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Shadow Governance Intel

Shadow Governance Intel

Shadow Governance Intel (www.shadowgovintel.com), the analytical arm of West Sands Advisory Limited, conducts in-depth research on power players and power plays that challenge the transparency…

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Turkey Expands Influence In Kurdish Energy Sector

Turkey

Over the past 12 years, Turkish energy companies have moved into the Kurdish energy sector at great pace in line with the sector’s rapid expansion under the semi-independent government in Erbil. Energy cooperation between the Kurdistan Regional Government (KRG) and the Turkish government is the single greatest factor for energy companies’ involvement in the region and the commercial realization of this cooperation is no doubt the result of high-level political alignment.

The recent downturn in the global petroleum market, the outbreak of war in North-Western Iraq, and internal political tensions have dampened investors’ expectations vis-à-vis energy sector viability in Iraqi Kurdistan. However, questions still remain as to which parties were the key beneficiaries of energy cooperation and how some of the most lucrative contracts were negotiated during the sector’s peak – many of these parties are primed to benefit should the industry pick up again.

Humble Origins

The KRG began exporting oil for the first time to Turkish ports by truck in June 2009 when Jalal Talabani was Iraq’s President. Supplies originated from Genel Energy’s Taq Taq and Tawke fields, which is where Genel’s concessions from the KRG are still focused today.

Between 2011 and 2012, a secret diplomatic energy agreement was negotiated between Turkey and KRG, with Ankara toning down its relations with the Maliki government - ostensibly due to Sunni-Shia tensions. Between 2009 and 2012, Baghdad allowed oil to be exported from the Kurdistan region to Turkey’s Mediterranean Ceyhan port, with the KRG receiving a share of the revenue – it is alleged that oil companies were allowed to claim expenses but made no profits. However, those exports ended in April after the KRG complained that it received no money at all.

To circumvent Baghdad, and avoid the financial losses that its agreements with Iraq incurred, the KRG launched the construction of a new oil pipeline to bypass the Kirkuk-Ceyhan pipeline from its fields to the Turkish border, with help from the Turkish government. However, until the completion of the oil pipeline from Kurdistan to the border of Turkey, Erbil needed a novel way of exporting its oil without consultation with Baghdad.

The KRG began selling its oil and gas through convoy trucks, taking the condensate liquid fuel bi-products into Turkey. In return, Turkey sent back diesel fuel and kerosene to use in KRG’s power plants. Genel Energy reportedly loaded almost 500 trucks a day while waiting for a new pipeline.

In short, Turkey became a facilitator in liberating Kurdistan’s energy sector from oversight and management by the political authorities in Baghdad, who are constitutionally responsible for the management of Iraqi oil. In doing so, Turkish and Kurdish elites put in place an informal status quo whereby mutually beneficially energy deals could flourish between them without Iraqi oversight.

The Political-Commercial Nexus Solidifies

Çal?k Energy, whose former CEO is Erdogan’s son-in-law, Berat Albayrak, applied to Turkey’s Petroleum Directorate for a license to build a crude oil pipeline from the KRG-Turkish border to Ceyhan in early 2012. The pipeline from Khurmala to Fish Khabur, 5 kilometres from the Turkish border, was subsequently completed at the end of 2013.

PowerTrans was granted rights to transport the oil from Northern Iraq by trucks, having been founded four months prior to the resolution. The rights given to PowerTrans to transport oil was extended to the 31st of December 2020 (Resolution 2015/7583), being finalised only one week before the 7th of June 2015 elections in Ankara. Its access to the logistics side of the emerging Turkish-Kurdish energy collaboration strongly suggests that it enjoys privileged access to the industry before it became a high-profile sector.

In May 2013, Turkey sealed an energy agreement with ExxonMobil to cooperate on ExxonMobil’s six blocks in the KRG region. Erdogan said this deal made it suitable for a (unnamed) “Turkish company” to become a partner with Exxon and KRG. Afterwards, Erdogan and the KRG Prime Minister, Nechirvan Barzani, signed a comprehensive energy deal in November 2013, which was never officially shared with the public.

As part of the deal, the state-backed Turkish Energy Company (TEC), founded in Jersey, Channel Islands, signed a contract to operate in 12 exploration blocks, six of them with ExxonMobil. According to the deal, the two parties agreed to build a new oil and gas pipeline. Nechirvan Barzani announced that Turkey and the KRG signed a 50-year deal to export Kurdish oil in June 2014 despite the FGI’s position on the matter. However, the KRG did not permit the international audit firms Deloitte or Ernst & Young to see the terms of this energy agreement, thereby bringing into question the integrity of the deal. Related: Oil Futures Point To Higher Oil Prices

Furthermore, Patriotic Union of Kurdistan (PUK) officials in Erbil said that they were not aware of the 50-year energy deal with Turkey, illustrating the clear dominance of the Kurdistan Democratic Party’s (KDP) influence in the energy relations. Sherko Hama Amin, a member of the Iraqi Kurdistan Parliament’s Education Committee, wrote that this deal included security issues such as the deployment of Turkish troops, the defence of KDP members and its allies, and the fight against the PKK.

Thus, it is evident that Turkey and the KRG signed several energy deals despite opposition from Baghdad to brokering regional agreements independent of national authorities. As a result, the oil flow has been cut many times since 2011 due to these legal disputes; and more recently, for security reasons. Today, oil flowing from Kirkuk to KRG, and KRG to Turkey, remains governed by the rules and approval of Baghdad. However, none of the revealed signed accords have been approved by the Parliaments of Erbil and Baghdad to-date.

Turkish Energy Companies Operating in KRG

Genel Energy (GE) was established by Mehmet Emin Karamehmet, a former Turkish media mogul – chairman of Cukurova Holding that owns Turkcell - and Mehmet Sepil. In 2016, Sepil sold all his shares in GE which triggered the merging of the company with UK-based ‘Vallares PLC’ on September 2011, registered in the Channel Islands. GE was registered on the London Stock Exchange in 2011, after merging with Vallares PLC.

The same year ex-BP CEO, Tony Hayward, was appointed its CEO. Currently, GE operates six fields in the KRG – the oil production fields of Taq Taq and Tawke, gas production at Miran and Bina Bawi, and the Chia Shurkh and Peshkabir exploration fields. GE began its operations in Taq Taq field in 2002.

Although GE rapidly grew between 2002 and 2013, the company’s shares plunged more than 40 percent after it slashed the estimated value of its largest oilfield by U.S. $1 billion. In April 2017, its market share value on the London Stock Exchange was £215 million whereas it was U.S. $4.8 billion in 2013. GE suffered severely not only because of the decline in oil prices and payment problems, but also because of declining reserves, which went from 683 million barrels to 356 million bpd in the Taq Taq field.

On the 28th of March 2017, GE released the latest results of the Taq Taq field, which stated a further drop in reserves. Genel Energy’s Competent Persons report put gross 2P (proved and probable) reserves at 59 million barrels as of 28th of February 2017, down from 172 million bpd at the end of 2015.

In this sense, GE’s only exit from this difficult situation is to produce natural gas in the KRG fields and sell it to Turkey. The company has started talks with TEC (Turkish Energy Company) regarding a gas sales agreement between Turkey and the KRG. Moreover, GE announced that Tony Hayward is to be replaced by Stephen White, who was previously head of exploration and production at Portugal’s Galp Energia.

Turkish Energy Company (TEC)

When Tayyip Erdogan and Nechirvan Barzani signed energy agreements in June 2013, Turkey withheld the name of the “Turkish Entity” which was given stakes in the Choman (80 percent), Hindren (80 percent), Arbat (80 percent), Pulkhana (40 percent), Jabal Kand (40 percent), and Khalakan (40 percent) blocks. It was subsequently disclosed that this “Turkish Entity” was TEC - Turkish Energy Company - which was initially registered as Salus Energy in the Channel Islands on 12th of October 2012. Today, the identity of TEC is disclosed in KRG oil and gas infrastructure maps. According to the latest map published by Western Zagros (2017), TEC has three blocks in KRG which are Jabal Kand, Pulkhana, and Arbat.

Apparently, the reason why Ankara sought to maintain confidentiality around TEC was to protect Turkey from possible international lawsuits initiated by Baghdad, and to bypass Turkish state auditing institutes. It remains unknown what the KRG government received in exchange for providing block shares to TEC. Although none of the maps include TEC’s name on any ExxonMobil blocks, TEC has shares in the six blocks owned by ExxonMobil. Exxon Mobile created a subsidiary company, EMKRGL – ExxonMobil Kurdistan Region of Iraq Limited – to exclusively operate in the Kurdistan region. Since January 2016, the General Manager of TEC and TPIC is Ahmet Turkoglu, who worked for Çal?k Holding as a marketing director between 2003 and 2010.

As a result of a Production Share Agreement (PSA) between Turkey and ExxonMobil, signed on the 18th of October 2011, TEC received a 16 percent share in all ExxonMobil blocks where ExxonMobil had 64 percent, and KRG had 20 percent. For this reason, TEC paid U.S. $271.8 million for six blocks until June 27, 2016. No further public information confirms whether the concession or these blocks was extended or simply expired.

EMKRGL pulled out of three blocks - Qara Hanjeer, East Arbat, and Betwata - in December 2016 and raised many questions. It is unknown whether TEC purchased the EMKRGL shares in the blocks or not. TEC was also interested in buying half of Western Zagros shares in the Kardemir (40 percent) and Garmin (40 percent) blocks in 2016. It seems that TEC officially operates 6 blocks: Jabal Kand, Pulkhana, Arbat, Al-Qush, Bashiqa (operations suspended for security reasons), and Pirmam.

Political Consequences

While none of the energy deals signed between the KRG and Turkey have been approved by either the Parliaments of Ankara and Baghdad, trade between these two countries is being carried out anyway. In this sense, the companies benefiting from this informal agreement are owned by individuals directly related to both Turkish and Iraqi Kurdish governing elite, meaning that energy relations are highly personalised and “closed-off” to outsiders. Related: This $65 Billion Oil Opportunity Will Never Be Tapped

Besides the case of Petoil, which has ultimately fallen under the economic sphere of influence of businessmen with strong ties to Erdogan, the other Turkish companies have members with direct political, economic or blood ties to Erdogan. Berat Albayrak, for example, has played a key role in the Ankara-Erbil energy relations, benefiting economically and politically. His ministerial role has further upgraded his presence in the KRG energy sector, and his familial ties with Erdo?an make him a potential successor to Turkey’s President, and therefore an enduring power player in these energy relations.

Additionally, Albayrak’s network in the KRG has also been a crucial factor in the development of these relations, and has allowed Kurdish families with strong ties to the KDP to benefit from these deals as well. This is the case of Mushin Nezir, who is present in the Turkish energy company, PetroTrans.

Furthermore, it is important to highlight the case of GE, which – through some key principals - possess significant levels of political exposure and has arguably benefitted from close ties to the Turkish political elite, arriving to the KRG’s energy sector in tandem with the political consolidation of Erdogan. In this sense, all of them directly depend on Turkey’s foreign policy, and any modification in this policy could directly affect their presence in the KRG.

By Shadow Governance Intel

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Leave a comment
  • Richard on August 17 2017 said:
    Genel does not operate the Tawke license. The Tawke license is operated by DNO and contains the Tawke and Peshkabir fields.
  • Re da Caste on August 19 2017 said:
    To mention Tawke and not to mention DNO (55% of the license) is really strange. Does he knows what's going on in Kurdistan?

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