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Russia keeps eye on Kurdish oil contracts, referendum

Russia has been boosting its presence in Middle East oil via the Kurdish Regional Government, but is also waiting to see what the potential impacts might be of the KRG’s independence referendum.
ATTENTION EDITORS - VISUAL COVERAGE OF SCENES OF INJURY An injured member of Kurdish Peshmerga forces reacts as smoke rises after an attack at Bai Hassan oil station, northwest of Kirkuk, Iraq, July 31, 2016. REUTERS/Ako Rasheed - S1BETSSSNUAB

As major regional powers Turkey, Iraq, Syria and Iran mull the Iraqi Kurds’ independence referendum, Russia finds itself in the position of having become the major investor in Iraqi Kurdistan. Russian spending in the area’s oil and gas industry has reached at least $4 billion.

Stronger energy ties between Moscow and Erbil (the capital of the Kurdistan Regional Government, or KRG) became apparent long before the Sept. 25 referendum. In February, Russia’s state-owned oil giant Rosneft announced it would finance in advance a two-year deal, beginning this year, to buy Kurdish crude for the company’s growing global refining system.

In early June, Rosneft signed a 20-year deal to buy Kurdistan oil and refine it in Germany. The parties also inked a contract to explore and develop five oil fields “with substantial geological potential” in Iraqi Kurdistan.

On Sept. 18, Rosneft made public a project to finance construction of Iraqi Kurdistan’s gas pipeline infrastructure, with expected export capacity by 2020 of 30 billion cubic meters (more than a trillion cubic feet) a year. Domestic clients would be served as well. “The investment in the project will be under a BOOT (Build-Own-Operate-Transfer) arrangement,” the statement read. Other details were not disclosed.

Moscow’s proactive stance can be accounted for by a range of factors. It seeks to deepen its foothold in the Iraqi Kurdistan gas industry to reinforce Russia’s status as a leading gas exporter.

Nowadays, Russia’s rivals rule the roost on the ground. For example, Genel Energy is developing the Miran and Bina Bawi fields (the reserves total 311.5 billion cubic meters). The Pearl Petroleum consortium, whose major partners are United Arab Emirates-based Dana Gas and Crescent Petroleum, has invested about $1.2 billion in the Khormor and Chemchemal fields. It intends to increase production to 3.2 billion cubic meters per year.

But as opportunities abound in Iraqi Kurdistan, Moscow is seeking to leapfrog its rivals.

Moreover, Russia is keen to gain more political leverage in the Middle East, which will increase along with its economic weight. In turn, the Kurdish government faces a desperate shortage of funds as a result of poor management and the costs involved in fighting jihadis, taking in refugees and the rebuilding process.

Meanwhile, Moscow should not forget that despite the seeming appeal of the joint projects, including so-called tax holidays for foreign investment, foreign companies have traveled a bumpy road while operating similar projects.

Shortly before the September deal, Erbil settled the issue of restructuring and repaying debts to foreign companies. The unresolved issues have been a stumbling block to foreign projects in Iraqi Kurdistan in recent years, with Exxon Mobil Corp. pulling out of several exploration blocks it operated.

Negotiations with Pearl Petroleum were particularly tough, as the consortium sought damages to the tune of $26.5 billion, but finally agreed to compensation of $2.24 billion.

Earlier in August, Erbil reached similar agreements to restructure the debt with Norwegian DNO and Genel Energy. A chunk of the sum is due to be paid in the near future. Moscow might be among those who could provide some funds.

All the dealmaking in the energy sector has predictably caused Iraq’s central government in Baghdad to resent and criticize “Russia’s bid to buy Baghdad’s oil.” The problem with this, as seen from Moscow, is that the cooperation between Baghdad and Erbil that envisaged government funding of the latter came to a halt after Kurdish peshmerga forces took control of Kirkuk province from Islamic State (IS) fighters. Baghdad lays claim to Kirkuk, which is rich in oil.

The Iraqi response to a more robust Russian presence remains to be seen. It may affect Russian companies in Iraq, as well as military and technical cooperation between the two countries. However, Russia should realize that its activities will predictably meet with a negative response from a range of countries. Among others, that list includes Qatar — which is not interested in tougher competition in a gas market that is already pressured by US shale gas exports to Europe.

Washington will also welcome such attempts half-heartedly. Although American energy companies have significantly scaled down their presence in Iraqi Kurdistan, the United States understands that stronger economic ties between Moscow and Erbil will inevitably lead to Russia’s proportionally reinforced presence on the ground. 

Besides, vying for the disputed territories of Ninevah (of which Mosul is the capital) and Kirkuk provinces, where the bulk of KRG oil is produced, is likely to subject Erbil to serious objections from Iran, Iraq and Turkey.

So Russia’s “breakthrough” has yet to materialize. The country is just working to ensure its purchase of Erbil’s oil, whereas other projects seem to have been postponed until it is clear what the referendum outcome will mean politically — for Iraq and the broader region. So far, one view in Russia is there’s little likelihood that Erbil will declare independence shortly after the vote. The KRG election commission reported Sept. 27 that the nonbinding referendum was overwhelmingly approved. Iraq's government opposed the referendum.

It’s not in Erbil’s best interest to agitate its neighbors by breaking away from Iraq. It appears KRG President Massoud Barzani might be more comfortable using the referendum’s outcome as leverage on potential partners as well as neighbors. For instance, he could offer Baghdad a deal under which it would have to withdraw demands for restored control over Diyala, Kirkuk and Ninevah provinces in exchange for Erbil's not declaring independence.

Likewise, the “yes” vote could be used to pressure Iran and Turkey, which backed groups opposed to the vote: Shiite Arabs and Turkmens, respectively.

As for Russia’s stance on the vote, on Sept. 27 the Foreign Ministry reiterated the country’s support for “coexistence within a single Iraqi state.”

“Moscow respects the national aspirations of the Kurds,” the statement read, adding, “We believe that all disputes that may exist … should be resolved through constructive and respectful dialogue.”

However, as Kurdish politician Hoshyar Zebari told Reuters just days before the vote, Russia’s position is to “wait and see” what impact the vote has.

As for Rosneft, company spokesman Mikhail Leontyev said, “The referendum won’t affect our work. We’re doing business in an autonomous region in Iraq that’s been recognized by law.”

Meanwhile, Rosneft’s contracts won’t necessarily translate into Russia’s overwhelming dominance in Iraqi Kurdistan, given that the next KRG parliamentary and presidential elections are just around the corner, scheduled for Nov. 1. Barzani has been lambasted by various opposition parties in parliament for the “nontransparent” Rosneft agreement and accused of corruption, and the opposition will give the president a run for his money

The Gorran movement, a “pro-European” Iraqi Kurdistan parliamentary party, has been particularly harsh toward Barzani. So although Russia is committed to further developing energy projects in the area, it is watchful of how the referendum echoes across the region so that Moscow doesn’t lose what it has been able to gain there.

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