BMI View: News has emerged that Turkey has approved a deal to import gas from Kurdistan in a move certain to exacerbate tensions with Baghdad. With Kurdistan planning to ramp up gas production and invest in new gas infrastructure over the coming years, Turkey could see a sizable share of its gas consumption needs meet by Erbil .
In a further sign of the growing ties between Iraq's autonomous Kurdistan region and neighbouring Turkey, approval has been given for the import of gas according to widely cited reports. Turkey's Ener gy Market Regulatory Authority has given the permission to the Siyah Kalem Company for the import of gas from Kurdistan for a period of 26 years as part of a project to be developed with OMV , Pearl Petroleum and MOL .
If confirmed, the approval would signal a worrying turn of events for Baghdad as the Kurdistan Regional Government (K RG) and Turkey further solidify their relationship. Iraq's central government continues to view various energy deals agreed to by the KRG government in Erbil as illegal . Thus, Baghdad was likely relieved when in November 2012, Turkish regulators rejected an application from EPDK to import gas from the KRG as part of a long term contract. At the time we noted that while political tensions prevented the company form securing the necessary purchase agreements, the developments underscored the likelihood that future efforts would be made to deliver gas from the KRG to Turkey.
KRG-Turkey Ties Grow Stronger
It now appears that with an oil pipeline that could allow exports independent of Baghdad from the KRG approaching completion, and a growing presence for Turkish oil and gas players in the Kurdish upstream, that a deal on gas is set to advance. Details have yet to be confirmed, but early reports indicate terms will be similar to the proposal which regulators denied in November. The contract will come into force from 2014 and will last until 2040 with initial imports of gas set at some 700mn cubic metres (Mcm) annually. Volumes are set expand to 3.2bn cubic meters (bcm) at a later date.
With domestic production of oil and gas limited, Turkey has long sought to secure access to the KRG's relatively abundant hydrocarbon resources buoyed by its investor friendly business environment.. The underexplored autonomous region estimates its own oil reserves at some 45bn barrels (bbl) with gas reserves of between 2,800 - 5,600bcm. This resource potential is seen more favourably than fields controlled by Baghdad and has already attracted a wealth of foreign investment from majors and independents despite the central government's best efforts.
|Heavy Import Burden Only Set To Grow|
|Turkey Gas (RHC) & Oil (LHC) Production, Consumption & Net Imports*|
Kurdistan's plans to tap into Turkey's rapidly rising demand for gas have long been on the agenda. However, progress has been stalled both by politics , given tensions between Ankara and Baghdad over Turkey's increasing presence in the KRG, and infrastructure, with supply bottlenecks limiting both production and exports. We are increasingly seeing movement on both fronts . Turkey is advancing investment in the KRG with less regard for Baghdad as it seeks access to lower cost and more reliable imports f rom the KRG in order to diversity and potentially reduce the impact of its' heavy import burden.
Big Plans For Gas Exports
The KRG is also progress ing pipeline connections in both oil and gas, with for example the Erbil-Dohuk gas pipeline nearing completion. While the pipeline is due to supply gas to a Kurdish power station at Dohuk, it is both near to the Turkish border and has a capacity of some 4.1bcm annually , whereas the power plant only requires some 1.02bcm per annum . The difference, just over 3bcm, is close to volumes targeted for export to Turkey in the latter phase of the recently signed deal.
The KRG has previously outlined plans to eventually deliver up to 10bcm of gas exports to Turkey annually as local production increase s . Genel Energy has previously suggested its fields alone could be capable of supplying in the area of 4bcm of gas for export by 2015 and an additional 4bcm by 2017/18. The independent recently increased the reserve estimates for its Miran and Bina Bawi gas fields with an eye toward supplying the Turkish market ( see, 'Miran Development Piles Pressure On Finding A Solution,' September 4 ). With Turkey's domestic consumption close to 50bcm in 2012, Kurdistan 's 10bcm would meet around 20% of the country's current demand.
With gas fired power generation set to grow rapidly and remain the primary feedstock source for the country, Turkey is keen to gain access to Kurdish gas despite the political challenges associated with the Erbil-Baghdad relationship . Imports from Kurdistan would limit the need for Turkey to increase its reliance on liquefied natural gas (LNG) imports , which could potential ly be more expensive than alternative sources. Further more, the introduction of Kurdish supplies would strengthen Ankara's hand in negotiations with suppliers such as Iran and Russia.
|Room For More Gas To Power Turkey|
|Turkey Total Net Generation, By Type (TWh)|
The KRG would also benefit, with access to the Turkish market further encouraging investment in its own upstream in order to deliver greater volumes for export. However, with planned expansions of power generation capacity and industrial activity, local demand for gas could grow and limit supplies available for export. Yet for Kurdistan, already using Turkey as a transit point for its crude with hopes of gaining greater access to global markets as export capacity increases, the long term prospects for potentially abundant gas resources could extend beyond Turkey.
Turkey is increasingly attempting to position itself a s a transit and entry poin t for gas supplies into Europe. Supplies of gas from the KRG (or possibly Iraq should political developments allow) could eventually reach Europe via Turkey as new infrastructure and fields come online . However pricing will be a key consideration , if the KRG sells gas to Ankara at too steep a discount, it would diminish the prospects that Kurdish gas could reach markets beyond Turkey.
Uncertain But Potentially Destabilising Implications
As we await gre ater clarity and confirmation of the deal, we have yet to adjust of our forecasts to reflect exports of gas to Turkey but not the political and strategic implications of an event that increasingly seems likely as the bilateral relationship between Erbil and Ankara advances on other fronts. While Baghdad remains opposed to these moves and is certain to protest this deal, its leverage increasingly appears to be waning as oil and gas activity in Kurdistan accelerates. With the political and security situation deteriorating in the remainder of Iraq , Baghdad's capacity and proclivity to respond may be constrained by its focus on events elsewhere in the country.