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September 13, 2011

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Kurdish energy and the EU: time for a (different) bear hug?

Kurdishaspect.com - By Shwan Zulal 

A decision by several European countries to phase out nuclear production will leave the continent even more exposed to Russia as their main supplier. Alternative solutions mooted so far range from renewable types of generation to natural gas piped from the Caspian region. Increasingly, the resource?rich Kurdistan region in northern Iraq appears as a viable source of supply. However, political infighting inside Iraq, as well as emerging rivalries between neighbouring Turkey and Iran are curbing the region’s prospects for progress. Furthermore, Brussels’ recent actions may be sending confusing signals to the Kurdistan region at a time when the two need each other most, as SHWAN ZULAL, a political risk analyst specialising in the area, argues.

The semi?autonomous Kurdistan region in northern Iraq has one of the last untapped onshore oil and gas reserves anywhere around the world. 

During Saddam Hussein’s reign, the region remained unexplored, but since the first Gulf War, Kurds have been running their own affairs and have been fighting to take advantage of the region’s natural resources to build up their economy. Geopolitics, local disputes and sanctions prevented the Kurdish region from developing the energy sector until the fall of Saddam in 2003.  

Since then the Kurdish Regional Government (KRG) has aggressively pursued a policy of taking ownership of oil and gas within its borders and other Kurdish areas known as the "disputed territories" under the Iraqi Constitution article 140.

Despite vehement opposition from Baghdad, and a lack of enthusiasm from the US for investments in the area, Kurdish authorities have managed to attract more than 40 foreign oil and gas exploration companies and awarded them PSCs (Production Sharing Contracts), as opposed to the less desirable TSCs (Technical Service Contracts) on offer from Baghdad.  

Some US companies could not resist the temptation and snapped up Kurdish oil, despite question marks raised by US authorities about the legality of such contracts. 

Following Baghdad’s threats to blacklist any companies entering Kurdish PSCs, many oil and gas majors stayed away from the Kurdistan region while eyeing the giant southern fields replete with proven reserves.  

The region’s oil exploration has been ahead of Iraq's since 2003, but due to political disagreement and infrastructure limitation, the progress has been limited. Some of the new oil discoveries have come on tap and the region currently produces over 200,000 barrels of oil per day and there is potential for growth.

ALL (VIABLE) ROADS LEAD TO TURKEY

The Kurdistan region is landlocked and the only viable route to sell the vast energy reserves, thought to amount to 40 million barrels of oil and as much as 200 million cubic feet of natural gas, is via a number of pipelines to the Mediterranean port of Ceyhan in Turkey. Turkey is an energy?transit nation that connects Caspian and Central Asian suppliers with European consumers.

Plans for building more capacity and connecting it to planned Southern Corridor projects such as the EU?back natural gas pipeline Nabucco have also been drawn.  

Turkey has the ambition to become the world’s 10th largest economy within a decade and sees itself as the emerging leader of the Muslim world.  

With a GDP growth of 11 per cent in the first quarter of this year, virtually outpacing China, Turkey relies heavily on energy imports to fuel its booming economy.  

But its overdependence on imports and recent spiking oil prices have brought its current account deficit to record levels, creating inflation and unemployment.  

Currently, Russia and Iran meet most of the Turkish hydrocarbon needs, but the Kurdistan region is quickly joining the fold.

It is generally acknowledged that the Kurdistan region has a huge potential for further Hydrocarbon discoveries and the US Geological Survey has estimated reserves at approximately 40 billion barrels of oil as these figures are constantly revised.  Altogether, the Kurdistan region and Iraq have the potential to fuel the Turkish economic growth as well as supply the European market, enabling it to diversify supply sources, thus breaking the Russian natural gas monopoly.

EMERGING RIVALRIES

However, ongoing tensions between Turkey and its own Kurdish population estimated at 20 million people are an important stumbling block in Ankara’s relationship with the Kurdistan region across the border.

Until recently Turkey refused to recognise the Kurdish region officially. Nevertheless, the tense relation has been thawing and strong economic ties have been forming in recent years.  

Turkey is by far the region’s largest investor and the potential economic and strategic benefit for Turkey's engagement with Kurdistan is enormous.  Nonetheless frictions along political lines continue to test the budding cordial ties as bases belonging to the Kurdish Workers’ Party (PKK) were targeted in southern Turkey and seven Kurdish civilians were killed, as reported by the international press recently.  The relationship is fragile and has not been on equal terms as many often describe it as biased in favour of Turkey. However, progress has been made and the Turkish government understands the need to solve the Kurdish question.

Iran is the other main player in the region, having similar ambitions to Turkey's as it sees itself as an emerging regional “super power”.  

Iran competes with Turkey for regional influence, but conducts politics more belligerently and has not made many friends around the world.  

Iraq, on the other hand, is crippled by political infighting and progress is painstakingly slow.

The Shi'i government in Baghdad has been ever closer to Tehran, which has made Kurds and Turkey sceptical about their intentions.  

The growing links between the two former enemies were best illustrated at the end of July when Iran, Iraq and Syria signed a Memorandum of Understanding to build a pipeline that could carry up to 110 million cubic metres per day of Iranian natural gas through Iraq to Syria.

This move by Iran is largely to defy existing international sanctions and extend its political influence throughout the region

EUROPEAN ENGAGEMENT AND ENERGY SECURITY 

Germany, one of Europe’s largest energy consumers, announced earlier this year that it plans to abandon nuclear power by 2022. This sudden shift will have a profound effect on the European energy market and will undoubtedly bring the EU’s energy supply and security into focus.  

Although the political rhetoric is geared more towards renewable energy, most experts agree that the solution is not viable, at least in the short term, given the unreliable nature of this type of generation.

Shale gas is one option to be explored as the technology has been very successful in the US, but it is unlikely to take off in Europe any time soon, as policymakers and the industry are yet to put their weight behind it.  

Under these circumstances, Germany relies on 40 per cent of its gas supplies on Russia, a figure that is likely to rise when the country will have phased out its nuclear generation.

Faced with fewer options, Germany as well as other European countries will have to consider the potential of gas supplies from the Middle East and Central Asia via the Southern Corridor. Such a possibility could help Europe to meet its energy needs in the medium to long term as well as wean itself off Russia.

In May, the EU’s Energy Commissioner, Günther Oettinger and Iraqi Deputy Prime Minister for Energy Affairs, Hussein Shahristani, signed a declaration on an enhanced strategic energy partnership, which paves the way for oil and gas delivery to Europe via the Southern Corridor.  

The EU acknowledged Iraq’s central government's authority on all exports of oil and gas from the country. This means that the Kurdistan Region has to go through the Iraqi government for any exports to the EU.  

The move angered Kurdish officials, who feel further hampered in their efforts to sell energy to European markets.

The EU's engagement with Baghdad on such a sensitive matter without including KRG sends a wrong signal to the Kurdistan region, isolating it even further. The Kurdistan region sees itself as friend of the West, with real ambitions to implement democratic values.

However, the ongoing rivalries between its neighbours Turkey and Iran as well as a lack of engagement from Europe and the ongoing political uncertainties in Iraq itself are casting further doubts over any form of progress.  There are many elements in the game: Turkey’s ambition to join the European Union, Kurdistan’s aspiration towards statehood, Europe’s need for energy security.

While the EU’s energy consumption is increasing and Russian monopoly on European gas markets is growing, embracing the resource?rich Kurdistan region which strives to emerge from isolation could the most obvious solution for Europe in the long term.

This Article first appeared on EUCERS NEWSLETTER  www.eucers.eu Shwan Zulal is a political risk analyst, specialising in Kurdish PSCs and Hydrocarbon Law and advising investors in the Kurdistan Region and Iraq with legal background. He also runs a blog on to the same subject http://kurdishviews.blogspot.com/

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