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Kurdistan eyes major role in Turkish gas market

The region of Kurdistan holds promising large natural gas reserves

Kurdistan’s rocky emergence as an oil exporter is the dominant story in northern Iraq. But the region’s large natural gas reserves hold promise, too, offering a lucrative business that may bypass some of the central government’s objections to Kurdish oil ambitions.

Genel Energy, a Turkish firm already producing oil in Kurdistan, says it plans to bring on stream 4 billion cubic metres a year (cm/y) of gas from its fields in Kurdistan by 2015.

The production will go to Turkey’s energy-hungry market, reinforcing the growing commercial ties between Ankara and the Kurdistan Regional Government (KRG).

Last year, trade between Kurdistan and Turkey amounted to $8bn, say KRG officials, who predict such figures will mushroom as the region’s oil and gas business, still in its infancy, takes off.

The KRG thinks oil production — hindered for now by weak infrastructure and an increasingly bitter dispute with the central government in Baghdad (see story) — will rise tenfold to 2m barrels a day (b/d) by the end of the decade.

But those plans are at the mercy of Iraq’s oil ministry and the country’s fraught politics. Natural gas, which is not covered by the Baghdad-controlled State Oil Marketing Organisation’s monopoly on oil exports, may prove an easier sell, believe some analysts.

By the end of the decade, says Tony Hayward, the ex-BP chief now running Genel, Kurdish gas exports could meet a fifth of Turkey’s imports of the fuel.

The fundamentals look good. Kurdistan’s gas reserves could amount to around 100 trillion cubic feet (cf), according to numbers being bandied about at the Kurdistan Oil and Gas conference in Erbil last week. Some optimistic Kurds have even talked of their gas being liquefied in Ceyhan, the port on Turkey’s Mediterranean coast through which Iraqi oil exports flow.

But the main target for hopeful Kurdish gas exporters is Turkey. Its economy is growing at around 4-5% a year, with electricity demand rising even more quickly. The country will need to add another 5,000 MW of power-generation capacity in the coming years to meet its electricity needs.

Turkey imports all of its natural gas to meet consumption that is now 47bn cm/y but is expected to soar in the coming decade to around 70bn cm, making it one of Europe’s biggest gas markets. The country spends about $70bn a year on fuel imports.

Kurdistan’s gas could be a cheaper alternative to imports from Russia, which cost around $400 per 1,000 cm. Kurdish supplies would also compete with gas from Azerbaijan, where the Shah Deniz field will soon support exports, and Iran, one of Turkey’s most important suppliers. The US has been demanding that Turkey cut back its energy imports from Iran in line with international sanctions on the country.

Relations between Iran and Turkey have also soured in recent months, with Ankara upset at Tehran’s support for the Bashar al-Assad regime in Syria.

Getting Kurdish gas to market would involve “relatively modest and technically straightforward” pipeline additions in Kurdistan, says Hayward, enabling the exports to enter to Turkish supply network.

Last month, Genel took full control of the 10.5 trillion cf Miran gasfield, which lies northwest of Sulaymaniyah, buying out UK firm Heritage Oil’s 49% interest in the project. Genel has already sunk two wells in the field and plans another two next year. The company says it is talks with customers about long-term offtake agreements.

The likeliest route for exports would take Kurdish gas to Fish Khabur, close to the border with Turkey in northwest Kurdistan. Turkey would also have to build infrastructure to bring the gas into its domestic network.

Botas, Turkey’s state-controlled pipeline operator, and other government-backed firms are in negotiations with the KRG over contracts in Kurdistan, said sources in Erbil.

Investors say Ashti Hawrami, the KRG’s energy minister, has outlined to them a comprehensive strategy to coordinate Kurdistan’s oil and gas infrastructure.

At present, though, such development is patchy, reflecting the immaturity of the region’s upstream play, which has been dominated by small investors with limited access to the cash needed to fund capital-intensive infrastructure projects.

The arrival of the majors in Kurdistan has changed that calculus. ExxonMobil, Chevron, Total and Gazprom Neft have already signed big upstream deals, and other large companies continue to look for opportunities.

Sources said ExxonMobil and Chevron had both discussed building oil-export infrastructure linking Kurdistan and Turkey with the government in Ankara.

The companies are also spending large dollops of cash as they build their presence in Kurdistan. Chevron country manager Donnie MacDonald described his company getting “embedded” in the region, part of Chevron’s ambition to build a “legacy position, a 40-, 50-, or 60-year” commitment to the region. “Ashti has a clear vision,” said MacDonald of Hawrami’s pipeline plans. “In due course, infrastructure will be developed.”

That would reassure some investors that gas-bearing plays could be monetised in the way Genel expects.

Canada’s Talisman Energy, another investor with a promising oil position, is also sitting on substantial gas reserves, says Richard Herbert, its head of exploration. “Do we get it to market or do we re-inject it,” he asked in an interview. Given the political constraints on oil exports and lack of storage in Kurdistan, gas sales may offer a way for Talisman to monetise its hydrocarbons, or recoup some of the money the firm has ploughed into its promising Kurdamir prospect.

“The question isn’t near-term oil production, it is near-term cash flow,” said Herbert. Gas-export receipts could tide the company over.

The most dynamic and ambitious of Kurdistan’s junior investors remains Genel. Hayward sees Kurdistan as the company’s ticket to a doubling in size. “We want to help the people of Kurdistan achieve their hopes and aspirations,” Hayward said in Erbil in early December.

While crude exports remain the big prize for investors in Kurdistan, gas may prove a lucrative interim business while the fraught oil politics between Erbil and Baghdad play out.

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