To realise its energy potential Iraq's Kurdish region needs to get its house in order

In February, Federal Supreme Court ruled that semi-autonomous region's 2007 oil and gas law unconstitutional, which would require Erbil to surrender management of petrol exports to Baghdad

A flame rises from a pipeline at Tawke oil field. A surprise ruling by Iraq's Supreme Court has cast doubt on the legal foundations of the independent oil policy of Iraq's Kurdish-run region. Reuters

High oil prices and threatened gas embargoes can make Iraq's Kurdish region a key piece on the Middle East-European chessboard. This year, the Kurdish prime minister and president have busily talked energy with the leadership in Abu Dhabi, Doha, Turkey, London and the American, EU and Russian ambassadors. But the complexities of geology and local and international politics again threaten to get in the way.

The semi-autonomous region has endured some tumultuous years. From 2014 to 2019, it was on the front lines against the terrorist group ISIS, whose scattered forces continue hit-and-run attacks in border areas. Following its independence referendum of 2017, Erbil lost its temporary control of most of the giant Kirkuk-area oilfields back to the federal Iraqi government.

The last oil price slump of 2014 and disputes over the region’s share of the national budget led to an economic crisis, huge accumulation of debt, and long backlogs of payment to oil companies and state employees. In 2020 came the pandemic and a deeper oil price plunge.

The situation is markedly different now, as oil market dynamics are more positive. Oil production has been quite stable, about 450,000 barrels per day and enjoying healthy prices.

The Pearl Petroleum consortium, which features Sharjah-based Crescent Petroleum and Dana Gas, is expanding gas production in southern Kurdish region of Iraq. The local Kar Group will extend a gas pipeline from the fields to Erbil and on to the northern city of Dohuk, close to the Turkish border.

That should provide enough fuel for reliable domestic power generation and industrial consumption, and an exportable surplus. Neighbouring markets need the energy: the rest of Iraq buys costly and unreliable gas and electricity from Iran, while Turkey and Europe are searching for alternatives to Russian gas as cut-offs and sanctions tighten.

In February, Kurdistan President Nechirvan Barzani talked about a possible natural gas deal with Turkey’s Recep Tayyip Erdogan in Ankara.

In the same month, Prime Minister Masrour Barzani discussed the region’s “huge gas potential” with Qatari Energy Minister Saad Al Kaabi. In March, he told a conference in Dubai that Kurdish of Iraq would soon export gas to the rest of Iraq, Turkey and Europe.

But matters in Iraq and the Kurdish region are never so simple. First, there are geological challenges. After a string of reserve downgrades, oil production has become dependent on a few leading northerly fields, including Kar’s Khurmala, and the Atrush field operated by Abu Dhabi’s Taqa.

The Patriotic Union of KRG-controlled area, meanwhile, has much less oil output, notably from Gazprom Neft, a unit of the Russian gas monopoly. Rosneft, Russia’s state oil giant, bought a stake in the oil export pipeline in 2017, but its option for a gas pipeline has gone nowhere, and the small fields it operates produce only minor amounts. The two Russian firms will find it hard to make further progress, given constraints of Western-led sanctions and finance.

US behemoth ExxonMobil, which entered the region to much fanfare and political controversy in 2012, finally wrapped up its operations there in April, having failed to launch any commercial projects.

And London-listed Genel just announced an unsuccessful well on its Sarta field, while in January it had to give up drilling the Qara Dagh prospect near Sulaymaniyah, due to geological complexity. This ends any immediate hopes of discovering major new oil reserves.

Second, internal politics are a problem. Most of the region’s gas resources are in the south-east, controlled by the Sulaymaniyah-based PUK. But the PUK’s power has progressively diminished relative to the Kurdistan Democratic Party, which controls the north-west, including Dohuk and the capital Erbil.

This is partly due to the KDP’s tight control over the oil portfolio and its productive alignment with Turkey. Independent parties gained seats in October’s national elections, over discontent with the KDP-PUK duopoly’s corruption, mismanagement and opaque treatment of petroleum revenue.

The PUK does not want to repeat this situation with gas, but exports to Turkey would have to flow through the KDP area. Bafel Talabani, co-chairman of the PUK, said last month that unless contracts were transparent and consensual, “they will have to export gas pipelines over Bafel Jalal Talabani’s dead body”.

In August, the KRG government cancelled two gas licences held by Genel. These large and technically complicated fields could support exports to Turkey. But whatever Erbil’s plans for them, Genel has now launched arbitration, threatening a lengthy legal process. Genel’s shareholders ousted chief executive Bill Higgs from the board of directors on Friday.

Third is the national Iraqi and international political scene. On February 15, the Federal Supreme Court ruled that the Iraq Kurdish region’s 2007 oil and gas law was unconstitutional. This would require Erbil to hand over management of petroleum exports and revenues to Baghdad. The judgment was unexpected, as the case was 10 years old and seemed inactive.

The court is accused of politicisation. Although its ruling won’t be literally enforced any time soon, it could be an Iranian gambit to put pressure on the KDP to fall into line in the interminable process of government formation following October’s elections.

Last month, Iranian missiles badly damaged the house of Baz Karim, the KDP-aligned Kurdish businessman who heads Kar Group. There were further attacks on the company’s refinery near Erbil, possibly part of a campaign of intimidation. On Saturday, there were claims that Kurdish forces had taken control of some of the federal North Oil Company's oil-wells near Kirkuk, later blamed on a fake social media account and denied by the KRG authorities.

In 2014, Baghdad launched international arbitration against Ankara, claiming $24 billion of damages for Kurdish oil shipments through the Iraq-Turkey pipeline, which it claimed breached the 1973 governing treaty, updated in 2010. A ruling is due in July. This also threatens any idea of independent Kurdish gas exports.

To realise their strategic energy potential, the politicians of the Kurdish region of Iraq would first have to put their own house in order. Then they would require support, whether from Washington, Brussels, Ankara, the Gulf or all of them. Until a mutually acceptable deal with Baghdad, the Kurdish queen will remain off the energy chessboard.

Robin M. Mills is chief executive of Qamar Energy and author of 'The Myth of the Oil Crisis'