Why Rosneft's Kurdistan Exit Could Reshape Global Energy
As exclusively revealed to OilPrice.com some years ago by a very high-ranking official from the Kremlin: “By keeping the West out of energy deals in Iraq, the end of Western hegemony in the Middle East will become the decisive chapter in the West’s final demise.” Consequently, the push has been on from Russia and China – especially since the U.S.’s unilateral withdrawal from the ‘nuclear deal’ with Iran in 2018 – to remove all Western firms from southern Iraq and from the semi-autonomous Kurdistan territory in its north as well. On the other side of the superpower equation, the U.S. and its key allies believe breaking the multi-layered links between Iraq and Iran will not only significantly weaken Baghdad’s neighbour but its key sponsors, China and Russia, too. The U.S. and Israel also have a further strategic interest in utilising the Iraqi Kurdistan region as a base for ongoing monitoring operations against Iran. The West additionally sees this northern territory as a critical security bridge from NATO member Turkey into the Middle East and beyond. It is in the context of this massive geopolitical power balance that news of Russian oil giant Rosneft’s downscaling of its operations in Iraqi Kurdistan should be seen.
The crucial point about Rosneft’s operations in Iraqi Kurdistan was that it meant Russia effectively controlled the vital oil infrastructure in the semi-autonomous region, and as such also exerted enormous influence over the oil flows of the Federal Government of Iraq (FGI) in southern Iraq too. For a long time, the only pipeline able to export oil out of Iraq to the West was the Iraq Turkey Pipeline (ITP) controlled by the government of the semi-autonomous region of Iraqi Kurdistan. But behind that lay the fact that Rosneft had secured its influence in the region shortly after the extraordinary ‘Iraqi Kurdistan Independence Referendum’ in September 2017, as fully analysed in my latest book on the new global oil market order, through three far-reaching deals with the government of the Iraqi Kurdistan region (the KRG). First, Russia provided the KRG with USD1.5 billion in financing through forward oil sales payable in the next three to five years. Second, it took an 80% working interest in five potentially major oil blocks in the region. And third, it established 60% ownership of the vital ITP pipeline by dint of a commitment to invest USD1.8 billion to increase its capacity to one million barrels per day. This was the original Kirkuk to Ceyhan Pipeline, consisting of two pipes, which had a nameplate capacity of 1.6 million barrels per day (bpd) combined. The FGI-controlled pipeline’s export capacity reached between 250,000 and 400,000 bpd when running normally, although it was subject to regular sabotage by militants of various types. The KRG, in response to the regular attacks on the FGI pipeline, completed its own single-track Taq field-Khurmala-Kirkuk/Ceyhan pipeline in the border town of Fishkhabur. This was part of its drive to raise oil exports above 1 million bpd, which was later backed in the Rosneft deal. Related: Russian Tanker Reaches Venezuela After Evading U.S. Warship
However, as later disclosed by the Kremlin source among others, Russia’s securing of such influence on Iraqi Kurdistan was only a smaller part of its overall plan to extend this across the rest of Iraq. Its primary strategy to do this has been seen in standard operating procedure in its foreign policy and specifically involves causing chaos on the ground before handily interposing itself as a ‘peacemaker’ between the newly warring factions that it has created. Handily for Moscow, a perfect mechanism was already in place for it to wield its malevolent influence in the shape of the omni-dismal 2014 ‘Budget Payments-for-Oil’ deal, as also fully detailed in my latest book. In this, the KRG agreed to export a certain volume of oil from its own fields and Kirkuk via Iraq’s State Organization for Marketing of Oil (SOMO) and to not independently sell oil from the fields on the international markets. In return, the FGI in Baghdad would disburse a certain level of payments to the KRG from Iraq’s central budget. The initial figures agreed by both sides were 550,000 bpd of oil a day from the KRG side to the Federal Government in Baghdad and 17% of the federal budget after sovereign expenses (around USD500 million at that time) per month in payment from Baghdad’s side to the KRG. Given the already fractious nature of the two groupings, the chance of this deal running smoothly was around 50%, but with Russia involved it was zero.
Almost immediately upon Rosneft’s deals being agreed in 2017, Moscow insisted through the KRG that oil flows through the Kirkuk-Ceyhan pipeline would not restart until pipeline transit fees and pumping tariffs were paid to the Russian company. Moscow also wanted the FGI in Baghdad to look again at its decision to deem ‘invalid’ the assignment to Rosneft by the KRG of the five exploration blocks in Kurdish territory in which it had secured an 80% stake. These were estimated at the time to have aggregate 3P reserves of 670 million barrels. Under the then-FGI administration of Prime Minister Haider al-Abadi, the signs were that some accommodation of the demands of Rosneft and the KRG might be in the offing. There had been some movement on the percentage basis for the budget compensation, up from just under 13%, as had been earlier suggested in Baghdad. There had also been a ratification of the idea that Baghdad would return significant volumes of oil to Kurdistan for local refining, and it had even been acknowledged that a pumping tariff might be paid to Rosneft. At that time, then-Oil Minister Jabar al-Luaibi even said that he was willing to accommodate Rosneft in the Kirkuk oil hub itself, highlighting that Baghdad did not want to close the doors in the face of anyone ‘who wanted to help’. The only condition at that point was that Rosneft should work with BP which, as BP owned a 19.75% stake in Rosneft, did not appear to be an insurmountable requirement. As it transpired, the two firms went their own ways, leaving the FGI and KRG still wrangling over the ‘Budget Payments-for-Oil’ deal that finally resulted in the complete shutdown on the ITP in March 2023. The prospects for its subsequent recent restart look brighter with every diminution in Russia’s toxic influence in the country.
To wit, Rosneft has now reduced its stake in the Kurdistan Pipeline Company (KPC) from the 60% it acquired in 2017 to 49%. The KPC is the key operator of the feeder pipeline network within the Iraqi Kurdistan region which connects oil fields (such as Taq Taq and Tawke) to the border metering station at Fishkhabur. At Fishkhabur, the pipeline links up with the main ITP system. This follows the recent targeting by U.S., European and British sanctions of Russia’s number one oil firm Rosneft and its number two company Lukoil, which also apply to any entity in which the companies hold more than a 50% stake. Between them, the two companies export approximately 3.1 million bpd of crude oil, which the West sees as vital to Russia’s ability to keep funding its war in Ukraine. Lukoil, for its part, capitulated to the West’s ratcheted-up pressure even quicker than Rosneft, withdrawing almost immediately from Iraq’s huge West Qurna 2 oil field and Block 10 assets. As analysed fully by OilPrice.com, these withdrawals are regarded by senior legal and energy sources in Washington, London, and Brussels as a “major turning point” in the West’s fightback against increasingly aggressive Russia and Chinese moves against the allies.
By Simon Watkins for Oilprice.com
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