Iraq and its semiautonomous state Kurdistan have frequently been at odds, especially since the latest oil boom in the latter. After months of trying to come to a deal with Baghdad, Kurdish officials began shipping crude oil to Turkey. The oil was stored in Kurdistan before it was exported, prompting Iraq to threaten to take the matter to the United Nations and mount a legal challenge against the Kurds as well as Turkey. However, Kurdistan doesn’t seem to be heeding these warnings and instead is relying on oil to secure its independence.
On May 20, 2014 reports broke that a long anticipated gas deal between China and Russia would not be forthcoming on Russian President Vladimir Putin’s current trip to China. Hours later the blockbuster deal to sell up to 38 billion cubic meters of Russian natural gas a year to energy hungry China for a term of between 20 and 30 years to begin in 2018 was announced. Negotiations regarding the deal have been going on for at least a decade with pricing being the major sticking point. However the final pricing terms were unannounced, so it is unclear if this is a final agreement or another in a series of memoranda of understanding. The route the pipeline will take to transport the gas from Russia to China was also not disclosed. Agreements regarding coal and LNG exports to China were also formally signed.
Many in the West see the timing of this deal as a reflection of Russia’s need to diversify away from its reliance on gas exports to Europe. While this is certainly a factor it must be remembered that this deal was going to happen regardless of Russia’s relations with Europe as China has been extremely active in securing long term access to energy supplies. Perhaps most notably last year when Chinese President Xi Jinping went on a tour of Central Asia and returned to Beijing with energy supply agreements from Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan. Nonetheless it appears likely that China was able to obtain better terms from Russia than in the past. Whether this is a result of current geopolitical concerns, diversification of supply, or both is unclear. What is clear is that this is one of, if not the largest, gas supply deals in history. No doubt the final terms of the deal will make for interesting reading.
In 2013, the U.A.E. imported USD $26.9 billion in U.S. exports, making it the U.S.A.’s largest export destination in the Middle East and North Africa (MENA) region for the fifth year in a row. The fact that new U.S. Secretary of Commerce Penny Pritzker started her inaugural tour from Abu Dhabi and Dubai indicates how Washington values the commercial ties between both countries.
Confirming this, Pritzker addressed an audience in Abu Dhabi saying, “Our bilateral friendship reaches all the way back to the U.A.E.’s foundation. We have supported each other in countless ways. Clearly, the U.S. and the U.A.E. share a commitment to preserving the stability and security throughout the Gulf and that commitment won’t change, even as the U.S. becomes more energy independent.”
Only an eight-hour flight from most of the world’s strongest and emerging markets, the U.A.E. boasts world-class and multi-modal infrastructure that satisfies the needs of global travelers as they connect from the Emirates to economic hubs in MENA and the rest of the world. With the U.S.’s support, Emirati business leaders are learning how to become more ingenious and innovative while competing on a global stage.
Both the U.S. and the U.A.E. are currently creating commercial partnerships and innovative projects, especially in the infrastructure development and green build, energy development, transportation, media and tourism, education, and energy development sectors. These projects are in part a result of the U.A.E.’s economic development plans (e.g. U.A.E. Vision 2021 and Abu Dhabi Vision 2030) and President Barack Obama’s national export initiative.
Pritzker commented, “We are helping to build a legal environment where entrepreneurs can have the ability to try, fail, and try again, which is crucial. Entrepreneurship is something that is near and dear to my heart, having started five companies myself, so there are a lot of ways we can work together on that.”
Khalfan Al Kaabi, the vice president of the Abu Dhabi Chamber of Commerce, agreed saying that the country plans to build bridges with the U.S. and maintain them. “As we go through an economic growth in Abu Dhabi, we see there are more opportunities that can be concluded between our members and their U.S. counterparts,” he said. “As a business community, we must take advantage of this excellent reality.”
The U.A.E.’s government has committed billions of dollars to expand its airports and infrastructure across the country, including a multi-modal rail system that would link it to neighboring GCC countries. By planning these projects, the Emirates has added American industry to its list of key commercial partners. And by the looks of it, American private and public sector leaders will become active members in this process.
Despite successfully flowing Kurdish crude to Turkey earlier this year, Kurdistan is unable to start exporting internationally until Baghdad approves the deal. However, despite threats from both sides, the Anglo-Turkish exploration and production company, Genel Energy, is expecting that the Baghdad-Erbil oil issues would be resolved.
Officials so far aren’t reaching a point of agreement. While Iraq’s Deputy Prime Minister of Energy Affairs, Hussein Shahristani, announced that Erbil and Baghdad have agreed on “the mechanism of exporting oil through SOMO (State Oil Marketing Organization)”, a Kurdistan Regional Government (KRG) spokesman, Safeen Dizayee, contradicted this saying that there is no such agreement between Kurdistan and the federal government. Muayad Tayib, a spokesperson for the Kurdistani Alliance in the Iraqi parliament, confirmed Dizayee’s statement calling Shahristani’s comments “baseless.”
With tensions rising between both governments, the U.S. stepped in as a mediator. Brett McGurk, Deputy Assistant Secretary of State for Near Eastern Affairs, shuttled between Erbil and Baghdad to find a common ground. As a result, on March 22, the KRG announced its plans to resume exporting 100,000 barrels a day through the Iraqi pipeline beginning April 1.
The KRG’s official website quoted Kurdish Prime Minister Nechirvan Barzani as saying, “As a goodwill gesture, the Kurdistan Regional Government (KRG) has offered to make a contribution to the Iraqi oil pipeline exports to give the negotiations (with Baghdad) the maximum chance of success.” He added, “The KRG contribution to oil export will be 100,000 barrels per day effective 1st April 2014, and will continue while the negotiations are proceeding in a positive direction.”
In addition to the U.S. involvement, Kurdistan’s decision to flow oil through Iraq’s pipelines may have been spurred by the central government’s decision to cut off funding to the KRG, causing the latter to delay paying some government salaries. While unofficial reports say that the U.S. pressured Baghdad to pay the KRG budget allocation for February, the payment for March is yet to be sent through.
To ensure that both sides reach a mutually beneficial agreement, the U.S. will take part in the upcoming negotiations. In a statement by the embassy, the U.S. invited both sides to discuss exports and find a solution. “The United States urges the joint GOI-KRG committee, comprising experts from the GOI’s Ministry of Oil and the KRG’s Ministry of Natural Resources, to meet and assess future month-to-month export targets based on technical capacities and in a manner consistent with the Iraqi Constitution.”
Meanwhile, the U.S. will be a “neutral broker and facilitator” to the extent both governments agree on and according to the Strategic Framework Agreement with Iraq. U.S. Vice President Joe Biden believes that Erbil-Baghdad oil issues can be solved with the help of dialogue and understanding.
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In January 2014, Kurdish crude successfully flowed into Turkey, where it was to be stored until Iraq decided to waive its claim over Kurdish oil. Turkish Minister of Energy Taner Yildiz told the press that he believed the first exports to actual customers could start by the end of January. However, February doesn’t bear tidings of a solution any time soon.
On January 27, Kurdish Regional Government (KRG) Prime Minister Nechirvan Barzani met with Kurdish lawmakers from the Iraqi parliament to discuss the region’s oil exports. The central government in Baghdad had threatened both the KRG and Turkey, indicating that any kind of trade would violate national laws. Without Baghdad’s approval, Kurdish oil would not cross Turkish borders.
As a result, despite the oil’s availability, buyers are few. The largest energy companies fear Baghdad’s wrath, especially since Iraq has signed major crude oil supply contracts and is considered one of the world’s largest oil producers. A senior executive of a large energy company commented, “We will not be involved in KRG tenders until we have a much better understanding of the ramifications for our relationship with Iraq.” Two other companies which also refused to be named said that they would not be part of the bidding process initiated by the KRG’s Ministry of Natural Resources.
Kurdistan is rich in oil and has already approved exploration licenses for some of the largest energy companies including ExxonMobil and Total. However, it’s 200,000 barrels a day doesn’t contribute much to the global market. In addition, executives are worried about stepping into a dispute that has the KRG and energy-hungry Turkey pitted against Iraq and the U.S. The U.S. appears to be concerned that direct Kurdish crude oil exports may lead to a break up of the Iraqi state.
The Kurdish government, however, is trying its best to export its oil resources and to please the central Iraqi government. It is offering to sell two million barrels at official Iraqi prices. In addition, the KRG invited Iraq’s State Oil Marketing Organization to observe the process while assuring Baghdad that it will receive a majority of the revenues.
Unfortunately, these efforts are not met with much enthusiasm because Baghdad still insists that the State Oil Marketing Organization should be fully in control of all Iraqi oil exports. As a result, the central government is pushing energy providers not to take part in the Kurdish tender. In a statement, the organization said, “Companies [that participate in the tender] shall be subject to legal proceedings.”
BP and Royal Dutch Shell have aligned themselves with the central government to protect major projects in the country’s southern region. Meanwhile, Total, Chevron and Repsol continue to rely on Iraqi crude despite defying the government and getting exploration licenses in Kurdistan. Even independent trading houses have taken a stance. Swiss traders Vitol and Glencore continue to supply fuel to Iraq while Trafigura has been blacklisted from such contracts because it traded Kurdish oil.
Due to the lack of sales from the largest oil buyers, experts recommend that the KRG rely on one-off sales to smaller trading houses. However, that will limit the impact of the tender, which some think is being used to force Baghdad to approve the exports.
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The Indian government has approved a price hike for Indian gas to $8.4 per BTU from between $4.2 to $5.7 per BTU, effective April 1, 2014. The gas price increase will be applicable to Reliance Industries (RIL), Oil India (OIL) and India Oil and Natural Gas Corporation (ONCG) nominated fields, which are classified as Administered Pricing Mechanism gas (APM gas), as well as coalbed methane and shale gas. Newly approved gas price recommendations will be valid for five years and reviewed on a quarterly basis.
It remains to be seen whether subsidies will be decreased in proportion to the gas price hike so as to negate the net benefits of such prices increases. Another potential downside of this development is the viability of gas-fired power plants, the capacity of which is already down due to lower gas availability, but which would be further non-viable without additional subsidy announcements which would promote investment in capacity construction.
Higher prices directly benefit producers of APM gas because as investments in deepwater gas discoveries and previously uneconomical fields become viable, higher gas production will result in additional revenues for future investment. Previously underdeveloped assets will become more economically feasible to develop. RIL could almost double production by 2018 in response to elevated gas prices, helping India meet its growing energy demand without relying as heavily on imports. Oil Minister Veerappa Moily estimates that of the estimated $1 billion in additional revenue operators can expect, $400-500 million will be passed along to the government in the form of taxes and royalty, which it can then use to subsidize power and fertilizer facilities. Companies like RIL, which already have a presence in the U.S. shale gas market, could purpose additional revenue for the acquisition of U.S. gas and development of liquefied natural gas (LNG) export projects.
Highlighting the pitfalls of doing business in developing countries, BG Group, Britain’s second-largest energy company, has invoked force majeure under LNG supply contracts with customers of its Egyptian gas. The force majeure event arose from the Egyptian government’s order to divert BG’s share of production under its production-sharing agreement for domestic purposes preventing BG from fulfilling its export obligations. Faced with political unrest and widespread discontent, the Egyptian government had little choice but to allocate the gas to a domestic market plagued by electricity shortages and power outages at BG’s expense.
The force majeure declaration shocked the markets and dealt a big blow to BG’s share price given that Egypt accounts for nearly one-fifth of total production. It remains to be seen how BG will be made whole, but the episode offers a lesson on the need to diversify in order to “spread the risk” when investing in developing countries.
1. BG Group Warns of Gas Problems in Egypt: http://www.nytimes.com/2014/01/28/business/international/bg-group-warns-of-gas-problems-in-egypt.html?_r=0
2. BG’s Force Majeure Highlights Egypt’s Energy Troubles: http://madamasr.com/content/bgs-force-majeure-highlights-egypts-energy-troubles
The Iraqi federal government in Baghdad certainly faces many challenges. Two of the most important challenges are:
- for some time, the Kurdish Regional Government (KRG) has and continues to assert a constitutional right separately contract for oil and gas development and to market the oil and gas produced in the Kurdish Region; and
- the growing instability in Sunni controlled provinces due to demonstrations and insurgent activity based on alleged disenfranchisement.
The most recent move by the KRG to sell millions of barrels of oil to Turkey, independent of Baghdad, prompted Iraqi Prime Minister Maliki and his cabinet to draft a budget that provides the KRG with no funding from the federal budget unless the KRG sells 400,000 barrels per day of oil through “SOMO,” the Iraqi state oil marketing entity. As an alternative, a prorated deduction may be applied to the KRG’s portion of the federal budget proportionate to any shortfall in the KRG’s minimum required sale of oil through SOMO as determined by Baghdad.
In response to the issues experienced in the Sunni controlled provinces, the Prime Minister and his cabinet have proposed to carve out a number areas currently located in existing northern and western provinces to form new provinces. It is thought that the proposed adjustment in internal political boundaries will help to counter the waning authority of Baghdad over Sunni provinces and the Kurdish Region.
However, those who scratch the surface of Baghdad’s proposed actions may find only a veneer of authority and that the prospect for Baghdad’s proposals to be successful to be uncertain. Many observers justify the Kurdish Region’s current independent approach to the production and marketing of its resources as resulting from Baghdad’s seeming inaction and unreliability. The KRG often points to Baghdad’s lack of effectiveness in developing and passing a national oil law and to alleged delays of payments to the KRG from the federal budget as a catalyst for the KRG’s recent and past actions. In response, Baghdad blames the KRG’s alleged circumvention of Baghdad’s national policies for its actions.
The KRG targeted budget proposals still need to be approved by the Iraqi Parliament, which in many respects is quite fractured and not supportive of the current government. Even the president of the Parliament has been unsupportive of the government due to the recent arrest of a member of Parliament and a governmental crack down on demonstrators in Anbar. A handful of the home provinces of members of the Iraqi parliament are looking for similar semi-autonomous authority to that enjoyed by the KRG. Negotiations on all these important issues appear to be ongoing. The results of these negotiations may only help to focus the complaints on all sides.
The proposition to carve out portions of the disputed territories and Anbar province to create new provinces is fraught with particularly significant challenges. These challenges are legal as well as political. The legal and administrative authority over the areas within a province, including the disputed territories, lies with the local governments or “governorates.” According o the Law of Governorates Not Organized into a Region, the Governorate Council and Governor would have authority over such administrative and border changes. While a new law could be passed or new federal regulations promulgated, the constitution clearly states that the authorities not in the exclusive authority of the federal government rest in the provincial or regional governments. Because the authority to create provinces is not mentioned in the exclusive authorities of the federal government, Baghdad would be proceeding without certain legal foundation. Perhaps the government would reach out to its national security authority, which is exclusive. However, this not without political peril and would be stretching legal authority, almost certainly creating more instability and new security issues.
One must wonder whether the Sunnis would support breaking existing Sunni provinces into smaller, separate provinces thus diluting Sunni power and unity? Would minorities and Kurds in the northern disputed territories, having enjoyed security and prosperity, support breaking away and giving up the only stability and continuity available to date in Iraq?
It is important to note that the disputed territories face many challenging issues, mainly population demographics and border issues for which the government has not been able to provide a solution. These difficulties are compounded because there has not been an accurate census taken in Iraq since 1987. It truly is questionable whether these issues can be solved today by the various new proposals under consideration in Baghdad.
It is important to note that Baghdad’s proposed political boundary changes involving the Turkmen community of Tuz Kharmatu may be the only exception to the issues outlined above. This is because, under Baghdad’s plan, Tuz Kharmatu would be joined to Kirkuk, which has one of the largest Turkmen communities in Iraq. The relevant district council supports the joinder while the provincial government would certainly oppose such a move.
Almost any path the government takes would require support from the national parliament and from affected provincial governments. Even if all of the noted challenges were surmountable, it is uncertain whether adequate resolutions can be attained before the coming national elections in April.
Whether pursuit of Baghdad’s proposed budgetary and geographical political maneuvering will be successful or effective to enable Baghdad, the KRG and Iraq’s Sunni population to reach satisfactory resolutions to their issuesremains to be seen.
This week, a Royal Dutch Shell Plc (RDSA) and OAO Gazprom Neft joint venture began an exploratory drilling program in the West Siberian Bazhenov Shale formation. This is just the latest announcement of intent to explore for oil and gas in Russia’s shale formations. In December 2013, Rosneft and Norwegian oil company, Statoil, announced an agreement to explore the Domanik shale in the Samara Oblast. Rosneft and ExxonMobil have been working to develop the Bazhenov and Achimov formations since a $300 million deal in 2012. 
The U.S. shale boom combined with stagnant European economic growth has Middle East oil and gas exporters focusing on growing their shipments to fast-growing Asian markets. In an effort to drive market share and lock-in long-term contracts with Asian buyers, crude oil exporters such as Kuwait, Iraq, and Abu Dhabi are employing aggressive sales tactics including offering steep pricing discounts, extended credit terms, and shipping concessions to lure customers. The pressure is even greater on gas producing powerhouse Qatar which has begun cutting prices on its LNG exports in an effort to head off competition for Asian dollars, particularly from the U.S. which is set to ramp up its own LNG exports.
The bright-side is that, assuming energy prices do not fall precipitously, the increased competition among Middle Eastern and other exporters for Asian customers will help drive down energy bills in the region. This should help fuel strong economic growth in energy-hungry Asia and, in turn, continued demand for exports from Middle East producers.
 Gulf Oil Exporters’ Rivalry Grows in Battle for Asian Buyers. http://www.arabianbusiness.com/gulf-oil-exporters-rivalry-grows-in-battle-for-asian-buyers-529126.html?page=1#.UqqnAvRDuaQ
 Qatar Cuts Gas Prices to Keep Competition at Bay. http://www.arabianbusiness.com/qatar-cuts-gas-prices-keep-competition-at-bay-525622.html
 U.S. Picks Up Steam on Natural Gas Export Projects. http://www.reuters.com/article/2013/09/11/usa-dominion-lng-idUSL2N0H71NE20130911