The February 15 ruling by Iraq’s Supreme Court that declared the Iraqi Kurdistan Oil and Gas Law unconstitutional cast a shadow over Turkish President Recep Tayyip Erdogan’s hopes of buying gas from the autonomous region, coming s add to an arbitration case over Ankara’s oil trade with Iraqi Kurds that bypasses Baghdad. Relying on his political and economic clout, Erdogan could ignore the court ruling, just as he kept the oil trade going, ignoring the prospect of Baghdad winning the arbitration. Yet the gas project faces financial and technical problems that Erdogan could hardly ignore.
Turkey’s access to Kurdistan’s energy resources dates back to when the United States was preparing to invade Iraq and Iraqi Kurds were looking for energy investors, convinced that Saddam Hussein’s reign would soon be over. During a trip to Ankara in March 2002, Jalal Talabani, the late Iraqi Kurdish leader who at the time headed the Patriotic Union of Kurdistan, met Mehmet Sepil, the owner of the Turkish construction company Epik. Sepil, whose experience was limited to construction projects at US and NATO bases, was caught off guard when Talabani offered him the development of the Taq Taq oil field, predicting big profits for early investors. Sepil partnered with Mehmet Emin Karamehmet, the owner of Turkey’s Cukurova Holding, to create Genel Energy, which soon began operations at Taq Taq under a production-sharing contract.
Genel Energy expanded into many other areas over the following years, forming consortia with Dana Gas of the United Arab Emirates, Austria’s OMV, Norway’s DNO ASA and Turkey’s Petoil, before merging with Vallares, a company London-based investment firm in 2011.
Meanwhile, Iraq adopted a new constitution in 2005, followed by an oil and gas law two years later. Iraqi Kurdistan enacted its own oil and gas law in 2007. Federal legislation stipulated that Baghdad should manage oil resources in conjunction with regional and provincial governments. Oil and gas extracted in Kurdistan were to be sold through the Iraqi state company, SOMO, and Kurdistan was to receive 17% of the federal budget. But things turned out differently on the ground.
Defying objections, Kurdistan awarded contracts to foreign companies and in 2009 launched oil exports from the Taq Taq and Tawke fields. In 2012, a 1974 oil deal between Ankara and Baghdad expired, and Erdogan – at odds with then-Iraqi Prime Minister Nouri al-Maliki – struck a 50-year energy deal with Erbil the following year. Under this agreement, the Turkish Energy Company received licenses for 12 exploration blocks in Iraqi Kurdistan. It was a remarkable turnaround from Ankara, which only a few years earlier had rejected the involvement of Kurdish gas in a gas pipeline project to Europe on the grounds that it would help Kurdistan pursue its independence.
The Ankara-Erbil deal involved the construction of a new gas pipeline to Iraqi Kurdistan to bypass the Iraqi section of an existing gas pipeline from Kirkuk to the Turkish Mediterranean port of Ceyhan, as well as the construction of a gas pipeline from the fields Miran and Bina Bawi gas stations. to the Turkish border. The pipeline was quickly completed and became operational in 2014. Meanwhile, Powertrans, a company allegedly linked to Erdogan’s son-in-law, Berat Albayrak, transported crude from Iraqi Kurdistan overland. Heavy truck traffic from 2009 to 2013 saw up to 500 vehicles loading oil per day. Kurdish crude was transported to Ceyhan and then sold to Israel and some obscure companies. It also made its way to Turkey’s largest refiner, TUPRAS, in Kirikkale.
But unlike booming oil activities, gas projects in Kurdistan have failed.
Gas from the Khor Mor and Chamchamal fields, extracted by Crescent Petroleum and Dana Gas, is routed to power stations in the region, as export-oriented investment remains insufficient. Turkish state pipeline operator BOTAS has extended its pipeline network to the border, while a 180 kilometer (112 mile) pipeline has yet to be built on the Kurdistan side as part of initial plans to export 20 billion cubic meters of gas per year.
Arif Akturk, the former director of Genel Energy’s gas project in Kurdistan, told Al-Monitor that a combination of political, financial and technical factors led Turkey, a potential buyer of gas from the Miran and Bina Bawi fields. , to slow down.
First, Iraq filed for arbitration against BOTAS in 2014 over unilateral oil shipments from Kurdistan to Turkey – a decision that deterred investors and financiers.
The arbitral tribunal is expected to order Turkey to pay up to $25 billion in compensation to Iraq. Yet, BOTAS’ agreement with the Iraqi Kurds contains a little-known provision that responsibility for any legal sanctions arising from the oil trade will be transferred to the Kurdistan administration. According to Akturk, Ankara would refuse to pay a fine and would forward the bill to Erbil instead. Erbil, for his part, appears unable to pay such a sum. A compensatory confrontation between the three parties could strain Turkey’s ties with Iraq and rekindle ambitions for independence in Kurdistan.
Second, the Kurdistan independence referendum in 2017 caused some reluctance over energy projects in Ankara.
Third, Akturk drew attention to technical and financial issues. The high sulfur content of Kurdistan gas, he explained, requires additional processing and is a thorn in the side of the project. Sulfur has market value as a feedstock for the fertilizer industry, but the mountains of sulfur granules that emerge from the desulphurization process must be disposed of quickly to prevent them from mixing with rain and turning into acid. sulfuric acid with toxic impacts on the environment. Rail transport is considered to be the most convenient means of transporting sulfur to fertilizer industries or export outlets. In other words, sulfur kills gas projects unless a proper processing facility and other infrastructure is built.
A treatment facility cost $4.5 billion in 2018, according to Akturk. Preliminary work with a Chinese company before the independence referendum did not lead to an agreement. Genel Energy, which has invested more than $1 billion in Miran and Bina Bawi, has suggested prioritizing oil extraction at various underground levels and then returning to the gas project if conditions improve, but Erbil refused, fearing to discourage gas investors. In December, Genel Energy announced it was initiating arbitration for “substantial claims” against Erbil after the latter refused to unbundle oil and gas projects and terminated the company’s production-sharing contracts.
According to Akturk, building a pipeline is a relatively easy task that could be completed in about a year and a half for $350 million on flat ground.
Highlighting another issue, he said Turkey must give a purchase guarantee through an intergovernmental agreement or else no lender would be willing to fund the project. While oil could be sold even on the back of mules, the gas industry requires more integrated investment, distribution and sales guarantees. “The gas processing plant requires about $4.5 billion and the wells $2.5 billion. No one in the industry can fund this with equity,” Akturk said. “For the processing plant, in particular, you have to knock on the doors of the financiers, and they would like to see a purchase guarantee agreement. A transport agreement is not enough,” he added.
Another deterrent here, the Ankara-Erbil partnership has lacked transparency and oversight.
Turkey’s Energy Market Regulatory Board has authorized Siyah Kalem, a company with no experience in the sector, to import gas from Iraqi Kurdistan. It granted a similar license to Cengiz Holding, a group of companies close to the government, given the needs of its power plant and fertilizer plant. The two companies failed to do anything.
But despite the many handicaps, Erdogan’s interest in Kurdish gas seems to have reawakened. Why?
On February 2, Nechirvan Barzani, the president of the Kurdistan Regional Government (KRG), traveled to Ankara to discuss the issue with Erdogan. The meeting followed Iran’s 10-day cut off of gas supplies to Turkey. A few days later, Ali Hama Salih, the head of the energy committee in the Kurdistan parliament, said that a gas pipeline to Turkey would become operational in 2025. Then KRG Prime Minister Masrour Barzani discussed The gas potential of Kurdistan and regional energy cooperation with Qatar’s energy minister, signaling a potential quest on the Erbil-Ankara-Doha triangle.
Meanwhile, Erbil reached an agreement with KAR Group in December to build a pipeline from the Khor Mor field to Erbil and from there to Dahuk. The conduit is intended to meet domestic needs, but once it reaches the Dahuk power station, the remaining distance to the Turkish border would be only 35 kilometers (22 miles).
According to Akturk, Qatar is unlikely to intervene and Kurdish gas is unlikely to become an alternative to Iranian supplies for Turkey, although it would help diversification.
Coalition wrangling in Baghdad and Iranian influence may have played a role in the Iraqi court’s decision, but Kurdistan’s unilateral energy deals have clearly faced a broad front of objections. A key question now is whether Erdogan will insist on Kurdish gas despite the court ruling. The arbitration case did not deter Ankara from the oil trade. Relying on Turkish influence, Erdogan may be hoping to untangle the gas knot after the formation of the Iraqi government. After all, “it’ll be fine at night” is an approach he’s often employed.