While the energy factor in US elections is taking center stage in the news right now as we close in on November, and issues like the war on coal position themselves as key topics, we’d rather take a step back from this to look at something further afield that will have a resounding effect on sector investment and Middle East geopolitics: the oil and gas showdown in Iraq.
More than any other publication out there, Oilprice.com has examined the oil and gas showdown between the Iraqi central government and the Kurdish authorities in Northern Iraq. From the beginning, we felt there was much more at stake here than the reputation of a handful of oil majors. We believe this now more than ever.
To sum up this dangerous and game-changing impasse ...
It all began in earnest last year, when ExxonMobil took a decisive risk by ignoring threats from Baghdad and cutting a deal with the Kurdistan Regional Government (KRG) in Northern Iraq. As far as Baghdad is concerned, all oil deals in Iraq must go through the central government, and the KRG, does not have the right to cut unilateral deals with foreign oil companies to exploit oil on its territory, regardless of its autonomy. Junior oil companies were already making major gains in Iraqi Kurdistan, while the oil majors had to set back and watch these deals—which were more lucrative and flexible than Baghdad’s—unfold. Once ExxonMobil took the plunge, other majors followed, including Chevron, Total and Russia’s Gazprom Neft. Baghdad threatened to blacklist them all, but hasn’t been able to afford such as move, independent on these revenues for investment in much-needed oil and gas infrastructure.
So far, the Kurds have maintained the upper hand in this game, which is all about independence in the end—and independence that will be fostered by oil and gas and which is not likely to go down without another bloody conflict.
This week, however, saw a rather interesting development for the Kurds and foreign oil companies operating on KRG territory. Baghdad apparently thinks it’s found another outlet for retaliation: Russia.
The keen observer who has been keeping up with this story will note that while the Western oil majors have been threatened by Baghdad, not a word has been said about Gazprom Neft’s entry into the KRG market. Now we know why. Earlier this week, reports began to emerge that Iraqi Prime Minister Nouri al-Maliki is considering kicking ExxonMobil out of the massive West Qurna-1 field in southern Iraq and replacing it with Russian companies. In fact, the previous week saw Russian President Vladimir Putin hit the ground running in Baghdad with a series of talks about its involvement in Iraq.
Related Article: Baghdad is Losing Iraqi Kurdistan - Empowered by Oil and Gas
How worried should the Kurds and their oil major friends be? Well, it is a brilliant strategy by Putin, on one hand in terms of strategic positioning at a time when the West and Turkey are de facto in control of autonomous Iraqi Kurdistan, where they are eyeing gas exports that would make their way to Europe and bypass Russia. On the other hand, we are not convinced that Gazprom Neft has the capacity to handle the West-Qurma 1 field, nor the investment that Iraq needs. Finances are thinner than usual these days, and the US natural gas boom (not mention the corruption behind Gazprom’s Kremlin slush fund) has done severe damage to Gazprom.
But there’s more: This is really a ruse by Baghdad to make it appear as if it has control over the majors. ExxonMobil had already let it leak that it was in talks to sell 60% of its stake in West Qurna.
If it does go to Russia, though, we are still that much closer to carving up Iraq into a central/southern Iraq largely governed by Iran and Russia, and a Northern Iraq influenced by the West and Turkey.
Another impasse of a North American variety that has piqued our interest is the showdown between Texans—who are always good for a lively brawl—and TransCanada over the Texas stretch of the Keystone XL pipeline. The contention here can be summed up pretty quickly: TransCanada is acquiring private Texas land by it condemned by courts who rule in favor of the “common good”.
As we noted on our website, the fact that Texans are up in arms against Big Oil is significant on two levels: (1) It shows that while Texans are friends to Big Oil and keen to relinquish their land to pipelines as long its profitable, they won’t be bullied about; (2) it will legitimize the Keystone XL debate in a way that it would never have otherwise been. By adding oil-friendly Texans to the opposition mix the issue becomes bipartisan, and hopefully productively rational.
So, two showdowns to keep your eye on in the coming weeks and months.
For investors, this week we examine five key markets in East Africa, noting both the vast potential and the pitfalls of oil and gas business in Kenya, Mozambique, Tanzania, Uganda and South Sudan. Read the report here.
By. Oilprice.com Analysts