Russia Set to Resume Oil & Gas Operations in Iraqi Kurdistan
Russia is to restart its key oil and gas operations in the semi-autonomous Kurdistan Region of Iraq (KRI) according to recent comments from its Energy Minister Sergei Tsivilev. From 2017 until the forced removal of President Bashar al-Assad of Syria, Moscow’s extensive energy operations in the KRI provided it with very cheap oil and gas supplies and were also an integral part of its growing geopolitical presence on the western flank of the Middle East. This encompassed the KRI, much of the rest of Iraq under the control of its Federal Government (FGI) in Baghdad, Syria, and by dint of these the ability to hold sway over all the other ‘Shia Crescent of Power’ countries, as analysed in full in my latest book on the new global oil market order. Given China’s similar policy to expand its influence in the region, with a primary initial focus on Iran and Saudi Arabia, Moscow and Beijing found their efforts especially rewarded after the U.S.’s unilateral withdrawal from the Joint Comprehensive Plan of Action (‘JCPOA’, or colloquially ‘the nuclear deal’) with Iran in May 2018. That said, Russia’s dismal showing in its 2022 invasion of Ukraine and the subsequent removal of front man al-Assad in Syria in moves orchestrated in key respects by the U.S. and U.K. threaten Russia’s and China’s gains across the region. Consequently, this latest move by Russia to restart its operations in the KRI is a high-stakes geopolitical and energy game.
Moscow is starting from a very high base level of influence in the KRI. Following the chaos that ensued after over 90% of the KRI’s population voted in favour of independence from Iraq in the September 2017 Independence Referendum, Russia thought the time was right to exploit the discord for its own ends, as also detailed in my latest book. At that point, the Kremlin’s corporate oil proxy Rosneft executed three deals that effectively took over the ownership of Kurdistan’s oil sector. First, Russia provided the KRI’s government (the KRG) with US$1.5 billion in financing through forward oil sales payable in the next three to five years. Second, it took an 80% working interest in five potentially major oil blocks in the region. And third, it established 60% ownership of the vital KRG pipeline by dint of a commitment to invest USD1.8 billion to increase its capacity to one million barrels per day. Moscow considered itself well-placed at that point to leverage this presence into a similarly powerful position in the south of the country (run by the FGI). This was to be effected by striking new oil and gas field exploration and development deals with Baghdad as part of Russia’s role in intermediating in the perennial dispute between the KRI and the FGI on the budget disbursements (from the FGI)-for-oil (from the KRI) deal first struck in November 2014.
Russia not only challenged the percentage of the budget payments that was earmarked for payment to the KRI but also insisted that oil flows that had been suspended in the KRI following the September 2017 Independence Referendum would not restart fully until pipeline transit fees and pumping tariffs were paid to Rosneft. By that time, the firm had formalised its 60% stake in the Kirkuk-Ceyhan pipeline. Moscow also wanted the FGI in Baghdad to look again at its decision to deem ‘invalid’ the assignment to Rosneft by the KRG of the five exploration blocks in Kurdish territory in which it had secured an 80% stake. These were estimated to have aggregate 3P reserves of 670 million barrels. Rosneft’s involvement in the KRI not only threatened Iraq’s plans to meet its new in-house oil production targets but also its potential export routes for the new flows, given the Russian company’s involvement in the northern pipelines leading into Turkey’s Ceyhan port. The original Kirkuk to Ceyhan Pipeline – the ITP – consisted of two pipes, which had a nameplate capacity of 1.6 million bpd combined. The FGI-controlled pipeline’s export capacity reached between 250,000 and 400,000 bpd when running normally, although it was subject to regular sabotage by militants of various types. The KRG, in response to the regular attacks on the FGI pipeline, completed its own single-side track Taq field-Khurmala-Kirkuk/Ceyhan pipeline in the border town of Fishkhabur. This was part of its drive to raise oil exports above 1 million bpd. It is interesting to note that Russia’s restarting of its operations in the KRI are occurring at a time when Iraqi oil exports through the ITP remain embargoed mainly because of Baghdad seeking to stop independent oil flows from the KRI. This gives the Kremlin the same sort of potential to leverage chaos into increased influence in both the KRI and FGI regions of Iraq.
It is also interesting to note that since the removal of al-Assad from Syria, Western interest in investing in the KRI has surged. The West had been a major sponsor of KRI interests before and during the expansion of Islamic State across the region in 2014, but this had declined as Russia’s influence in neighbouring Syria had expanded over the period, as also analysed in full in my latest book. In very basic terms, a senior source who works closely with the European Union’s (E.U.) energy security complex exclusively told OilPrice.com, the current broad policy of the West is to target investments in the KRI such that it persuades the KRI government to terminate all links with Chinese, Russian and Iranian companies connected to the Islamic Revolutionary Guards Corps over the long term. One such deal that might act as a template for renewed cooperation between the West and Baghdad is BP’s US$25 billion deal formally signed recently to develop four huge oil fields in the Kirkuk region. The U.S. and Israel also have a further strategic interest in utilising the Kurdistan Region as a base for ongoing monitoring operations against Iran. On the other side of the power balance, China and Russia’s general policy is to remove the KRI’s main source of financing — oil exports – by stopping all independent sales and then gradually reducing all budget dispersals from the FGI down to nothing. As a senior political source in Moscow exclusively told OilPrice.com many months ago: “Iraq will be one unified country and by keeping the West out of energy deals there, the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.” This ultimate objective was clearly laid out on 3 August last year when Iraqi Prime Minister, Mohammed Al-Sudani said the new unified oil law — run in every way that matters out of Baghdad — will govern all oil and gas production and investments in both the FGI and KRI areas and will constitute “a strong factor for Iraq’s unity”.
Aside from the geopolitics of it all, the KRI also has enormous oil potential. Prior to the recent rise in exploration activity in the region, more than half of the exploratory wells in Iraq had been drilled prior to 1962, a time when technical limitations and low oil prices meant a much tighter definition of a commercially successful well than would be the case today, as highlighted by the International Energy Agency in its 2017 report on the country Based on the previous limited exploration and development of oil fields in the KRI area, the proven oil reserves figure was first put at around 4 billion barrels. This was subsequently upgraded by the KRI government to 45 billion barrels, but this again may well be a significant underestimate of the oil resources there. Even using the most conservative figures, Iraq had produced only around 15-20% of its ultimately recoverable oil resources back in 2017, compared with 23% for the Middle East as a whole, according to the IEA. This figure for Iraq has not significantly changed since then. Further exploration is highly likely to add substantially to the proven reserves figure over the coming decades, particularly given the high success rate of drilled prospects in Iraq. Similarly propitious are current estimates of at least 200 trillion cubic feet (Tcf, or 5.67 trillion cubic metres) of natural gas reserves in the KRI — around 3% of the world’s total reserves.
By Simon Watkins for Oilprice.com
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