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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Russia Tightens Its Grip On Kurdistan Oil

Atrush Kurdistan

The oil-producing subsidiary of Russian state gas giant Gazprom, Gazprom Neft, has announced that it plans to launch a fourth well at the Sarqala field in Iraq’s semi-autonomous region of Kurdistan (KRI) in the first half of 2021. Not only will this consolidate its own foothold in the KRI but it will also do the same for Russia in the semi-autonomous region, following the effective takeover of its oil and gas pipelines in November 2017. It will also further open up the way for the exploitation of greater synergies for Russia across the whole of Iraq.

In basic terms, the fourth well is intended to increase crude oil production at the Sarqala field to at least 32,000 barrels per day (bpd), from the current 24,000 bpd, according to Gazprom Neft, following the launch of first production in 2011 and commercial oil shipments commencing in 2015. Gazprom Neft itself has only been the lead operator in the Garmian block that contains Sarqala since February 2016, at which point it took a full 40 per cent stake, with the government of the KRI (the KRG) holding 20 per cent, and Canada’s WesternZagros keeping 40 per cent. In line with Russian plans across Iraq as a whole, Gazprom Neft also plans to exploit associated gas from Sarqala to provide electricity to several regions in Iraqi Kurdistan through a 4.5 kilometre gas pipeline that will connect the field to various power generation facilities. In addition, said Gazprom Neft’s deputy general director for exploration and production, Vadim Yakovlev, recently:  “We remain interested in exploring new options for development in the region.” Whether this still applies to the neighbouring Shakal block - in which Gazprom Neft has an 80 per cent stake, with the remainder held by the KRG, in which the company has drilled three wells so far – remains unclear. The wells were re-commissioned in 2018 but, according to Gazprom Neft’s head of major upstream projects, Denis Sugaipov, in March last year: “The results of these seriously dampened expectations.” Related: Canada's Oil Heartland Goes Into Lockdown As Covid-19 Infections Surge

With Russia’s top oil producer, Rosneft, already holding all the cards in the KRI’s oil industry by dint of a series of deals done in 2017, it was Gazprom Neft – rather than the country’s top gas producer, Gazprom – that was ‘encouraged’ by the Kremlin to also represent Russia in the KRI. “Gazprom Neft is basically the advance party for Gazprom in difficult foreign projects, which Iraq is for obvious political reasons, and it can work as easily in oil developments and gas developments, which can then be connected into the bigger Gazprom machine,” a senior Moscow-based oil and gas analyst told OilPrice.com last week. In Iraq’s case as well, because Gazprom Neft is seen less as the direct representative of the Russian state than either Rosneft or Gazprom, it can work more under the geopolitical radar than those two companies. In this instance, it can work at oil fields in the KRI and in one of the south’s bigger oil fields – with gas potential as well – Badra. “This allows Russia to pursue a pan-Iraq strategy, which other countries are finding difficult,” a senior London-based risk analyst told OilPrice.com last week. “Rosneft has the KRI’s politicians in its pocket and Gazprom Neft is definitely currently in favour in Baghdad, so the opportunities to act across the political divide in the country is there for Russia,” he added.

Such cross-country opportunities are why, despite recent obstacles, Gazprom Neft is to continue in Badra, and to look for further opportunities in the north and south of Iraq. Initially, Gazprom Neft began to operate Badra under the profoundly unpopular Technical Service Contract (TSC) that was the norm for Baghdad for many years. The Russian company took 30 per cent of the field, with the other consortium members being South Korea’s KOGAS, Malaysia’s Petronas, Turkey’s TPAO and Iraq’s Oil Exploration Company. The TSC contract runs for a period of 20 years, with possible extension for a further five. Gazprom Neft receives a fee of US$5.50 for each barrel of oil equivalent produced, although the rate declines once the payback point is reached. Originally, the estimate for Badra was that it would produce up to 170,000 bpd, yielding good returns for Gazprom Neft, given lifting cost projections of around US$2.50 pb. The field, though, had a much more complex geological structure than originally thought – and the oil a very high sulphur content - so increasing the cost estimates. Indeed, according to Russian analysts, the project costs have increased by around US$700 million from the original estimates, and the output projection is for peak production of 85,000 bpd. Due to the geopolitical importance to Russia of Gazprom Neft’s operations spanning Iraq, though, far from scaling down its interest in Badra after 2022 – when the company believes that payback for the US$1.6 billion it has invested will occur – it is looking to expand its operations. According to various Russian analysts, this will involve drilling many horizontal wells to increase the oil recovery factor and extend the production plateau. Related: Large Oil Trader Trafigura Books Strongest Trading Year Ever

These plans were part of the wider discussion on further co-operation between Russian and Iraq when the president of Russian state oil proxy Lukoil, Vagit Alekperov, recently met one-to-one with Iraq’s Prime Minister, Mustafa al-Kadhimi, and Oil Minister, Ihsan Abdul Jabbar Ismail, with Russia pressing Iraq for definitive progress on the series of deals that had been agreed between the two countries in 2017. Just prior to this year’s spate of attacks against U.S. military sites in southern Iraq, Russia had made it clear to Iraq (and before that to Iran) that a number of its companies were ready to move on at least US$20 billion of oil and gas projects in Iraq in the near term, including Zarubezhneft, Tatneft, and Rosneft-related oil and gas entities. These companies and others had seen their already-agreed projects stalled by the effective seizure of power by the de facto leader of Iraq, radical cleric, Moqtada al-Sadr, and his ultra-nationalist ‘Sairoon’ power bloc in the May 2018 Iraq elections and they remained slow-tracked as anti-foreign feeling in southern Iraq gathered momentum thereafter.

Nonetheless, March 2018 had seen Russian state-owned energy firm Zarubezhneft (and private Iranian company, Dana Energy) sign a US$742 million deal to boost production at the Aban and Paydar oil fields in Iraq’s Ilam province near the border with Iran. At around the same time, preliminary deals had been agreed in Iran for Tatneft to develop Dehloran, for Lukoil to expand its oil operations into Ab Teymour and Mansouri, and for Gazprom Neft to do the same in Changouleh and Cheshmeh-Khosh. In the latter two cases, both companies already had functioning operations in southern Iraq, with Lukoil active in the 14 billion barrel West Qurna 2 oil field, and Gazprom subsidiary Gazprom Neft active in the 3 billion barrel Badra oil field (the Iran side of the shared field is Changouleh). Rosneft subsidiary Bashneft is also operational in southern Iraq’s Block 12.  In addition, Russia again made it clear that it is extremely interested in taking over the development contract of Iraq’s Mansuriya gas field following the recent termination of the contract with a consortium led by Turkey’s state-owned TPAO. This will form one part of a skewed triangle of fields across southern Iraq, stretching from Mansuriya near the eastern border with Iran, down to Siba in the south (extremely close to the key Iraqi Basra export hub), and then all the way west across to Akkas (extremely close to the border with Syria). The 2019 contract between Russia’s Stroytransgaz and Iraq’s Oil Ministry to develop the hitherto virtually unknown Block 17 in Iraq’s lawless wasteland of Anbar province is a key part of this infrastructure plan.

By Simon Watkins for Oilprice.com


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