How Europe Would Benefit from Russia’s Investments in Iraq
This summer Russian energy giants Gazprom Neft, Lukoil, and Rosneft signed new contracts in Iraq’s southern fields, which are controlled by Baghdad’s federal government, as well as in the northern fields controlled by Erbil’s Kurdistan Regional Government (KRG). Gazprom even announced in July that the oil investments would soon be followed by similar activity in the natural gas field. If so, Iraqi gas could join the Trans-Anatolian gas pipeline and create a price concurrence with Azeri gas, which would be a major change for European consumers looking to multiply their gas suppliers with the southern energy corridor.
This year in February, Gazprom Neft signed its third contract with the KRG, adding to Russia’s already sizeable portfolio in both the KRG and the Baghdad-controlled Iraqi south. Since 2012, Gazprom Neft has penetrated the KRG’s Shakal and Garmian blocks. Moreover, in February 2012, after a visit to Moscow by Massoud Barzani, the KRG’s president, Gazprom Neft signed a contract to develop the Halabja block.
Russian investment in Iraq gained new momentum this summer after the visit of central and regional government authorities to Moscow and St Petersburg. The first visit occurred in June by a high-level representatives group from the KRG. It consisted of President Barzani, Falah Mustafa (head of the KRG's foreign relations), and Hersh Muharam (head of the Investment Board of the KRG), all of whom met Gazprom’s chairman Alexei Miller in St. Petersburg. The second visit came in July from Iraq's federal authorities, a group led by Iraqi Prime Minister Nuri al-Maliki and Iraqi Oil Minister Abdul Karim Luaibi. Those talks were held in Moscow with Russia's second-largest oil producer, Lukoil OAO Holdings. Both visits had oil in their agenda and ended with resolutions strengthening Russia's presence in Iraq.
Even though Maliki’s visit followed the visit of the KRG’s president, international media did not report any announce from Iraqi authorities about Russian investments being in jeopardy due to continued work in the KRG. Presumably, Baghdad authorities considering the Kurdish deals illegal because of the lack of legislation regulating oil and gas revenue sharing nevertheless do not oppose Gazprom Neft and Lukoil revenues in the KRG.
Despite Iraq’s juridical gap creates tensions between the regional and federal governments and increases the vulnerability of energy investments, international oil companies have begun to question their presence in the country. This summer, a Gazprom spokesman made a new announcement after meeting with Barzani: “in particular, the parties discussed the progress with interaction in oil and gas field exploration, development and operation“. Rosneft has also joined this gas interest group and Rosneft's CEO Igor Sechin told reporters in August that the company is considering teaming up with its long-standing partner, ExxonMobil, to tap oil and gas in Iraq.
In addition to 143.10 billion barrels in oil reserves (the sixth-largest in the world), Iraq has also large natural gas reserves, mainly located in the northern territories controlled by the KRG. Kurdish authorities estimate their reserves at 2.8 trillion cubic meters–making them the eleventh largest supply in the world and larger then Azerbaijan's Shah Deniz gas fields’ reserves.
If Rosneft achieved its objective of exploiting Kurdish gas in partnership with ExxonMobil the presumable export road would be Europe via Turkey by using the southern energy corridor, which consists of the Trans-Anatolian gas pipeline and the Trans-Adriatic gas pipeline infrastructure. Economically, the exploration and production costs for oil and gas in the Caspian Sea Basin still remain high compared to costs in the Middle East. Consequently, the joint American-Russian move would create for European consumers a chance to multiply suppliers in the southern energy corridor.
Additionally, this project might rebuild Russia's internal market dynamics, improving Rosneft's position in its battle with its rival Russian state-owned corporation, Gazprom. Rosneft has already announced its objective to increase its share of the domestic gas market from 9 percent to 19-22 percent by 2020 and to produce more than 40 billion cubic meters of gas in 2013, to reach over 60 by 2016 and to hit 100 billion cubic meters by 2020.
But Rosneft is not alone in the Kurdish gas market. This week the Istanbul-based Siyahkalem Engineering Construction Industry and Trade was issued a license, valid for 26 years, to import natural gas from northern Iraqi territories to Turkey. This will no doubt raise competition in the European market and improve market condition for European consumers.
Olgu Okumuş
Olgu Okumuş is an affiliated lecturer in energy diplomacy at Sciences Po, Paris and director of strategy development at LEO Advisors. She is also a PhD candidate at Sciences Po, Paris, where her research focuses on Turkey’s energy transit policy.
She can be reached at olgu.okumus@sciences-po.org