Russia Penetrates Southern Energy Roads

The oil exploration and production subsidiary of Gazprom, Gazprom Neft Middle East B.V has recently followed the example of the US-based International Oil Company (IOC) ExxonMobil by beginning to invest in oil fields controlled by both the central government of Iraq and the Kurdistan Regional Government (KRG). 

While investments on both sides, Erbil and Baghdad are suffering from the lack of a national agreement on oil and gas revenue sharing, along with infrastructure bottlenecks, this tripartite consensus appears to be advantageous for all.  Moscow allows Iraqi secure oil transport via Russia’s allies, Iran and Syria, while Russia benefits from lucrative agreements with the KRG, and the KRG prepares the ground for Europe's gas supply.

In Iraq’s southern fields, Gazprom Neft operates in the Badra block and Lukoil the West Qurna-2 oil block. Since 2012, Gazprom Neft has also penetrated the KRG’s Shakal and Garmian blocks. Moreover, after a visit by KRG president Messud Barzani to Moscow on February 20, 2013, Gazprom Nefts signed a contract with the KRG to develop 80 percent of the Halabja block.

Barzani’s meeting with Russian President Vladamir Putin “focused on economic and cultural cooperation as well as on the role of Russian companies in the reconstruction process in both Kurdistan and Iraq,” as reported by the KRG's department of foreing relations.

Kurdistan region’s energy market is attractive - the region states an objective to export 1 million barrels of oil per day by 2015.

Kurdistan’s oil and gas industry only dates back to August 6, 2007, when parliament approved the region’s oil and gas law. To standardize agreements, the KRG prepared a model production sharing contract (PSC).

The KRG’s PSC has become a turning point in the region’s energy business because the PSC represents a lucrative product sharing agreement instead of the fee-based technical service contracts (TSCs) offered Baghdad. Indeed, the KRG’s PSCs are a large incentive for developers to begin production deals in Kurdistan. Under the terms of Baghdad’s TSC, fees are paid for incremental production, produced above a specified baseline rate. Remuneration fees in Baghdad’s TSCs are designed so that a declining fee per barrel is paid to the contractor as cumulative revenues exceed cumulative costs.

Even Baghdad has introduced changes to its contracts to make them more attractive and reward greater risk-taking by IOCs. The PSC is a far more profitable arrangement that incentivizes rapid and efficient development. IOCs have been signing contracts with the KRG under Kurdistan’s oil and gas law, following the example of the model PSC. The energy sector grew by a factor of ten in the past six years, while all contracts remained in a legal grey area. 

Until 2011, interest in Erbil's upstream oil sector largely came from medium-sized foreign oil companies. But today, more than 40 energy companies from 15 countries are operating in 55 fields in the region. The recent entry of IOCs is expected to consolidate the industry. In 2011, when ExxonMobil decided to penetrate the region, the status quo changed. Other IOCs such as France’s Total, Russia’s Gazprom, and Chevron have also entered the market. The region nowadays ranks at the top of world energy investment destinations.

Any investments in reserves will not be able to secure their values if transport of the oil reserves to market is not reliable. For the KRG's northern oil fields, export is being done by truck or pipeline, via Turkey, with Russia as the main supplier. Oil export from the Baghdad-controlled southern oil fields runs via Iranian and Syrian territories – i.e. Russia’s two new political allies. Building both these ties simultaneously is difficult for ExxonMobil.

The KRG's oil business will, in the long term, also open a door to the gas business, just as it did in the Caspian zone in the 1990s. A gas pipeline running from the KRG to Ankara might join Europe’s southern energy corridor, originally planned to reduce Gazprom's energy monopoly in Europe. However, this will not be the case if, ultimately, Gazprom becomes the company that is supplying the KRG’s gas.

Olgu Okumus is completing her PhD on “The Role of Turkey in EU Energy Security” at Sciences Po-CERI in Paris. She is also an affiliated lecturer in energy diplomacy at Collège Universitaire de Sciences Po, Paris.  She can be contacted at (olgu.okumus@sciences-po.org_)