Coming soon to Turkey: Kurdistan oil and gas

By bne IntelliNews September 18, 2013

David O’Byrne in Istanbul -

Ankara's decision to award Turkish construction group Siyah Kalem a license to import gas from the Kurdish region of northern Iraq into Turkey further ramps up pressure on the Iraqi central government in Baghdad to give its semi-autonomous northern enclave more control over the export of its oil and gas.

Turkey has for the past year been allowing the Kurdistan Regional Government (KRG) to export increasing volumes of crude oil and condensates by truck through Turkey's Mediterranean ports in spite of objections from Baghdad. Ankara now appears increasingly likely to go the whole way and allow both crude and gas to be exported through it by pipeline. The question increasingly appears to be not "if" but "when" - albeit with the caveat of "what", as in what will be the reaction of Baghdad?

With its sizeable reserves of oil and gas, the semi-autonomous Kurdish region of northern Iraq has long presented a conundrum for Turkey. The region is home to camps of the Kurdistan Workers party (PKK), which has for close on 30 years been conducting a violent insurgency in southeast Turkey. So on the face of it, Ankara should be treating the KRG as an enemy. In fact the exact opposite has occurred, with the two sides enjoying particularly close relations and Kurdish ministers treated as the equals of their Turkish counterparts despite their lower status as "regional ministers".

Mutual benefits

As with all the best friendships, each has something the other wants. With little likelihood of improved relations with Baghdad and every sign that it will one day formally secede, the KRG sees Turkey as the best route for it to monetise its oil and gas reserves. Ankara for its part sees a guaranteed supply of cheap gas, a lucrative role in transiting oil and gas, not to mention leverage over its own sizeable and fractious Kurdish minority.

With the region thought to hold as much as 45bn barrels of oil and 2.8 trillion cubic metres of gas, both sides have much to offer each other. The only problem preventing the immediate construction of pipelines is that the Iraqi central government in Baghdad remains the internationally recognised authority, even over the northern Kurdish province over which it exercises little control. As such, Baghdad refuses to recognise the contracts the KRG has signed with oil companies developing its oil and gas fields in the region, and also refuses to allow the KRG to export any of it without its say so.

Limited exports began in 2011 under an agreement that saw two fields in the region truck crude across country to be fed into the existing Iraq-Turkey oil line, which terminates at Turkey's Mediterranean oil hub of Ceyhan and remains under Baghdad's control.

However, a proposal made to Baghdad last year by Turkey and the KRG for increased independent exports with revenue to be paid into an escrow account - with 83% to be paid to Baghdad and 17% to Erbil - was rejected by Iraq. And with Baghdad refusing to pay the region its share of the revenue for the oil it was already exporting by October last year, the KRG had already started exporting condensate by truck to Turkey to be followed in January this year by crude, trucked to the Atas terminal at Mersin.

Exact export volumes are unclear, but Turkish tanker truck operator Powertrans, which has been trucking in and exporting the crude, rented storage capacity of up to 80,000 tonnes at Atas and is believed to be renting a further 40,000 tonnes from the DeltaRubis-operated Dortyol terminal, from which a first cargo was exported in mid-September.

More may be about to follow with three pipelines under construction in the KRG-controlled region ostensibly to carry crude from oil fields under development by DNO, Genel and Gulf Keystone to the Baghdad-controlled Fishkabour measurement station on the Iraq-Turkey oil line. However, reports suggest all three may yet terminate at a new metering station being constructed by the KRG closer to the Turkish border, allowing a cross-border connection with the Turkish section of the Iraq-Turkey pipeline.

Turkish officials claim that they have no official knowledge of the new pipelines, but confirm that they are open to discussing possible options. Whether that will result in the long-anticipated cross-border connection to the Turkish side of the existing pipeline remains to be seen. However, by awarding Siyah Kalem a license to import gas, Ankara has for the first time signalled its intention to defy both Baghdad and the US.

A visit by Turkish Prime Minister Tayyip Erdogan to Washington earlier this year had been expected to elicit approval for plans for Turkish upstream operator TPAO to partner ExxonMobil in developing gasfields in the KRG region, but to Ankara's chagrin the Obama administration declined to budge.

What remains to be seen is whether licensing Siyah Kalem is aimed at further pressuring Baghdad into agreeing a deal with the KRG to free up exports, or whether Ankara and the KRG seriously intend to go it alone.

In the current climate with the Syrian civil war showing every sign of escalating and ethnic divisions in Syria, Iraq and Turkey already inflamed, such a move would be risky. The question, therefore, is whether for Ankara and Erbil the benefits will outweigh the risks.

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