Kurdistan’s Natural Gas Resources May Become a Game-changer Over the Longer Term

By Olgu Okumuș, June 21, 2013

If a firm manages to create a dominant position in the Kurdistan Region of Iraq (KRG) oil business this could, in the long term, open a door to the gas business, as it did in the Caspian zones in the 1990s, when the Baku – Tbilisi – Ceyhan oil pipeline prepared the ground for the South Caspian gas pipeline and TANAP, the Trans-Anatolian gas pipeline. A similar future may be possible for the KRG and the firms working within it. The KRG’s proven gas reserves are estimated at 2.8-5.7 trillion cubic meters (tcm). That is about four times more than Azerbaijan’s reserves. In the perspective of the southern energy corridor projects, KRG’s natural gas sources may become a game-changer over the longer term.

Up till now Azerbaijan’s offshore gas fields remain the sole source for the southern energy corridor. A gas pipeline running from the KRG to Turkey might create competition between the KRG and Azerbaijani gas for European and Turkish markets. As BP is the leader of the Azeri offshore consortium, a firm that ended up driving KRG gas to Turkey could eventually find itself competing with BP on the global market.

 The Southern Energy Corridor Project (SECP) is a gas transit infrastructure project running from the Caspian Sea to Europe via Turkey and the Balkans. The SECP is at the top of Eurasian energy security concerns, since the Russia-Ukraine gas crisis of 2005. European countries affected by the crisis diagnosed their gas supply system as overly dependent on Russia and, by consequence, highly vulnerable. This is reason enough for European energy companies to compete in order to become a part of the SECP.

Azerbaijan as the Sole Source for the SECP

However, the SECP targeted the entire Caspian area’s resources, but some economical, political, and legal challenges jeopardized full access to all Caspian sources. Economically, the exploration and production costs for oil and gas in the Caspian Sea Basin ($5 per barrel) are seen as relatively high compared to costs in the Middle East ($1 per barrel). As the region has no direct access to navigable international waterways, all littoral states are dependent on each other for trade and transportation of oil and gas. This challenge creates high transit fees and a complex legal aspect. The Caspian Basin has neither legal status nor regime – i.e., it is unclear if the body of water is a lake or a sea. The qualification of the Caspian as a sea or a lake directly affects the delimitation of territorial waters and sovereignty for exploring and exploiting natural resources. In the absence of a legal framework, littoral states cannot make separate agreements or envision a trans-Caspian pipeline project.

Therefore, Western investors have excluded Kazakhstan and Turkmenistan gas sources from the SECP. Turkmenistan has chosen to direct its energies towards Eastern markets, in particular China. All in all, Azerbaijan’s gas fields remain the only reliable Caspian sources. But in the future Azerbaijan may not be longer the sole Caspian gas source for