RWE's Kurdish Nabucco Gas Deal Spells Problems for Upcoming Iraqi Gas Licensing Round

RWE Takes a Logical Step

Germany's RWE has signed a co-operation deal with the Kurdistan Regional Government (KRG), to help it develop domestic and export gas transport infrastructure, with an eye to creating "a route to market for Kurdistan's major gas reserves", an RWE announcement published on the KRG Web site on Friday (27 August) read. The statement added that "the cooperation also foresees the negotiation of gas supply agreements to enable gas from the region to be transported to Turkey and Europe via the Nabucco pipeline", clarifying that while no binding agreement had yet been finalised, the intent to pipe KRG gas to Europe was open.

RWE's step is a logical conclusion of the Nabucco consortium's problems to enlist sufficient gas volumes to underpin the massive project, which aims to transport as much as 31 bcm/y of gas to Central Europe and provide a diversification for the continent away from dominant Russian and Algerian sources. International sanctions against Iran are looking likely to remain in place for the considerable future, while the Islamic Republic's own domestic planning and development difficulties also question whether there would have been any spare export capacity over the coming decades. This has more or less forced the RWE-partnered pipeline consortium to look to Iraq as a possible future gas supplier, although there it has found that only the KRG will be able to commit to exports reliably in the near future, given the underdeveloped power demand and supply situation in the rest of Iraq, which might make exports politically contentious (see Iraq: 26 August 2010: Sweetened Iraqi Gas Terms Could Backfire As Kurds Push for Gas Exports). RWE's choice also comes after years of lobbying from two of its main Nabucco partners, Austria's OMV—which officially leads the consortium—and Hungary's MOL, both of whom are involved in upstream development of gas resources in the Iraqi Kurdistan region and hence have been arguing in favour of connecting the region to Nabucco (see Europe: 18 May 2009: OMV, MOL, Crescent Attempt to Bring Iraqi Kurdistan Gas Through Nabucco to Europe). With RWE now joining OMV and MOL in trying to secure KRG gas volumes for the pipeline, a large step has been taken towards empowering the KRG with regards to gas exports, especially vis-à-vis the Iraqi Oil Ministry.

Baghdad Condemns

The reaction from Iraq's Oil Ministry has been predictably sharp, with a statement issued calling the co-operation deal "illegal", as has been the practice by the Ministry since the middle of the last decade. "No one outside the ministry has the right to sign contracts for the exportation of oil and gas", the statement further added, going on to stipulate that "all [sales] contracts and agreements signed outside the legal framework, in other words with the State Oil Marketing Organisation (SOMO), are illegal."

The dispute boils down to different interpretations of Iraq's intentionally unclear 2005 constitution about the scope of Iraqi Kurdistan autonomy and the control over the region's natural resources. Previously this dispute has mainly hit the oil sector, with those oil companies taking up exploration and development acreage in Iraqi Kurdistan being blacklisted from projects in Iraq proper and their contracts being declared as null and void by the central government in Iraq's capital, Baghdad. The KRG has nevertheless defended its corner, having managed to sign up a large number of interested companies to its acreage and already starting to see the fruit of early exploration and development deals, despite its companies being barred from exporting their production in what has become a stand-off between the autonomous region and the government. In a response, it yesterday accused the Iraqi government of "wasting billions" while failing to provide basic services such as electricity to the general public and now being preoccupied with stopping added export revenues from benefiting the whole country's population.

With a growing number of companies having discovered oil and gas in Iraqi Kurdistan and about to decide on development investment, resolving the export issue out of Iraq is top priority for the KRG and one of the points it is pressing most strongly in the government formation negotiations with other political parties in Iraq proper, where its united and well-organised parliamentarian factions still wield considerable "king-making" power. As gas now also moves more into focus on both sides of the border, the KRG might use this dispute to strengthen its hand, providing that the timing remains right.

Outlook and Implications

Licence for What?

Iraq's upcoming gas licensing round, offering three fields in the south, west, and north-east to prospective bidders, will depend on companies judging the opportunities to export 50% of the production, given that the Oil Ministry has said that it will only buy 50% of the production for domestic demand in order to increase commerciality for the investing companies. Still, gas export schemes are notoriously long in the making, demanding concerted government efforts and political will, meaning that the investors might find themselves struggling to connect their fields to international buyers for years after having had to develop full plateau production capacity expensively within a very short period of time, under the Iraq contracts. If the Nabucco pipeline creates a spur to first connect the Iraqi Kurdistan region, it places the KRG in a position where it will effectively be able to deny gas producers in Iraq proper access to a main gas export link to Europe, unless its oil producers are given access to Iraqi crude export links.

Iraq's three offered fields are themselves too geographically spread out—and probably too small—to warrant one new export link over Syria to Turkey and Europe, especially since the southern Siba field is likely to be most interesting as an exporter to gas-starved Kuwait. While Akkas on the Syrian border easily could export over that route—or indeed just to Syria—the Mansuriyah field in the volatile north-east would really only make sense to hook up to a future KRG network and its export link for any export revenue-driven development to be attractive. Iran is, for the obvious political reasons, not on the cards for any IOC.

Hence, the continued dispute over resource ownership between Iraq proper and the KRG might further weaken investor interest in Iraq's upcoming licensing round, as unless the Iraqi government stops blacklisting hydrocarbon investors in the KRG, gas from Iraq proper is likely to be unable to be fed into the possible Nabucco pipeline, even if routed over Syrian territory. Of course, on a political level European governments might choose against signing up for KRG gas volumes in contravention to Iraqi government wishes, although given the uncertainty over export volumes from Iraq proper for many years to come, such a move is likely to doom the Nabucco project from ever signing up sufficient volumes. Therefore the KRG has managed to secure a trump card ahead of what are hopefully the last phases of negotiations over forming an Iraqi government, demonstrating why Iraq needs to use Iraqi Kurdistan as conduit for a future successful gas export development. Companies thinking of participating in the gas licensing round might well see this as yet another sign of their exposure to Iraqi politics over the coming years and choose to bide their time until later opportunities.