In June 2017, Kurdistan Regional Government (KRG) and Russian energy behemoth Rosneft signed several cooperation, investment and production sharing agreements regarding hydrocarbon exploration, production, infrastructure, logistics and trading. Rosneft also obtained access to Kurdistan’s oil pipeline to Turkey with a capacity of 700,000 bbl/day, and is planning to extend this to over 1 million bbl/day, although no timeline has been given.
Earlier in 2017, Rosneft agreed to buy crude oil from Iraqi Kurdistan until 2019. The crude is to be delivered to Rosneft’s refineries in Germany.
Rosneft committed to paying KRG for oil supplies in advance. According to sources quoted by Bloomberg, the 1st advance payment was $1 billion.
The deal meets the commercial interests of both sides. Rosneft expanded its global portfolio and secured crude supplies for its German, and potentially new Indian, refineries.
In August 2017, Rosneft finalised the takeover of Indian refiner Essar Oil. On the other hand, KRG obtained much-wanted funds to finance its costly endeavours.
However, as the layers of the deal begin to peel off, it has become increasingly clear that the agreement was primarily a demonstration of political legitimacy from the KRG, and a manifestation of Russian regional influence.
KRG politics have been in a political deadlock since 2013. In 2015 the regional parliament in Erbil was suspended, triggering an unprecedented political scenario.
Since then, President Barzani has been ruling the KRG informally. After more than a decade in power, Barzani has secured key positions in the KRG government, now controlled by loyal figures.
The structure of these informal networks is key to understanding governance in the KRG, along with the drivers of the Rosneft deal.
Rosneft: The Power Player
In a comment to the Financial Times, CEO of Rosneft Igor Sechin criticised international sanctions for «transferring political responsibility on to the corporate level» and denied Rosneft being part of international politics.
However, Rosneft’s foreign operations tell a different story.
The Kremlin frequently uses Rosneft to promote its foreign policy agenda.
The latest examples include the sale of 20 % of Rosneft’s subsidiary Verkhnechyonskneftegaz (VChNG) to Beijing Gas in June 2017 and the takeover of India’s Essar Oil in August 2017.
These deals were in line with the government’s «pivot to the East», declared after western democracies imposed sanctions against Russia over its involvement in the Ukrainian crisis.
Last year, Russia overtook Saudi Arabia as the biggest crude oil supplier to China, Russia's sought after strategic partner and the key to the Kremlin's so-called ‘Eastern pivot'.
Now it is rumoured that Rosneft might even sell a stake to a Chinese energy conglomerate CEFC.
Rosneft’s new deal with KRG has all the signs of falling within the same context.
KRG Power Players in the Rosneft Deal
3 main figures arise in the KRG in relation to the Rosneft deal, which ultimately are directly linked to President Barzani.
The 1st of these figures is the current KRG Prime Minister, Nechirvan Barzani – the brother of Masoud Barzani.
Nechirvan has taken part in this deal as the senior representative of the KRG authority.
Nechirvan, who is also the president of the KDP, is likely to be playing the role of a middle- between international energy clients and President Barzani, who is seeking to maintain a low public profile given his lack of political legitimacy.
Another key figure that took part in the Rosneft-KRG deals was Dr Ashti Hawrami, the current KRG Minister of Natural Resources.
Hawrami is believed to be an essential actor in deciding access to KRG oil fields, as he has strong influence over most stakeholders in the KRG.
The last key KRG energy sector power player – who was also involved in the Rosneft deal - is Qubad Talabani, son of the former president of the second largest political party in the KRG, the Patriotic Union of Kurdistan (PUK), Jalal Talabani.
According to Shadow Governance sources, the Talabani family controls the oil fields of Sulaimaniyah, which makes them key actors in the energy sector.
Moreover, Qubad Talabani - since 2014 – has been the Deputy PM, and he is also believed to play a key role in KRG-U.S. political and economic relations.
In this context, the power players that surround the Rosneft-KRG deal highlights:
(1) that the deal is highly personalised;
(2) that the political dynamics and power relations in the KRG are evolving; and,
(3) that the rule and political recognition of President Barzani is being reinforced. This deal with Rosneft will inevitably help legitimise his current (unofficial) position as President of the KRG.
Main political outcomes: Russian energy endeavours in Iraqi Kurdistan
While the KRG-Rosneft oil deal primarily highlights the dynamics of the KRG's domestic power struggle, from the Russian perspective, it promotes the Kremlin’s foreign agenda.
Rosneft is not the only Russian company involved in exploring KRG’s energy resources.
Gazpromneft, another state-owned energy giant, started producing oil in Iraqi Kurdistan back in 2012 and currently operates in 3 blocks, i.e. Garmian, Shakal and Halabja.
It also holds a license for developing Badra oilfield in Eastern Iraq which is controlled by government forces.
In January 2017, Gazpromneft declared that it would increase oil production in Iraqi Kurdistan despite the ongoing military conflict that is only 50 km away from one of its production sites.
Gazpromneft’s CEO Alexandr Dyukov then said that the company did not see any risks that could affect its operations in Iraqi Kurdistan.
Interestingly, in 2016, Gazpromneft was more cautious about its intentions vis-à-vis Iraqi Kurdistan.
It then claimed that due to remaining geological uncertainties at Halabja, Shakal and Garmian blocks - as well as the overall situation in the region - Gazpromneft did not rule out the possibility of reconsidering its geological exploration programme in Iraqi Kurdistan.
Both Rosneft and Gazpormneft explain their decisions to enter and remain in Kurdistan’s oil industry due to significant undiscovered oil reserves.
The KRG Ministry of Natural Resources estimated that Iraqi Kurdistan held 45 million barrels of oil reserves with one of the lowest production costs per barrel in the world.
However, there is conflicting evidence regarding Iraqi Kurdistan’s resource potential.
Therefore, risks associated with operations in a debt-ridden politically unstable administration, with an open military conflict in the vicinity, seem to override the potential benefits.
The exception being if Rosneft entered the deal knowing that it was primarily pursuing geopolitical goals, and was offered significant privileges.
While Rosneft refused to disclose which oilfields it was looking to develop under the 5 PSA agreements, it is rumoured that some of the sites are located in disputed territories including Bai Hassan field near Kirkuk and Sinjar block near the Syrian border.
Rosneft’s deal with KRG creates a strategic stronghold for the Kremlin giving it certain bargaining chips over the central Iraqi government and Turkey without too much official involvement in KRG affairs.
Consequences of Political Leverage
On the other side, the deal between Rosneft and KRG has been announced by the Kurdish government and its loyal media outlets as a factor that marks a new era in this region.
This deal has been presented as evidence that the KRG is again political and economically stable, and that the political crisis triggered by the presence of ISIS in KRG territory is now part of the past.
The KRG is trying to portray a more stable image to attract foreign investors, especially in its energy sector.
Therefore, Rosneft is being presented as the 1st client, of many others, to invest in the KRG.
While this discourse is embraced by KRG officials, the reality and consequences of this deal are quite different.
Economically, this deal could be understood as one of provisional aid being provided to the KRG – which is generally financially strapped.
In the short term, the $3 billion promised by Russia seem to strengthen this weakened economy.
Yet, it remains unclear how this investment can shape the financial future of the KRG.
Moreover, this deal has also brought together KDP and PUK political elites, which might work to reinforce the informal power that President Barzani currently holds.
Although this emerging environment is favouring the informal networks of President Barzani, and the de facto political actors that are driving energy sector deals, international investors should be aware of the high levels of political exposure.
The high levels of personalisation of these deals should also raise concerns for political and economic analysts.
The fragility of this deal stems from the fact that it relies on the informal connections between the deal makers.
Should there be any changes to the status quo, the deal would be vulnerable to subsequent questioning in terms of its legitimacy.
While the KRG is portraying its deal with Rosneft as a great success that will attract future investment, the outcomes are much less certain.
The KRG’s political impasse is likely to remain as the deal with Rosneft actually adds to its informal governability.
Russia, on the other hand, is betting on the deal to promote its long-term policies in the Middle East, rather than expecting a return on its investment.
Therefore, the deal is more of a political gamble rather than an economic one.