After the steady buildup of a burgeoning strategic partnership between the Russian national oil company and Kurdistan’s Regional Government (KRG), the year 2018 threw cold water on the ambitious plans of the two sides. Having signed an oil supply contract in February 2017 and an oil and gas infrastructure ownership takeover deal in September, Rosneft seemed to become Kurdistan’s key partner in marketing its hydrocarbon resources. However, after the failed independence referendum in late September, Baghdad’s recapturing of the Kirkuk oil hub and its successful drive to stamp out any possibility of a Kurdish secession, bad news started to pile up for the Rosneft-KRG axis.
Three major issues need resolving – Rosneft’s five exploration concessions in the Kurdistan Region of Iraq, the restarting of full-scale oil exports via Kurdish territory and that of Rosneft’s massive prepayment financing for future barrels of oil.
Acting accordingly to the October 2017 agreement on the assignment of five exploration blocks in Kurdish territory, Erbil granted Rosneft five concessions the details of which, albeit not made public, took shape over time. This is due to Rosneft’s registering of five subsidiaries in Singapore, all five of which bear the names of towns in the Kurdistan Region of Iraq (Batil, Darato, Qasrok, Zawita and Harir-Bejil) and are located in different license areas. Located predominantly in the Northwestern part of Kurdistan, these $400 million exploration blocks (Rosneft took a 80 percent stake in all five of them, aggregate 3P reserves estimated at 670 million barrels) will become a subject of debate as Baghdad warned that any deals approved without the knowledge and approval of the federal government are to be deemed invalid.
Rosneft initially dismissed any hint of illegality, claiming that any “contradictions” are to be solved between Erbil and Baghdad and that the Russian major merely wanted to do the same thing that many other international companies are doing. Yet recently Rosneft has taken on a new role, a not publicized one, that of a mediator between the two rivalling sides. Late February, the Iraqi Prime Minister claimed that an agreement had been reached to resume full oil exports via Kurdish territory to the Turkish port of Ceyhan. Related: What Trump's New Appointment Means For Oil Prices
This does not automatically presuppose a Russian mediating role, however, the devil is in the details. Within the terms of the agreement, Erbil would transfer the money back to the federal authorities, which in return will provide Kurdistan with some volumes of oil for local refining and, more interestingly, pay a pumping tariff to Rosneft. Rosneft has become the main shareholder of crude pipeline infrastructure in Iraqi Kurdistan (it has a 60 percent stake in the Kirkuk-Ceyhan pipeline) on October 19, virtually a couple of days after federal forces retook Kirkuk and all the adjacent fields around it. If the verbal agreement will transform into a legally binding written one, Rosneft might consider it one of its most brilliant diplomatic successes.
But it only gets better from here. The Iraqi Oil Minister, Jabar al-Luaibi, has expressed willingness to accommodate Rosneft in the Kirkuk oil hub itself, saying that they do not want to close the doors in the face of anyone who “wants to help”. The only condition here is that Rosneft should work with BP (which owns 19.75 percent of Rosneft), hardly an insurmountable requirement. This would catapult Rosneft into world-class territory, as Kirkuk production is potentially in the 400-450 kbpd interval (a part of it is still halted due to the Kirkuk-Ceyhan pipeline working only partially), more than the total output of Iraqi Kurdistan.
It should be noted that of the concessions the KRG has granted Rosneft in Iraqi Kurdistan, several have been previously relinquished by international oil and gas companies, either due to geological complexity or unwillingness to develop heavy oil deposits (for instance, the Ber Bahr field in Block 9 is a 15° API one). Oil fields in the Northern part tend to be heavy (within the 15-28° API range), whilst those in the South, including the still Kurd-controlled Khurmala Dome and Kirkuk which is now controlled by the federal government, are much lighter (predominantly 40-50° API). Therefore, one might expect Rosneft to go all for it, as it would allow it to have unprecedented powers in Northern Iraq – not only would it control the infrastructure, it would also be a key player in oil production, both within the disputed and non-disputed territory. Related: Oil Rig Competition Flares Up Amid Permian Boom
Hence, it would be fair to say that Rosneft has minimized the risk that anything negative will happen to its projects in Iraqi Kurdistan. It has invested heavily to keep Erbil satisfied – during 2017 it transferred $2.1 billion to KRG in prepayment deals under the long-term supply contract it concluded with the Regional government (valid until 2020). This puts the aggregate value of Rosneft-KRG contracts substantially above $3 billion. Moreover, by gaining the favor of both Erbil and Baghdad, Rosneft has significantly de-risked its gas pipeline project in Kurdistan, under which it would build, own and operate a 30 BCm/year pipeline that would presumably connect Suleymaniyah with Turkey. If it can find a similarly mutually acceptable solution to the gas issue, it would fortify its positions in the Middle East for a long time.
No matter how one sees the Erbil-Baghdad row, it is highly remarkable that Rosneft has factually become an arm of Russian foreign policy in the Middle East. Practically negotiating state-to-state diplomatic and military relations, the Russian IOC has managed to wriggle itself into almost all energy-related equations, without seemingly antagonizing anyone, even more so, promising investment to both quarreling sides. No small feat.
By Viktor Katona for Oilprice.com
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