitution. Mr. Hawrami repeatedly stressed the transparency of the process, stating that the handling of the operations and the metering of the oil flows should be closely observed by the central government. Moreover, the minister underscored the fact that Iraqi-Kurdistan‘s resources should serve ”all Iraqi people“.
Turkish Energy Minister Taner Yildiz dampened some of the KRG’s optimism by declaring at the Energy Market Regulatory Authority (EMRA) conference in Ankara a day later that Turkey does not intend to implement anything without the consent of Baghdad. However, Turkey did propose that the KRG and the central government sign a revenue-sharing agreement and offered to participate in trilateral talks. This is clearly aimed at incorporating Baghdad into the process and to foster cooperation.
What are the chances of Baghdad and Arbil coming to an agreement? While there are some unresolved financial issues before a revenue-sharing agreement can be reached (for instance, the Kurds demand compensation for the atrocities committed against them by Saddam Hussein), there are positive signs coming from Baghdad. Iraqi Oil Minister Luaibi expressed his openness to cooperation and trilateral talks by stating “there are some meetings that will be held to set the measures.” All in all, the revenue-sharing proposal seems to have taken priority over the ongoing dispute regarding a hydrocarbon law.
In many ways Baghdad is confronted with a fait accompli as a result of the steady rapprochement between Turkey and Iraqi-Kurdistan which forms the basis of all hydrocarbon development in the region. Over the past five years, it has become increasingly apparent how these former adversaries have turned into partners. Today, Turkey seems to be the benign hegemon of Iraqi-Kurdistan. Moreover, Ankara has become the guarantor of the KRG‘s autonomous constitutional status in the world. The new partnership reached a new peak when Iraqi-Kurdistan‘s President Massud Barzani met with Erdogan recently: not in Istanbul, but in Diyarbakir, the cultural capital of the Kurds in Turkey. Here the Turkish Premier used the word ”Kurdistan“ for the first time, calling the Kurds his brothers.
However, the new partnership between the two countries is not a new love affair, but the result of an identity of interests: Ankara badly needs cheaper oil and gas for its energy hungry economy and sees a great opportunity to minimize its enormous trade deficit. Arbil, on the other hand, wants to sell its natural resources and have a reliable and independent source of income. In foreign policy, common interests are a stronger foundation than mutual affection.
There is also another lesson to learn from the history of international energy politics. It is practically unheard of that a country endowed with rich natural resources has not delivered its supplies to another country that has needed it. Energy will go where it is needed and any efforts to prevent this will likely fail. In the 1970s, during the peak of the Cold War, the Soviet Union and West-Germany signed a historic agreement: the so called Erdgas-Röhren-Geschäft (Gas-for-Pipes deal), which paved the way for permanent shipments of Russian gas to the growing German market. The US and other NATO allies of Germany saw this deal with obvious mistrust. However, Russia and Germany eventually became reliable energy partners. Another example: Venezuela and the US clearly have their differences. Still, Caracas continues to deliver 40% of its oil to the US.
Competition is growing and, in the cost-intensive energy industry, investors will go to places with limited risks
The Iraqi central government does not have to fear Kurdish independence – at least not in the near future. While it is clear that Ankara is interested in a strong Kurdish energy partner, it is also difficult to imagine that any Turkish government would support an independent Kurdish state. The same goes for the US and the EU, neither of which is interested in changing borders in the region that could have the potential to exacerbate existing conflicts. Hence, it may be prudent for the Iraqi central government to pay heed to the KRG’s intentions to export, embrace the partnership, and engage and influence the process – instead of standing aside, complaining and being forced to swallow the facts of life later.
The KRG and its Prime Minister Nechirwan Barzani are aware of this. They understand better than anyone else that it is one thing to use the possibilities of the Iraqi constitution to strive for as much autonomy as possible, but that pushing for full independence is another matter altogether. This is why the KRG has resisted all temptations of separatism and has always taken a moderate stance on the matter. During the conference, the KRG invited Baghdad to embrace the Arbil-Ankara cooperation for the benefit of all Iraqi citizens. No language advocating secession or independence was uttered at the Oil & Gas Conference.
We are living in a rapidly changing world. Particularly in the field of energy, forecasts are difficult and those who earn their money by predicting what will happen in the world of energy have often been proven wrong. There is a lot of new competition amongst oil and gas players: Iraqi-Kurdistan has to compete with resources in the Caspian Sea, upcoming shale gas-exports from the United States, new gas reserves in the Levant Basin in the Eastern Mediterranean and so on. Just a few years ago, everyone was talking about peak oil and limited gas reserves. This has changed. Regions that have resources no longer can be sure that they can easily find markets. Competition is growing and, in the cost-intensive energy industry, investors will go to places with limited risks. This is one more reason for Baghdad and Arbil to settle their dispute – starting with a revenue-sharing agreement.
Prof. Dr. Friedbert Pflüger is a retired Deputy Minister of the first Merkel Government. He is Director of the European Centre for Energy and Resource Security (EUCERS) at King‘s College London and Managing Partner of Pflüger International Consulting GmbH, Berlin.