South-eastern promise

By bne IntelliNews May 23, 2013

David O'Byrne in Istanbul -

If, as the old adage would have us believe, "It is better to travel hopefully than to arrive", then the visit in mid-May by Turkish Prime Minister Tayyip Erdogan and Energy Minister Taner Yildiz to Washington can be judged to have been a complete success.

High on Turkey's wish list was the hope that the US would approve Turkish plans to play a role in the development of oil and gas fields in the Kurdistan region of Northern Iraq, and the export of that region's oil and gas to Turkey for domestic use as well as to be transited on to global and regional markets. However, if the near silence on the results of the visit is anything to go by, those hopes were - if not exactly dashed - then certainly not met with the same degree of enthusiasm as Ankara has recently been hinting that it was hoping.

Departing

Ahead of his departure to Washington on May 14, Erdogan finally confirmed reports that a Turkish state company had, with the blessing of the Kurdish Regional Government (KRG), formed a joint venture with ExxonMobil to develop fields in Northern Iraq. That company is widely believed to be Turkey's TPIC, formerly the international arm of state upstream operator TPAO, which was earlier this year transferred to state gas company Botas.

Subsequently, Yildiz has gone further, suggesting that Turkey could this year sign more deals with US or Russian companies to develop oil and gas reserves in Kurdistan.

Turkey's case is clear. Although still part of Iraq and under the control of the central government in Baghdad, the Kurdistan region has for the past two decades been a de-facto self-governing state, signing more than 50 agreements with oil companies that allows them to prospect and commence production. And over the past few years it has been developing close relations with the country that offers the only realistic export route for the region's resources, namely Turkey.

Anglo-Turkish Genel Energy has already announced plans for the construction of a new crude oil line to the Turkish border from where it can connect with the existing Iraq-Turkey export line, which runs to Turkey's Mediterranean oil hub of Ceyhan. While at the same time, Turkish construction group Siyah Kalem has applied for a license to start importing gas from the region to Turkey.

So with developers already in place, why not allow them to start exporting, allowing Turkey and Europe a valuable new source of natural gas and increasing the flow of oil to global markets, increasing supply security? The benefits, Ankara has argued, are obvious to all. All, that is, except the Iraqi central government.

Baghdad, which has failed to pass a new petroleum law or reach an agreement which would resolve the dispute with its uppity Kurdish province, has stridently opposed granting any authority that could be construed as going beyond that granted by Iraq's federal constitution. To date, the only concession Baghdad has made is to allow the export of small volumes of Kurdish oil through the existing Iraq-Turkey oil line, in return for an agreed level of compensation paid to the KRG, which in turn pays the developers. This is a significant concession that has allowed field development to continue, but on which Baghdad has frequently reneged, failing to make payments, which has most recently resulted in the KRG amending its own constitution allowing it to sell the region's oil and gas itself, should Baghdad fail to make payments within 90 days.

For the US' part, it doesn't want the KRG to start gas exports to Turkey independent of Baghdad because they are afraid of a possible conflict between Baghdad and Erbil, and worried that this would drive Iraq closer to Iran. US efforts to force Iran to abandon its nuclear programme have to date been unsuccessful, despite the imposition of wide ranging sanctions, including pressuring Turkey to reduce the volume of crude it's sole oil refiner Tupras has been buying from Iran at a discount on market prices and preventing Turkey from paying for the crude and gas it buys from Iran in gold bullion - a short-term measure adopted in response to US sanctions which have enforced the isolation of the Iranian banking sector.

Washington would also like Turkey to reduce the volume of gas it buys from Iran, something Ankara has been unwilling to do both for fear of breaching its 10bn cubic metres a year take-or-pay contract and risking Iran arbitrarily cutting supplies, and because irrespective of whoever cuts supply from Iran, Turkey has no alternative sources of gas to fall back on. With Iranian gas currently meeting one-fifth of Turkish gas demand and with gas generating over 40% of Turkish power, losing gas would see Turkey facing crippling power cuts.

Hence the reason for Turkey's increasing interest in Kurdish gas. Not just with the aim of meeting growing demand, but also for fear that US policy on Iran may yet see Turkey lose its gas supplies from Iran. Turkey, it seems is between a rock and a hard place.

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