The budding relationship between Russian energy firm Rosneft and Iraq's Kurdistan Regional Government (KRG) is closer than ever. The company announced Sept. 18 that it was in the final stages of negotiating a deal with the KRG to finance and build a $1 billion natural gas export pipeline to Turkey. Once complete, the pipeline will transform the way the autonomous region in northern Iraq exports its energy. And its effect on regional politics will be no less dramatic.
Pipelines and Power
As a landlocked region, Iraqi Kurdistan relies on pipelines through nearby territories to carry the energy it exports to markets abroad. Its dependence on its neighbors has proved a vulnerability, though. The Kirkuk-Ceyhan pipeline that transports oil from Kurdistan to southern Turkey, for instance, gave Baghdad considerable influence over KRG leaders in Arbil because it crosses through territory under the Iraqi federal government's control. To squeeze concessions from Kurdistan, the Iraqi federal government could block the KRG's access to the pipeline.
The negotiating tool lost its power in 2014 when Arbil closed a 50-year export agreement with Ankara that enabled it to construct its own oil pipeline to Turkey through Iraqi Kurdistan. Under the new arrangement, however, the KRG simply traded its reliance on Iraq's federal government for dependence on Turkey. And though Ankara is a less demanding administrator than Baghdad was, it still has a great deal of power over Arbil, its energy exports and even its oil revenues, since the KRG conducts its energy transactions through Turkish Halkbank. Turkey, moreover, could shut off the KRG's access to the pipeline without jeopardizing its energy security because it, like Iraq, consumes only a small portion of the Kurdish oil that passes through its territory.
So far, Ankara hasn't exploited its advantage over the KRG as Baghdad did. Nevertheless, Arbil is well aware of the risk. Turkey's support for KRG President Massoud Barzani is based largely on convenience and could waver as the leader continues to back an independence referendum scheduled for Sept. 25. Turkish President Recep Tayyip Erdogan recently announced that his government would reveal its planned response to the referendum after meetings of his Cabinet and national security council Sept. 22. Though it's unclear whether Ankara's response will involve the KRG's pipeline, the possibility is worrisome for Arbil and has prompted it to look for a way to even the playing field with Turkey.
The Rosneft-financed natural gas export pipeline would do just that. With a planned annual capacity of 30 billion cubic meters (98.43 billion cubic feet), the pipeline will be able to transport nearly two-thirds of the total volume of natural gas that Turkey imported last year. Not all of that natural gas would wind up in Turkey; some would likely travel on to markets in southeastern Europe. Even so, the pipeline would boost Turkey's consumption of natural gas from Iraqi Kurdistan, particularly since Ankara is eager to find alternative sources to reduce its dependence on Iranian and Russian supplies. The more natural gas Turkey imports from Iraqi Kurdistan, the less leverage Ankara will have over Arbil.
Rosneft stands to gain from the new pipeline, too. The firm's expansion in Iraqi Kurdistan not only dovetails with the Kremlin's strategy to insinuate itself into as many global hotspots as possible, but it also supports Rosneft's strategy to compete with Russian natural gas giant Gazprom. Rosneft has long tried to break Gazprom's monopoly on piped natural gas exports from Russia. With its plans to export natural gas each year from Iraqi Kurdistan to Turkey and southeastern Europe, Rosneft has set its sights on two of Gazprom's most important markets.
But Rosneft's pipeline deal is just the latest of in a string of recent agreements that bode well for the Kurdish energy sector. Earlier this year Rosneft became the first major oil company to start pre-purchasing Kurdish oil exports, throwing Arbil a financial lifeline. The Russian firm then used the arrangement as a springboard for the pipeline deal, along with an agreement to explore and develop five blocks in Iraqi Kurdistan. Apart from forging deeper ties with Rosneft, the KRG also finally settled its long-standing dispute with the Pearl Petroleum Co. over energy payments. The two sides reached an agreement that included future investments into natural gas production, which will contribute to the initial feedstock for the Rosneft pipeline.
The natural gas export pipeline that Rosneft and the KRG are negotiating could immediately change the way regional powers operate and behave. Although the infrastructure won't alter countries' individual interests in the region, it will change the factors at play in the dispute between Arbil and Baghdad — a dispute that will only intensify as Iraqi Kurdistan's independence referendum approaches.