Iraqi Kurdistan has finalized a comprehensive package of deals with Turkey to build multi-billion dollar oil and gas pipelines to ship the autonomous region's rich hydrocarbon reserves to world markets, sources involved in talks said on Wednesday.
The deals, which could have important geo-political consequences for the Middle East, could see Kurdistan export some 2 million barrels per day (bpd) of oil to world markets and at least 10 billion cubic meters per year of gas to Turkey.
Such a relationship would have been unthinkable just a few years ago, when Ankara enjoyed strong ties with Iraq's central Baghdad government and was deep in a decades-long fight with Kurdish militants on its own soil.
But Turkey imports almost all of its energy needs and growing demand means it faces a ballooning deficit, making the resources over its southeastern border hard to ignore.
During a visit to Istanbul last week by Kurdistan Regional Government (KRG) Prime Minister Nechirvan Barzani, both sides agreed on the fundamentals of the deals and mapped out technical details for a second oil pipeline and a gas route from Iraq's north to Turkey, sources involved in the talks said.
“It is official and it is historic,” a source close to the deal said. “For years, Turkey has deliberately avoided getting involved in northern Iraq but now it is the beginning of a new period. It was a bold but a very necessary move.”
Turkey's courtship of Iraqi Kurds has infuriated Baghdad - which claims sole authority to manage Iraqi oil and says Kurdish efforts towards oil independence could lead to the break-up of Iraq. It has also raised concern in Washington.
Under Iraq's constitution, all oil export revenue goes through Baghdad. The autonomous Kurdish region is entitled to 17 percent of the total, a windfall that has helped it flourish as a prosperous oasis safe from the violence that consumed the rest of Iraq in the decade since a U.S.-led invasion.
The Kurds say all of Iraq will benefit if they develop their region's own resources. But Baghdad fears that if the Kurds obtain separate export capacity they will seek independence.
Turkey has repeatedly said it respects Baghdad's sensitivities and will not take any steps that would further deepen the long-standing dispute between the Arab-led central government and the Kurdish-run enclave.
Pipeline for heavy oil
Kurdistan has struck deals with firms including U.S. oil giant ExxonMobil, Chevron and Total as it seeks to develop its energy industry.
Ankara has set up the Turkish Energy Company (TEC), a state-backed entity which has struck partnership deals with Exxon and will be Turkey's counterparty in dealings with Kurdistan.
A first KRG-sponsored oil pipeline, which is almost complete, will link up to an existing Iraq-Turkey pipeline and begin carrying Kurdistan's oil to world markets from December, sources familiar with the project say.
The existing pipeline from Kirkuk to Turkey's Mediterranean port of Ceyhan is currently carrying only a fraction of its 1.6 million barrels per day (bpd) capacity, and could in theory pump up to 700,000 bpd of Kurdistan's oil.
But as Kurdish output grows, with several new fields coming online this year and next, a second pipeline will be needed.
“The second pipeline will be mainly for the heavy oil that will come from the northern fields. Taq Taq and Tawke crude is very high quality and blending the two grades would depreciate the value of both crudes,” the source close to the deal said.
Turkish state pipeline company Botas will be instrumental in building the second pipeline, a government source said. A private Turkish company is also interested in the project.
The new pipeline will have a capacity of at least 1 million bpd of crude oil, KRG natural resources minister Ashti Hawrami said in Istanbul last week. The exports will be metered independently, he said, inviting all parties including Baghdad to send auditors to observe the process.
Revenues will be paid into KRG accounts, a source familiar with the plans said. Hawrami has repeated the KRG's readiness to send 83 percent of the income to Baghdad after deducting the autonomous region's share. Baghdad views such plans as illegal.
“The KRG says this oil belongs to all Iraq and they are happy to share it. There is also a bit of a hope that the reality on the ground will force Baghdad to make a deal on this,” the source said.
While oil has been the focus of attention, Turkey's interest in OPEC member Iraq is also due to its rich gas reserves.
Turkey is set to overtake Britain as Europe's third biggest power consumer in a decade and is hostage to expensive Russian gas. It also buys natural gas from Azerbaijan and Iran and liquefied natural gas from Algeria but is looking to diversify.
With the new pipeline from Kurdistan, Turkey will be able to import at least 10 billion cubic meters (bcm) per year of Kurdish gas more cheaply than from current suppliers, sources said, with its total capacity potentially up to double that.
“Turkey's existing infrastructure is almost ready for this tie-up. Northern Iraq will build its own pipeline, but Turkey could be instrumental here as well and Botas could play a role,” the government source said.
A gas purchasing agreement between TEC and Kurdistan is expected to be signed in December, sources familiar with the project said. Construction of the pipeline and gas processing plants, anticipated to cost billions of dollars, could start next year, with the first flow of gas targeted for early 2017.
Anglo-Turkish firm Genel Energy, headed by former BP chief executive Tony Hayward, is expected to be the first company to export gas to Turkey from its Miran and Bina Bawi fields, which contain sour gas.
Shipping the natural gas to European markets through a link to the Azeri-controlled Trans-Anatolian natural gas pipeline (TANAP) is another option, a second government source said.