Turkey Energy Advisory

We have had some requests from Oil & Energy Insider subscribers to evaluate the situation for foreign E&P companies operating in Iraqi Kurdistan and the potential impact the Turkish political crisis may have on them. Consulting with our intelligence wing, OP Tactical, we believe that for now, there is no perceived risk to foreign companies operating in Kurdistan, such as Anglo-Turkish superstar Genel Energy, Oryx Petroleum, Gulf Keystone or Afren.

However, there have been concerns voiced to the effect that if the Gulenists manage to defeat Erdogan in this power struggle, Kurdistan could become less important to the Turkish agenda and attentions could be shifted to Israel, where talks have been underway for some time over a pipeline carrying Israeli gas from the Levant Basin to Turkey.

The fears are based on the theory that Turkey will be weakened by divisions that will distract it from Erdogan's efforts to see successful talks with its own Kurdish minority in the form of the Kurdistan Workers Party (PKK), and that Turkey will be less capable of dealing with Baghdad, which is trying to stymie the Iraqi Kurds oil independence push. More specifically, the concern comes from the Gulenists' clear opposition to Erdogan's attempts to make peace with the Kurds, and Turkey's oil and gas efforts in Iraqi Kurdistan necessarily play into this equation. The influential Gulenist media takes a decidedly anti-Kurdish tone, and the Kurds themselves fear a Gulenist rise to power.  

On the Israel question, we agree that Erdogan has remained belligerent with Israel, allowing the bid by Turkey's Zorlu Group for a Turkish-Israeli pipeline to languish in some sort of geopolitical purgatory. The Gulenists, on the other hand, would more visibly push for this project and clearly favor better relations with Israel. That said, we do believe that the pipeline has gained significant traction under Erdogan, despite what the public banter indicates. We have been closely monitoring certain pro-Erdogan groups who are edging their way into Israeli-related projects and we have indications that they are preparing for something to break the ice over this pipeline. This is not a black-and-white issue in Turkey, and certainly not an issue that can be broken down into Gulenists "for" and Erdoganists "against."

We concur with assessments that Turkey's divisions will weaken its command over certain issues, and that the Gulenists, with their ties to Washington, could work to undo some of the progress made towards Kurdish oil and gas independence, which would directly affect companies like Genel, who are preparing to export Kurdish oil on the international market.

We are not ready to raise any alarm bells over the development of independent oil and gas exports from Kurdistan just yet. Baghdad's ability to challenge the Kurdish oil independence momentum is becoming increasingly limited-in tandem with growing turmoil in central/southern Iraq (most recently the loss of Fallujah to Sunni jihadists for all intents and purposes). Turkey, under Erdogan, has been keen not to rock this boat too swiftly as it attempts to repair relations to some extent with Baghdad. None of the parties involved wish to see this turn into a bloody conflict, so much is being done to allow Baghdad to save face on the issue.

But more to the point, we do not yet see indications that the Gulenists are emerging as the victors in this power struggle. For now, we see Erdogan emerging as the victor-albeit a weakened one without his Gulenist collaborators.

This, however, could change in the medium- long term: external forces in Washington (which is pushing for a rapprochement between Ankara and Baghdad) and Tel Aviv understand that the Gulenists would work in their favor. The Israeli media is under the impression that if Erdogan loses power to the Gulenists, good relations with Israel would be immediately restored-and this is a notion the Gulenists in the US are keen to portray in their US-based lobbying.

Turkey has a solid foothold now in Iraqi Kurdistan. Despite this, however, the ensuing political crisis could weaken Erdogan's ability to focus enough energy on resolving the dispute with Baghdad and the end result could be a delay in the KRG's oil and gas production and export targets, along with a problem paying international oil companies. It wouldn't stop exports; it would just mean that increasing volumes would be trucked over the border into Turkey.

The energy deals that exist between Turkey and the KRG are largely private affairs-deals between Erdogan and KRG President Massoud Barzani. They are not "government" deals, institutionalized and all that would entail. So if Erdogan falls, or if Erdogan fails to win the presidential vote later this year, there is a certain amount of uncertainty over what would happen to these deals.

To update you on the oil and gas row between Erbil and Baghdad, we note these recent developments:

•    On 15 January, Baghdad and Erbil announced they had failed to reach an agreement over the annual budget allocated to the country's northern region and the distribution of oil income from exports to Turkey. Several days later, Baghdad threatened to cut central government funding for the KRG entirely.

•    Last week, the KRG noted that while they were already shipping crude oil to Turkey, they expected to start fully exporting Kurdish crude to Turkey, for further export on to international markets, by the end of this month.

•    The KRG is forecasting that up to 2 million barrels of crude oil will flow through the new pipeline to Turkey within in the next month, and that monthly volumes will increase to 10-12 million barrels by the end of 2014.