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Enerji Piyasaları ve Politikaları Enstitüsü Institute for Energy Markets and Policies TURKISH AMBIVALENCE TOWARD KURDISH ENERGY:
BETWEEN ECONOMICS AND POLITICS
Dr. VOLKAN ÖZDEMİR EPPEN7 NOVEMBER 2014 Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
CONTENTS 1. INTRODUCTION.............................................................................................................................3 2. POTENTIAL OF THE REGION......................................................................................................3 3. ROLE OF TURKEY IN KURDISH ENERGY DEVELOPMENT.................................................6 4. OIL EXPORT TARGETS..................................................................................................................8 5. NATURAL GAS DEAL.....................................................................................................................10 6. CONCLUSION...................................................................................................................................11 8. ENDNOTES.......................................................................................................................................12 Not: Bu makalede yazılanların içeriği tamamen yazara aittir. EPPEN’in ya da makale yazarının görev yaptığı herhangi bir yerin kurumsal görüşünü yansıtmamaktadır. The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of the EPPEN, or of the author’s other affiliations. 2
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
TURKISH AMBIVALANCE TOWARD KURDISH ENERGY:
BETWEEN ECONOMICS AND POLITICS
1. INTRODUCTION
Turkey and the Kurdistan Regional Government of Iraq (KRG) have been developing a high level of
energy partnership for last two years. Framework agreement between the parties was followed by a
package agreement that regulates the exploration, production sharing mechanisms and exportation of
oil and gas resources of the region independently from the Iraqi Central Government. Accordingly, oil
from the region has been pumped since early 2014 and sold in the international markets in May of this
year. In this article, Turkish energy policy vis-à-vis the ongoing energy partnership with the KRG is
briefly analyzed with a special focus on the economics of oil and gas development in the region.
2. POTENTIAL OF THE REGION
There has been a growing tension between Erbil and Baghdad over the utilization of
Iraqi’s energy wealth in post-Saddam period. After withdrawing of US army from the
country, this tension has tremendously increased. In fact, the Federal Constitution of Iraq
regulates the oil revenue sharing mechanism and other features related to energy exploration
and production. Accordingly, all petroleum exported from Iraq should be marketed through
the country’s State Oil Marketing Organization (SOMO) with the KRG receiving 17 % of the
total revenues.1 The KRG on the other hand, has claimed independent authority over energy
resources in the region, including the right to sign oil field exploration and production
contracts within its territory and export of oil and natural gas. This inevitably led a clash with
Baghdad Government on which the Erbil dependent for oil payments. The KRG sought for an
alternative that helps to cut this financial dependency, a prerequisite for political
independence.
3
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
As 2014, Iraq’s world share of oil reserves is almost 9 %, accounting for 151 billion
barrels total, making Iraq the fifth biggest global oil reserve holder. Within the Middle East,
Iraqi oil reserves rank third right after those of Saudi Arabia 265.9 and Iran 157 billion
barrels. Iraq’s oil production witnessed remarkable growth over last 5 years and exceeded 3
million barrels per day (bpd) in 2014 and total exports reached 2.6 million bpd with reservesto-production ratio of more than 100 years at present.2 Together with this, it is noteworthy that
Iraq is not a significant gas producer although it holds huge reserves.
Within Federal Iraqi State, oil under the territory of KRG (excluding Kirkuk) has
largely been untapped for decades unlike the case in other parts of the country. Average
extraction cost is very low –less than 10$ per barrel- and this attracts international oil
companies (IOCs). It’s assessed that the regional proved oil reserves to stand at more than 2
billion barrels of reserves recoverable on P1 and P2 bases, and total resources of nearly 18
billion barrels. The KRG officials similarly claim the regional oil wealth to be as high as 50
billion barrels. As for the natural gas resources, the region is said to be even more attractive.
Within the region, more than 350 bcm of recoverable gas has been discovered on P1 or P2
bases, while total resource base is estimated at nearly 1.2 trillion cubic meters.3 With
necessary arrangements in place, the regional production could increase its capacity, reaching
export levels of 1 million bpd by the end of 2015 and 2 million bpd for oil and 20 billion
cubic meters (bcm) for natural gas by 2020.4 However, the production growth of oil output is
dependent on investments by oil companies as capital is necessary to support development.
Not surprisingly, more than 50 oil companies from a number of countries including industry
majors such as Chevron, ExxonMobil, Sinopec, Total, Genel Energy and Gazprom Neft, have
been attracted to the region thanks to contractual Production Sharing Agreements (PSA) with
high profit margins offered by the KRG’s Ministry of Natural Resources.5
4
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Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
OIL MAP OF THE REGION
Source: Genel Energy Web-site
5
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
3. ROLE OF TURKEY IN KURDISH ENERGY DEVELOPMENT
Nevertheless, for oil companies it is risky to invest billions of dollars to develop the
fields taking into consideration of the fact that region is lacking secure infrastructure and legal
regulations to deliver the crude to world markets. The only solution to realize oil exports to
international markets is through pipelines owing to the land-locked geography of the region,
While relations with Baghdad remains problematic, unpredictable with Iran and imprecise
with Syria, Turkey remains the only viable option to ensure exports of oil to international
markets via pipeline.
On the other hand, with remarkable economic growth over the last decade Turkey has
become one of the world’s rapidly emerging energy markets. Against the backdrop of a rising
need for energy, Turkey is clearly in a situation of energy insecurity as domestic resources are
meeting only one fourth of its total energy demand. Unable to pursue policies to utilize the
domestic sources of energy, Turkish decision makers focus on to diversification of imports
and to gain from reduced prices which might be a remedy for current account deficit of the
country.6 Turkey also started to encourage investments and acquisitions of oil and gas fields
outside the country with an active role played by Turkish state energy companies. Since the
Kurdistan region of Iraq is located at the doorstep, the region is seen as a strategic gateway to
meet future energy demands and drive the country’s energy policy7
Within this context, rapprochement between Turkey and Iraqi Kurds has been
observed for recent years despite the fact that relations between the two were characterized by
political tension after US invasion of Iraq in 2003. After 2008, the two have developed
economic partnership and Turkish exports to the region increased significantly. The current
relations reached a new level with the commencement of oil and gas flow from the region to
Turkey: The first consignment of KRG oil was transported through the Turkish port of
Ceyhan on the Mediterranean Sea on 22 May 2014, with Israel becoming the first buyer of
KRG crude delivered by tanker to the Ashkelon port.8
Although the fundamentals of energy cooperation between Turkey and the KRG had
been defined in 2012, it was only on 25 March 2013 that the deal was finalized in the form of
6
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
a framework agreement between the parties that paved the way for export of Kurdish crude
from Turkey for 50 years9. In order to handle the energy deal that envisages the investment of
a Turkish energy company in the upstream development of the region, Turkish Government
decided to establish a new oil company that specifically responsible for the realization of this
aim while would not engage in any energy projects in other parts of Iraq. Since the state
owned Turkish Petroleum Corporation (TPAO) has a series of operations in the southern part
of Iraq, a subsidiary of this company, Turkish Petroleum International Company (TPIC), was
transferred to another state owned Turkish Pipeline Corporation (BOTAŞ). Within TPIC
structure, Turkish Energy Company (TEC) was created for operating on energy development
in the KRG on behalf of Turkey.10
In conjunction with the framework agreement that was signed in March, a series of
energy deals between Turkey and the KRG came to an end after long negotiations on 27th of
November 2013. The parties wrote up agreements to govern export pipelines, sale of gas, oil
trade, acquisition of oil fields by the TEC, and the revenue sharing mechanism.11 For the
pipeline dimension of the energy deals, long-term logistic preparations have been guaranteed.
The KRG has completed a domestic crude pipeline to the Turkish border. The first section of
the pipeline begins at the Taq Taq fields and runs through to Khurmala, near Kirkuk. The
second section goes up to the border city of Feyshkabour, near the Turkish border, staying
within the KRG territory. On the Turkish side of the border, crude flows into the existing
Iraq-Turkey (ITP) or Kirkuk-Ceyhan oil pipeline, “firstly constructed in 1974 with 70 million
tons of annual capacity”, which is actually composed of two parallel lines: the 46 inch line is
currently being used to transport federally controlled Iraqi oil from Kirkuk to the Ceyhan port.
The second line, 40 inches in diameter, has been inactive due to poor maintenance but it was
not difficult to recover this line. The new KRG pipeline is connected into this line just before
the Turkish border. After completing the testing phase, crude from Kurdistan region of Iraq
entered the ITP and flowed through Turkish infrastructure to facilities at Ceyhan in first
quarter of 2014. Before being traded to international markets, the first cargos were held in oil
storage facilities in Ceyhan. As for gas, Turkey has begun preparing for imports from the
region, by extending its gas pipeline network towards the KRG border. BOTAŞ has already
begun construction of a pipeline 42-inch in diameter, enough to carry 20 bcm gas annually,
7
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
whereas on the Kurdish side construction of a parallel gas export pipeline has commenced
accordingly.
4. OIL EXPORT TARGETS
Amount of oil exported from KRG through ITP has reached to 350.000 bpd as mid of
November 2014. Under current development scenario, it is planned that up to 500,000 bpd
will be pumped into the export pipelines by the end of 2014 and a second new pipeline will be
constructed for heavier crude.12 This number is critical for economic independence of Erbil.
Even with an average price of $ 80 per barrel, the KRG would totally compensate the $ 12
billions loss, an annual amount it gets from the Baghdad Government for financing its budget,
from 17 % share of total Iraqi exports.
After first export cargo from KRG through ITP realized in spring 2014, the Maliki
government severely criticized this deal and threatened both the KRG and Turkey with a legal
action for violating the latest ITP agreement in 2010, which gives exclusive right to SOMO to
use the pipeline. This was followed by the collapse of Maliki government and emerging threat
of ISIL. The ISIL attacked northern Iraq in June 2014 and after the retreat of Iraqi Federal
Army from Mosul without resistance, the KRG did not miss the opportunity to send its
Peshmerga forces to hold oil rich region of Kirkuk in the same month. As a result, oil fields
of Kirkuk, namely Avana Dome and Bai Hassan, which were formerly controlled by the Iraq
Oil Ministry, are now under KRG control and the KRG is pumping approximately 120.000
bpd. Moreover, excess oil production from Kirkuk is partly used for domestic refinery of
Kalak and partly is flowed through KRG export line. According to Iraqi Oil Report, taken
together with the capacity expansion plans of the IOCs producing oil in KRG for pipeline
export (DNO Tawke and Genel Energy Taq Taq), the 500.000 bpd export target can only be
reached if oil from Kirkuk is either blended with crude from KRG crude for export, or is
consumed within domestic refining sector, freeing up oil from the Tawke, Taq Taq and
Khurmala fields for export13.
On the upstream level, TEC and the KRG have finalized terms for Production Sharing
Agreements in some of exploration blocs in the region. As a result, for the first time since its
foundation, BOTAŞ has become an upstream player through its recently established
8
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
subsidiary TEC. According to the agreement which was signed by the parties on 27
November 2013, the TEC has become the stakeholder of some fields in the KRG: Pulkhana,
Jabal Kand, Arbat, Choman, Hindren, Khurmala and Khalakan. In addition, the TEC became
minority partner in all of ExxonMobil’s exploration blocs, namely Bashiqa, Pirmam, Betwata,
Qara Hanjeer, Arbat-East and Al Qush.14
Another crucial aspect of the deal that remains to be solved is related to financial
revenue sharing mechanism. According to the framework agreement, the KRG agreed to open
a bank account in the Turkish state bank, the Halkbank, for revenues generated by oil and gas
transactions.15 Baghdad insists on a bank account to be opened in the US while Turkey and
the KRG opt for a Turkey-based account. At the end of the day, Halkbank was selected as the
for payments of exported oil and Ceo of Genel Energy claimed that Turkey get five percent of
total amount of oil that has been sold through transport and custom duties16. However, this is
a speculated remark and whether Turkey helds such kind of a commission from exported oil is
not clear. Negotiations for transfer of payments between Erbil and Baghdad are ongoing. The
parties might find an interim solution for oil exports and revenue sharing mechanisms but in
the long run this seems not sustainable without a well-defined solution.
Oil$exports$from$the$KRG$of$Iraq$through$Turkey$
(bpd)$
Critical(level(for(economic(independence(500000(bpd(
2000000(
1000000(
9
350000(
500000(
November(
2014(
End(of(2014(
End(of(2015(
(est)(
End(of(2020(
(est)(
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
5. NATURAL GAS DEAL
Another important pillar of the deal is natural gas purchase-sales contract. The KRG is
initially to supply 4 then, 10 bcm natural gas (in 2025 20 bcm) annually to Turkey from the
Miran natural gas field and the Genel Energy is likely to be the first company to export gas by
2017. Turkish desire to reach KRG’s gas fields emerged almost a decade ago and now Turkey
is also showing interest to satisfy international needs through the re-exportation of gas from
the KRG to Europe under Southern Gas Corridor.
BOTAŞ signed long term contract in which the price of gas is indexed to oil products
with 9 months leg. The gas price significantly undercuts other major suppliers such as Russia
and Iran (As 2014 BOTAŞ pays $410/mcm to Gazprom and $492/mcm to NIGC)17. However,
taking the low cost of extraction, transportation and first entrance of KRG to Turkish gas
market into consideration, one could basically argue that Turkey is overcharged even if the
price is cheap relative to Iranian and Russian gas.
More importantly, Turkey could have used this gas deal to negotiate for better
conditions from its traditional suppliers in a time when the gas market is transformed from
seller’s market to buyer’s one. As one of the biggest gas importers in the world Turkish
BOTAŞ opted for oil-indexed gas pricing mechanism with a formula that is outdated. Unlike
European importers, BOTAŞ has not been able to adopt the structural changes in natural gas
market. It avoided transition from oil price indexation to the spot market one in which hub
based gas-to-gas competition has become widespread in European market. In that sense,
Turkey could have not only used the opportunity to delink gas prices from oil products as a
bargaining tool against Gazprom and NIGC to decrease its gas bill but also it could have
formed a domestic gas hub for determining the price of a broader region by starting from the
gas deal with the KRG.
10
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
6. CONCLUSION
To sum up, the KRG benefits from the energy deal with Turkey more by securing
financial independence from Baghdad thanks to the oil exports through Turkey. On the other
hand, despite some economic opportunities by developing bilateral energy partnership with
the KRG, Ankara plays a risky game. The energy deal offers Turkey unprecedented economic
gains in energy field but it politically antagonizes Baghdad and more importantly paves the
way for Kurdish independence that could have severe political consequences for Turkey itself
in the long run. Also it’s noteworthy to mention US position toward evolving Turkey-KRG
energy partnership. By pretending itself as the supporter of federal unity of Iraq, the US has
finally found a suitable partner, which it could show as the initiator of the possible division of
Iraq to the orld public opinion. By gaining access to the ITP pipeline the Kurds have secured a
corridor to open seas, namely Mediterranean.
One could assert that with this energy deal historical ‘Mosul question’ of Turkey has
been revitalized under the changing status quo in the region. For the time being, it seems that
economic benefits prevail over political anxieties for Ankara. However, if economic gains are
more important, then Turkey could also demand its abondaned historic rights from Iraqi oil.
By signing 1926 Ankara agreement Turkey ceded the region to Iraq, which was under British
mandate that time, under the condition of getting 10 % royalty from all oil produced in Iraq
for 25 years. First payments started in 1931 but then it was interrupted many times by
Baghdad. Turkey was only able to receive 3.5 million out of 29 million pounds for its total
royalty18. The current price of remaining 25.5 million pounds of Turkish royalty could be
calculated differently but it is legitimate for Turkey to compensate its violated royalty right
for all Iraqi oil with adjusted prices from Halkbank account. Nevertheless, political dimension
is more complicated than the financial provisions of 1926 Ankara agreement: If Iraq
disintegrates one of three sides to this agreement disappears and political appearance is not
clear after this likely disintegration process in which territorial integrity of Turkey itself is
under threat.
11
e-mail: [email protected] www.eppen.org
Enerji Piyasaları ve Politikaları Enstitüsü
Institute for Energy Markets and Policies
ENDONTES
1
B Holland, 'Are Kurdistan's oil contracts constitutional?' (2012) Petroleum Economist, Energy in the Middle
East, 6. Iraq.
2
BP Statistical Review of World Energy June 2014 (2014), 6.
3
BV Heuvelen, Beyond the Caspian: Unlocking the Energy Potential of Iraq’s Kurdistan Region’ in D Korayni
(ed) A Eurasian Energy Premier: The Transatlantic Perspective (2013a) Washington DC: Atlantic Council, 1525, 16.
4
The Economist, ‘Northern Iraq: Peace, harmony and oil (Editorial comments)’ (2013) 20 April.
5
N Cunningham, ‘Kurdistan Set to Begin Oil Exports-to Turkey with New Pipeline Next Month’ (2013) Oil
Price, 28 November.
6
V Özdemir, ‘Turkey’s Role in European Energy Security’ in: SE Cornell and N Nilsson (eds) Europe’s Energy
Security: Gazprom’s Dominance and Caspian Supply Alternatives (2008) Stockholm and Washington: The
Central Asia-Caucasus Institute and the Silk Road Studies Monography, 99-115.
7
EG Abay, ‘Iraq potentially Turkey’s biggest energy partner’ (2014) Anadolu Agency, 9 May.
8
Jerusalem Post, ‘Israel receives first ever oil shipment from Iraqi Kurdistan’ (2014) 20 June.
9
http://www.hurriyetdailynews.com/turkey-iraqi-kurdistan-agree-on-50-year-energyaccord.aspx?pageID=238&nID=67428&NewsCatID=348
10
E Sağlam, ‘Devletin Yeni Enerji Devi’ (2013) Hürriyet, 16 September.
11
BV Heuvelen, Beyond the Caspian: Unlocking the Energy Potential of Iraq’s Kurdistan Region’ in D Korayni
(ed)A Eurasian Energy Premier: The Transatlantic Perspective (2013a) Washington DC: Atlantic Council,15/25.
12
B Lando, ‘Baghdad Warns of legal action against Kurdish exports’ (2014) Iraq Oil Report, 10 January.
13
http://www.iraqoilreport.com/news/krg-lifts-crude-kirkuk-field-kurdistan-refinery-13523/
14
Haber7, ‘İşte Türkiye’nin Kuzey Irak’taki Petrol Sahası’ (2013) Haber7, 21 November.
15
A Ünal, ‘Halkbank is Still in the Oil Game’ (2014) Sabah English, 3 January.
16
http://www.hurriyet.com.tr/ekonomi/27631816.asp
17
http://www.aljazeera.com.tr/al-jazeera-ozel/iranla-pahali-gaz-davasi-basliyor
18
Hikmet Uluğbay, İmparatorluktan Cumhuriyete Petropolitik, Deki yayınevi, 2008
12
e-mail: [email protected] www.eppen.org