Born in the KRG
Over several years as an advisor to the Kurdish Ministry of Natural Resources on matters such as the Kurdish Oil Law and Production Sharing Agreement legislation (discussed below), combined with working with Western oil companies bidding on projects in Kurdistan, I came to have considerable respect for the long-term view incumbent in Kurdish diplomacy.
However, recent events are indicating the time frame is changing. The matter of Kurdistan’s status is yet another powder keg in an already incendiary region. Ankara is opposing Kurdish rebels in eastern Turkey in an ongoing offensive that has spilled into neighboring war-torn Syria. Meanwhile, Tehran is cautiously eying Kurdish ethnics surrounding Tabriz in northwestern Iran.
For its part, the central Iraqi government in Baghdad has placed an economic embargo against the semi- autonomous region following an overwhelming Kurdish referendum approving a declaration of independence.
The independence drive is hardly new. It has been a stated Kurdish goal for generations. The crude oil and natural gas reserves in the region are what has fueled the economic base for the independence drive.
But that very source of what the Kurdistan Regional Government (KRG) in Irbil considers its revenue windfall is also the substance of an acerbic disagreement with Baghdad.
Sharing Means Caring
Over the past several months Moscow has decided to step up its own oil initiatives in Kurdistan, putting it at loggerheads with Iraq. As relations between Russia and the Iraqi central government waver, Russian oil companies are continuing to move into the semi-autonomous enclave of Kurdistan in the north. The “big three” of Russian production – state oil leader Rosneft, LUKoil, and Gazprom (both as the world’s largest natural gas producer and as parent of oil company Gazprom Neft) – have been expanding activities in the region.
Those moves, however, are as much to buttress Russian geopolitical interests as they are about the ability to improve Russian oil export bottom lines.
Kurdistan is officially still part of Iraq, although the KRG has declared it is has overwhelming Kurdish domestic support for a formal declaration of independence.
That option is actively resisted by both the Iraqi central authorities and Washington. With independence a galvanizing objective for a broad cross-border Kurdish population stretching across four littoral states, the fate of the Kurds remains one of the most short-fused flashpoints in a very delicate multi-state cauldron.
The Kurds remain the world’s largest indigenous ethnic population without their own state. But any move in that direction is certain to result in concerted responses from Baghdad, Damascus, Ankara, Tehran… and even Washington.
For the past several years, the KRG has been particularly adept at attracting international energy companies into Kurdish projects in defiance of ultimata laid down by the central Iraqi authorities.
Baghdad forbids exports of Kurdish oil and gas without the express approval of the national government. Irbil, for its part, has responded with moves to establish separate export pipeline venues bypassing the major line from Kirkuk to the southeastern Turkish oil mega port at Ceyhan.
It seems ironic that much of Kurdistan’s prospects for its own control over exports rest in the hands of the Turks. Ankara has a protracted opposition to the radical Kurdistan Workers’ Party (PKK), long a source of terrorism in eastern Turkey, as well as the Syrian Kurdish militia just across the border, known as the People’s Protection Units (YPG).
Nonetheless, there is one objective that does bind together the KRG and the Turkish government together – singular opposition to the Shiite administration of Haidar al-Abadi in Baghdad. And of course there is also the coincidence of interests bringing together the Kurdish desire to control its own oil/gas export revenues and Turkey’s ongoing interest in becoming the energy lynchpin connecting East and West.
The Kurds have been particularly successful in providing much better terms to foreign companies than those offered by Iraq. While Baghdad continues to offer what amounts to embellished service contracts (fee per barrel above a contracted level), the KRG has provided what amount to genuine Production Sharing Agreements (PSAs) governed by a central Oil Law. Iraq still does not have anything that resembles a PSA and has been negotiating a central oil law for more than a decade with regional and sectoral groups.
Contacts at the Iraqi Ministry of Oil (which whom I also had a consulting arrangement) have acknowledged that the primary leverage the ministry thought they had in negotiating with international majors turned out to be no leverage at all.
Baghdad has offered – via those less-than-desirable service contracts – access to huge existing (and producing) oil fields. But in return the government has also stated companies would not be eligible to work in Iraq proper if they entered into contracts with the KRG. The central authorities had concluded majors would not want to forego such work for smaller Kurdish fields.
They were wrong. Beginning with huge players like ExxonMobil and Total, the big boys opted for the better terms in Kurdistan. Baghdad responded by refusing to pay for work already completed in both Iraq and Kurdistan under contracts previously negotiated by Iraqi authorities.
Russian Into Things
It’s against this backdrop that the largest Russian companies signed agreements with the KRG. These began some three years ago and have recently entered a new phase. While both Rosneft, the largest Russian state oil company, and the Kurdish Ministry of Natural Resources have referred to the ongoing negotiations as involving additional field development agreements, the Russians are quickly moving into another area.
Sources in Minenergo (the Russian Ministry of Energy) have acknowledged that the new Rosneft initiatives involve control over a portion of Kurdish future oil and natural gas export consignments from fields other than those included in the new projects under consideration.
Further, international market contracts have confirmed that Rosneft has contacted international trading major Glencore to coordinate an ongoing series of contract swaps intended to fold Kurdish exports into volume effectively under the control of Rosneft.
In addition to the known connections between Glencore and the Kremlin this arrangement allows two advantages to Rosneft moving forward.
First, in a practice that both Rosneft and Russian state pipeline transport monopoly Transneft have utilized in the past with pass-through volume from Kazakhstan and Azerbaijan, this allows for mark-ups and exchanges of lower cost domestic production. Both tend to augment bottom line profits.
Second, a curious development has unfolded in the renewal of the OPEC-Russia production cap accord. Despite concerns that Iraq might demur from the production cuts, Baghdad has complied. In fact, April 2018 figures amount to the fifth consecutive month in which the Iraqi cuts have actually exceeded the nation’s quota.
Quietly, however, much of the Kurdish production expectations have been dropped from the overall Iraqi totals.
I heard rumors that this was in the works during meetings held late last year in Paris. That this appears to have been pushed through means the Rosneft/Glencore/Kurdistan contract swaps underway allow greater revenue flow for Moscow while Russia provides public posturing that the agreement with OPEC remains in force. Russia books pass-through volumes as Kurdish but pockets additional revenue without declaring additional sales.
No word yet from my contacts in the Saudi Ministry of Energy, Industry and Mineral Resources on whether this “accounting legerdemain” was the price Riyadh had to pay to keep the Russians on board.