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Rosneft reaches $1 billion energy deal with Iraq

By Patrick Higgins  |  20/09/2017 12:30
Russian oil firm Rosneft has entered into an agreement with the Iraqi Kurdistan government to develop oil fields and pipelines, ahead of a critical referendum on Kurdish independence from Iraq.
 
Rosneft, one of the world's largest publicly traded oil companies, will initially develop five oil fields for domestic use, with more slated for development in the coming decade.  Additionally, pipeline technology within the Kurdistan region will be examined and updated, with an entirely new natural gas pipeline to be built.  Sources per Reuters have put the total investment amount at around $1 billion. 
 
The new pipeline will have a carrying capacity of 30 billion bcm (cubic meters) for exports, additionally supplying Kurdistani domestic users.  The pipeline will open for domestic consumption in 2019, and for international exports in 2020. 
The sheer volumes of energy being moved will be enormous.  When fully inaugurated and implemented, amounts of up to 6% of total European gas consumption and 12.5% of the amount currently being exported by Russia to Europe per year will be exported.
 
KRG has increasingly sought to secure alternative sources of governmental funding, as the war with IS and persistently low global oil prices have put Kurdistan's finances into a precarious situation.  Additionally, budget tensions with Baghdad have taken their toll.
 
The Kurdistan Regional Government (KRG) seized the initiative of exporting oil & gas independently of Baghdad in 2014, at the start of the war with Islamic State (IS).  Formally, the Iraqi government is required to pay 17% of the annual Iraqi budget to KRG every year.  This payment has all but dried up since the war with IS began.  However, these payments were being contested even before the rise of Islamic State.  The core contention point had been that Kurdistan should export its oil & gas through the Iraqi system, not independently.  Kurdistan, which has oil reserves of 45 billion barrels, naturally objected.  The debate had gone on for years prior and was exacerbated by the emergence of IS.  Now, Kurdistan seeks to funds itself through domestic economic growth, such as oil & gas exports and financial sector development.  An obvious example of this goal would be Kurdistan's publically announced intention to increase its bpd rate from its current rate of 0.65 million to 1 million in the next ten years.  It is this drive towards self-reliance and domestic prosperity that has prompted KRG to seek deals with many of the world's preeminent oil & gas developers, such as Rosneft, Genel, and Exxon Mobil.  These buyers have financed KRG through loans in the millions or billions of dollars, with reciprocal payment guaranteed by Kurdistani oil futures.  Rosneft, in particular, has its investments secured through tariffs and returns on energy exports.
 
For Rosneft, this large-scale investment in the region plays right into their international ambitions.  Russia, Europe's largest supplier of oil & gas, has its oil & gas monopolised by another Kremlin-controlled company, Gazprom.  Gazprom is the undisputed leader in oil & gas export to Europe and Central Asia.  Rosneft is seeking to cement its influence in Kurdistan early on so that it occupies a favourable position if Kurdistan follows through with its pledge of independence from Iraq.  The development of Kurdistan's oil & gas will give Europe, Turkey, and Central Asia a viable alternative source of energy, a source independent of Gazprom.  However, whether it be from Kurdistan or Russia proper, the Kremlin benefits either way. 
 
Though both Ankara has voiced vocal opposition to the prospect of Kurdistani independence, Ankara stands to benefit from Kurdistani oil & gas exports.  Despite historical tensions between the Kurds and the Turkish government, Turkey would most likely be the primary recipient of Kurdish oil & gas for worldwide distribution and therefore be able to hypothetically secure attractive deals with KRG for Turkey's role in this process.  Turkey, with its ever-increasing population and expanding economy, yearns for new energy sources to support continued growth, and could potentially become a major centre of export to Europe, somewhat like the position that Russia currently holds.
 
Kurdistan, with its upcoming independence referendum on September 25th, could be interpreted as preparing for life as an independent state with these energy deals.  Although the referendum is non-binding, many countries opposed to the vote fear a Yes vote will encourage Kurdistan to declare independence regardless, and prompt an economic or perhaps militaristic war.  Whether KRG moves to become independent or not, the Kurds will move forward towards their goal of sustained and competitive energy exports.  Kurdistan's energy market is now internationally open for business.
 

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