The struggle for control of Northern Iraq's oil and gas and a looming Kurdish bid for independence will be the most visible energy-impacting conflict of 2013.
The juniors were the first to tap into Iraqi Kurdistan's oil and gas largesse. Now the majors are following suit, risking a sizable prize in central and southern Iraq to do so. But we have to pay attention here to the potential this risk has to foster a major geopolitical change that is not likely to go down without a bloody conflict-and hence, without some significant upset to the industry.
To put it in simple mathematical terms: Oil = Kurdish independence.
And what, exactly, does Kurdish independence equal? An Iraq carved up into a central and southern territory nominally controlled by Iran and a northern Iraq nominally influenced by Turkey, the US and the Sunni Gulf states.
So what we're creating here by rushing in to take advantage of Iraqi Kurdish hydrocarbons is a bulwark against Iran that may very well include Syria--depending on how Syria's 3 million Kurds decide to play this game, which is anyone's guess.
Risk vs Prize
The oil majors and juniors are not even blinking--despite the risks of their Northern Iraq endeavors. Even as tensions mount in places like Kirkuk, and Iraqi military troops line up against Kurdish security forces, no one is backing down. Exploration, production and export continue unabated, and plans for new pipelines persist relentlessly.
What…
The struggle for control of Northern Iraq's oil and gas and a looming Kurdish bid for independence will be the most visible energy-impacting conflict of 2013.
The juniors were the first to tap into Iraqi Kurdistan's oil and gas largesse. Now the majors are following suit, risking a sizable prize in central and southern Iraq to do so. But we have to pay attention here to the potential this risk has to foster a major geopolitical change that is not likely to go down without a bloody conflict-and hence, without some significant upset to the industry.
To put it in simple mathematical terms: Oil = Kurdish independence.
And what, exactly, does Kurdish independence equal? An Iraq carved up into a central and southern territory nominally controlled by Iran and a northern Iraq nominally influenced by Turkey, the US and the Sunni Gulf states.
So what we're creating here by rushing in to take advantage of Iraqi Kurdish hydrocarbons is a bulwark against Iran that may very well include Syria--depending on how Syria's 3 million Kurds decide to play this game, which is anyone's guess.
Risk vs Prize
The oil majors and juniors are not even blinking--despite the risks of their Northern Iraq endeavors. Even as tensions mount in places like Kirkuk, and Iraqi military troops line up against Kurdish security forces, no one is backing down. Exploration, production and export continue unabated, and plans for new pipelines persist relentlessly.
What are they risking?
• Turkey is risking relations with Iraq and Iran
• Turkey is also risking the strengthening of Kurdish militants which it has been fighting for decades
• Foreign oil companies are investing in major new deals that could be sidelined by a new civil war
• The majors are risking their lucrative contracts with the Iraqi central government
• There is also great risk by way of a very precarious legal environment for foreign companies
• Outstanding payments (Baghdad still owes foreign companies $857 million)
What is this prize that is so worth the risk and has attracted some $10 billion in foreign investment?
• It's virgin territory (though pregnant with risk)
• An estimated 45 billion barrels of oil
• An estimated 110 trillion cubic feet of gas
• The biggest prize-the onshore Shaikan field, where discoveries were first made in 2009
• High commercial viability (an average of 7 out of 10 wells drilled are commercially viable)
• Fast development (3 drilling rigs in 2008; 24 in 2012; 40 for 2013)
• 2013 estimated production 250,000 bpd (up 50,000 from 2012)
• Export predictions: 1 million bpd by 2015
• Pipelines in the works will boost exports directly to Turkey-meaning that the Kurds will be paid by Turkey, not by Baghdad, so no more payment bottlenecks
• A hungry market with Turkey next door and a direct link to gas-starved Europe, which is currently hostage to Russia's Gazprom and hesitancy to develop its own shale reserves
• More prizes in the disputed territory of Kirkuk, which produces one-fifth of Iraq's total oil
The Key Players
While the juniors like Turkey's Genel Energy, Gulf Keystone, Heritage Oil, and Canada's WesternZagros were the pioneers of Northern Iraq's hydrocarbons, late 2011 marked a significant change. The majors hit the scene, lured by the KRG's more flexible and lucrative production-sharing agreements and clear potential.
While Baghdad attempted to preempt this with threats to the majors' existing contracts elsewhere in Iraq, it wasn't enough to stop the shift. ExxonMobil was the first to take the plunge, signing a contract with the KRG in October 2011. Chevron and Total followed suit, and even Russia's Gazprom Neft. ExxonMobil has even given up its vast West Qurna oilfield concession in southern Iraq to clear the path for investments in the KRG.
Turkey's Genel Energy remains the biggest producer (and investor) in the KRG. In November alone it bought $1 billion in KRG oil shares from other companies. It also has major pipeline plans in the works.
Welcome to the Front Line
The front line here is the disputed territories-a prime bit of (oil-rich) real estate that is claimed by the KRG in northern Iraq and the central government in Baghdad. Recent weeks (and months) have seen things heat up here to the point of no return. Both sides are boosting their military presence as it becomes clear that the end-game is near. This military presence is in return fomenting significant sectarian discord-so we can double the tension immediately.
Kirkuk is the focal point as it houses some of the world's largest oil fields, as well as a pipeline to Turkey controlled by Baghdad. Kirkuk fields produce around one-fifth of Iraq's total crude exports of 2.6 million bpd.
This is the definitive front line in the Erbil-Baghdad energy showdown, and military forces from both sides are poised for conflict.
Right now, you can't even cross over from Northern Iraq to Central/Southern Iraq except by air. In December, air traffic control in Baghdad refused landing rights in Erbil to a plane carrying Turkish Energy Minister Taner Yildiz, who was en route to attend the Kurdistan-Iraq Oil and Gas Conference.
How it is supposed to work is this (according to Baghdad): The Iraqi central government has the sole right to export oil and it reimburses the KRG for exported Kurdish oil. Anything else is considered smuggling. According to Erbil, it has the right to export its own oil, and Baghdad hasn't been paying up anyway. Caught in the middle are the oil traders and producers.
Since Kurdistan began selling its own oil for the first time through independent export deals in October, oil traders have landed in a bit of a tight spot-unsure of whom they should be taking orders from. Vitol-a top oil trader here-found itself apologizing to Baghdad in December for exporting Kurdish oil via Turkey without the central government's permission.
Trafigure and Lukoil are also under pressure. Along with Vitol, they have purchased Kurdish light crude condensate via an intermediary and then sold it on world markets-exporting via Turkey.
There is one pipeline to Turkey that Baghdad controls, but the amounts flowing through this pipeline are declining. Right now, Kurdistan is pumping about 100,000 bpd through this pipeline, but they had agreed earlier to pump 200,000 bpd. However, Baghdad hasn't paid up, and the Kurds respond by cutting exports-sometimes halting it altogether.
And the Kurds are growing increasingly bold. Why? Because now the oil majors are flocking to their territory-ignoring warnings from Baghdad-and oil revenues are allowing the Kurds to further their ambitions. New pipelines to Turkey-which would bypass Baghdad's control entirely-are a significant addition to this balance-of-power equation.
Turkey's next move will be DECISIVE.
As we speak, Turkey is negotiating a game-changing deal for a Turkish state-backed company to drill for oil and gas in Kurdistan and build new pipelines for export to international markets. Ankara hasn't made a final decision yet because it's not exactly certain of the repercussions.
Clearly, Turkey is already on Baghdad's blacklist, unfortunately after years of improving relations. Ankara is also unsure of the implications of the bigger picture of an independent Kurdistan-even though Turkey itself is the main force fostering this.
A particularly precarious unknown here is the Syrian Kurd factor. Since the outbreak of conflict in Syria, Syrian Kurds have gained total control over a large swathe of territory bordering Iraq. What they plan to do with that remains unclear-even to them. They are sitting back right now and hedging their bets.
And for now no one can say with any certainty that the Iraqi Kurds can keep their Syrian brethren under control. Intelligence from Oilprice.com's network on the ground in Iraq and in the border area with Syria shows that the Syrian Kurds are waiting for a definitive move either by the Syrian rebels or Assad's forces before they make their next move. They are withholding potential alliances until the time is right. This has everyone nervous.
Iran is very concerned, and its state-controlled news agencies are a barometer for this. On New Year's Day, Fars News Agency lashed out against KRG President Barzani's "plan" for the "disintegration" of Iraq through the pursuance of an independent Kurdistan. Iran is not prepared for this coming Iraqi civil war. It hasn't yet solidified its influence in the rest of Iraq. For now, Iraq is just an Iranian satellite.
The New Year also brought rumors from Baghdad that a deal had been reached with the Kurds over the disputed territories. Those rumors were swiftly denied by the Kurdistan Alliance (KA).
What to look for in 2013?
• A potential bid for Kurdish independence
• Steadily rising violent incidents in the disputed territories, with Kirkuk the focal point, leading to a bloody conflict
• A behind-the-scenes proxy war over Iraq between Iran and the West-Gulf-Turkey nexus
• A wave of oil and gas consolidation as the majors move in on territory developed by the juniors
• A major shrinking of the playing field in terms of number of operators
Right now, it's all about infrastructure, and Northern Iraq does not have the pipelines necessary to handle its production potential without Baghdad. This is what it all comes down to for 2013-and these pipelines come with some consider political (and bloody) baggage.
Genel Energy, headed by a former BP chief, is key here. It's nearly finished with a new pipeline connecting its Taq oil field to another field on the border with Turkey and is drawing up plans now to export gas to Turkey.
The spoiler for the KRG-and the foreign oil companies operating on its territory (and in disputed territory)-is a deal being discussed between Erbil and Baghdad to end the energy standoff. The proposed deal would create a new joint energy corridor that would pump some 3 million bpd and 10 billion cubic meters of gas into Turkey from across Iraq.
If the flurry of recent near deals is anything to go by, this one won't see the light of day, either.
There is one more potentially cataclysmic change: Iraqi President Jalal Talabani is likely out of the picture. Talabani-the leader of the Patriotic Union of Kurdistan (PUK)-is a major heavyweight who has acted as the mediator between his Kurdish brethren in the KRG and the Iraqi central government. Throughout the last quarter of 2012, Talabani's health has been in question and the Iraqi president has been back and forth to Germany for medical treatment. In late December he suffered a stroke and returned to Germany again. He has not come back to Iraq since, and our sources say he has actually passed away, though we have no official confirmation of this as of the time of writing.
His likely replacement will be another PUK figure, Salih Barhem, a former KRG prime minister and a former minister of planning in Baghdad. While Barhem is a long-time PUK figure and is not likely to have a different agenda from Talabani's, he is certainly not the heavyweight that Talabani was. His mediation powers will not have the same influence and there will be a vacuum. Talabani was always at loggerheads with KRG President Massoud Barzani. Barzani will find it easier to deal with Barhem on the Kurdish independence question, should he so choose.
However, in all of this it is important to understand one critical thing: The Kurds could have declared independence at any time since 2005. The public is ready. But they are moving along cautiously because they do not want to declare independence without Kirkuk. It's all about Kirkuk, the single largest oil area in the country. What happens in Kirkuk in the coming weeks and months will be the indicator of where Kurdish independence is going.