Strategic investments from Rosneft have unclogged KRI’s messy export scene, paving the way for supplies to Turkey in the early 2020s
Natural gas prospects for the Kurdistan Region of Iraq look better than they have for several years. Production is up, a new gas pipeline to Turkey is planned and the region’s energy ministry claims it will start gas exports in 2020.
The latter is the latest bold promise typical of KRI oil minister Ashti Hawrami, who has admittedly done a reasonable job of licking the KRI’s independent oil sector into shape. But it is probably unrealistic, given it does not accord with development plans from the region’s gas companies. Their main focus is connecting the KRI’s main power plants to gas in a process expected to take the next three years to complete.
But the KRI now looks set to become self-sufficient in gas supply and a sizeable gas exporter before 2025. This represents a turnaround from the years of clashing gas strategies, financial crises and legal wrangling that left Kurdistan’s gas in a lost decade shortly after production started in 2008.
The Kurdistan Regional Government (KRG) has Russia to thank for bringing these lost years to an end. Until recently, KRI gas was characterised as a competitor to Russian supplies, albeit at unthreatening volume levels, into Turkey and Europe. Yet no one has done more to unclog the KRI’s stymied gas potential than Russia’s Rosneft, which waded in at a time when Kurdistan lacked funds and friends in the run-up to its September 2017 independence referendum.
Since 2017, Rosneft has spent $400mn on five exploration blocks and $1.2bn on advance crude purchases. It has also bought a 60pc stake in the KRG’s oil export pipeline for $1.8mn, injecting cash and legitimacy into the energy sector at a vulnerable time.
Stepping into Ankara’s shoes, Rosneft has committed to fund and build a gas export pipeline of up to 30bn m3/yr capacity into Turkey. It would run parallel to the existing oil export pipeline, stretching an extant line from a power plant south of Erbil to Turkey’s border, meeting with a 20bn-m3 Botas-managed spur line.
Integrated gas plans
Last May, striding into areas usually the preserve of fellow Russian company Gazprom, Rosneft announced “an integral plan to progress the gas business within the Kurdistan region”. This includes a pre-FEED study on a domestic and export pipeline network, and a study of “how to participate in the integrated gas business value chain in the region in order to extract maximum efficiency from investments and operations in such areas as exploration and production, transportation and trading”.
Following the pre-FEED and other studies, Rosneft says it “will decide on how to participate in the regional gas business”. It is not yet clear if Rosneft’s demands of the KRI gas sector in return for their investments will dovetail with other upstream contracts and gas sales agreements the KRG has in place.
As Rosneft tells it, Russia has essentially bought the option of a dominating role in Kurdistan’s gas sector. This marks a reversal in the polarity of energy diplomacy between the KRG and Turkey, its largest gas customer. Russia is the newly favoured patron in Erbil, while the KRG has had to backpedal to repair strained relations with Turkey.
Turkey loses appetite
Ankara decried the 2017 referendum and threatened to block oil exports. The decision was driven by Turkish security policy towards its own and neighbouring Kurdish groups. But it also marked a further decline in KRI-Turkish energy-driven alliances that peaked in 2013 with three broad energy protocols, including a 50-year gas sales agreement (GSA) with the Turkish Energy Company (TEC), a new state-backed firm.
The projects in the protocols have not gone to plan. Leaked TEC documents reveal its upstream investments have been disappointing, with export gas two years overdue. Oil pipeline tariffs were supposed to finance TEC’s strategic investments, but the KRG did not pay, racking up over $1bn in overdue fees and exhausting Turkey’s appetite for further investment.
The worst is now over, with the KRG repaying owed tariffs and diplomatic relations getting back on track. The 2013 GSA remains in place, and is still attractive for Turkey, as it would allow TEC to buy KRI gas at a cheap wholesale price and sell it on at a mark up to domestic utilities or export buyers. Crucially, however, it is not yet clear if the GSA aligns with Russia’s priorities in managing regional gas supply and pricing. Any rejigging could take a long time to negotiate.
The KRG will also find Turkey’s gas market less alluring than five years ago, when the GSA was signed. Turkey imports 98pc of its gas, accounting for most of its trade deficit. So the government welcomes cheaper sources of supply. But national demand growth has slowed in recent years, and prices have fallen. Ankara has put greater emphasis on domestic energy production, including renewables and Russia-facilitated nuclear. As a proportional share of feedstock for power, gas has been falling for several years.
Turkey gets about 53pc of its gas from Russian sources, with Iran and Azerbaijan running a distant second and third. While there are still disputes, Russian pricing has come down, and Ankara-Moscow relations are much improved since Turkey’s big KRG play in 2013.
The result may be that the KRG has to bite directly into Iran’s share of Turkey’s gas market to find a home for volumes of gas of 10bn m3/yr or more. Iranian gas has proven relatively expensive and unreliable, but Tehran will try to fend off challenges to its Turkey exports. Last month, Iranian officials talked up proposed economic ties and even gas exports to Kurdistan. The idea makes little sense, but demonstrates that Iran is taking an interest in threats to its market position.
That leaves Europe. The appetite for more diverse gas supplies is there, as is the infrastructure via the Tanap/Tap pipelines. The KRG’s resources are onshore and relatively cheap to develop and tie in to Turkey’s grid. But the potential of large eastern Mediterranean developments by the mid-2020s suggests a need for urgency, while the KRG’s newfound linkage to Rosneft means Kurdistan is no longer necessarily part of a pro-EU solution to Russian gas dominance.
Rosneft’s intervention has been a boon for Pearl Petroleum, a consortium led by sister UAE firms Crescent Petroleum and Dana Gas, the KRI’s largest gas investor. After almost a decade of delay, Pearl is set to take the lead on supplying export gas, provided the economics marry with Kurdistan’s sales agreement with Turkey and Rosneft’s need for tariffs.
Pearl and the KRG in August 2017 reached an arbitration settlement in Pearl’s favour. The company took $1bn, paid by Rosneft on the cash-strapped KRG’s behalf.
Pearl has put that cash to use, debottlenecking a plant at the Khor Mor field from around 305mn ft3/d to 400mn ft3/d, enough to increase the KRI’s power output from gas by about a third. Timely payments have unlocked drilling and facility expansions that should bring Khor Mor production to 900mn ft3/d before 2022.
Together with around 150mn-ft3/d first-phase gas supplies from the nearby Topkhana and Kurdamir gasfields, operated by Spain’s Repsol, Pearl’s efforts would be enough to fire all the region’s major power plants on gas, and leave a little over for export.
With 75tr ft3 of wet gas, and some 7bn bl of oil, Khor Mor and neighbouring Chemchemal form a lynchpin asset base for large-scale exports.
Genel’s plans on hold
Stalled Turkish-KRG energy diplomacy has left London-listed Genel Energy sitting on its Miran and Bina Bawi fields for several years.
Last January, Genel upped contingent gas resource estimates at the two fields by over 40pc, to 14.8tr ft3, and there is oil at Bina Bawi to help kick-start an initial drilling programme.
Genel is keen to start tapping light oil from Bina Bawi; but the KRG is not rushing to approve field development plans, and Genel will not invest before the midstream is sorted. Contaminants — particularly sulphur — in Miran and Bina Bawi gas will require a shared processing plant and about 100km (62 miles) of sour-gas pipeline spurs, a $2-3bn project that needs to be finalised before Genel can get drilling.
So far, the anticipated Turkish investment has not materialised, and while Rosneft now has the initiative, it remains to be seen if it will stump up for the plant, or whether the economics will actually work. Having previously talked up investment interest, Genel had no news in its January 2019 operations update, and appears set to write down the booked value of the Miran gasfield, reflecting delays to the project.