Iraq’s future energy could also be Turkey’s business opportunity

15:28 17 February in ARTICLES, In English, PUBLICATIONS

OGELogel | 2 (2007) |

MEHMET ÖĞÜTÇÜ | in Iraq

When Prime Minister Erdogan recently underlined that Iraq, rather than what the Brussels mandarins keep cooking up behind the curtains to slow down Turkey’s march towards EU accession, tops our national agenda, it was by no means meant to downgrade the importance of this historic vocation.

Indeed, he probably meant that the stakes were currently high; hence, many of the dynamics in Iraq would have deeper strategic implications, across its poorly guarded borders, on Turkey’s future security, domestic stability, trade and investment ties, and, more importantly, energy security interests. They will also have a significant bearing on Ankara’s relations with the United States, the EU, other Middle Eastern countries, and major powers with a vested interest in the region.

The greater attention being given today by Turkey to Iraq results not only from the global/regional geopolitical shift triggered by 9/11 but also from factors close to home such as the Kurdish unrest in south-eastern Turkey, the Iran-led Shia sphere of influence vs. the Saudi-supported Sunni resistance bloc, the vital significance of the region for the world’s energy supply security, the anticipation of more serious water disputes, and the proliferation of weapons and proxy wars.

Turkey, the most powerful actor to reckon with in the region economically, militarily and as a former ruler of Iraq, has a long-standing problem with its restive — and sizable – Kurdish origin population on the other side of the border. Ankara is seriously disturbed by the prospect of a strong Kurdish entity emerging in Iraq, which could fuel Kurdish separatism throughout the region, including in its Southeast.

Therefore, Turkey’s status quo favouring immediate priorities include, inter alia, maintaining Iraq’s territorial integrity in a federal structure, preserving the special multiethnic status of Kirkuk, removing the terrorist Kurdistan Workers’ Party (PKK) presence from the Kurdistan Regional Government (KRG) controlled area and managing the relationship with the increasingly assertive KRG in the north.

These are clearly sine qua non for Ankara — some in its power to influence, some largely beyond its reach. They should be pursued with appropriate levels of diplomatic/economic “carrots” and credible military “sticks” without damaging Turkey’s standing and vital national interests. There is no doubt about that.
However, Ankara must go beyond these hot topics of today and articulate a broader, longer-term strategic agenda vis-à-vis its next door neighbour, which is going through the most difficult and chaotic period in its sad history. Think what kind of Iraq will emerge by 2015 in light of different scenarios, assess the extent to which Turkey can alter the course of developments and consider the best ways to advance Turkish interests for today and tomorrow in a win-win partnership with all Iraqis.

One key element in such a constructive scenario concerns energy in Iraq as Turkey is poised to become a major regional transit/terminal hub for oil, gas and electricity flowing in all directions via its territory from the supply sources of Turkmenistan, Kazakhstan, Azerbaijan, Russia, Iran and Egypt to the high-value markets in the OECD world and Asia.

Iraq has the world’s third-biggest proven oil reserves (after Saudi Arabia and Canada), estimated at 115 billion barrels, with production hovering around 2 million barrels a day (mbd). Just 400,000 bd of this come from the north; before 2003, Iraq used to export around 800,000 bd from this region. The KRG estimates northern Iraq’s reserves at around 45 billion barrels of oil and 100 trillion cubic feet of gas (more than half of Iraq’s total gas reserves). The Kurds also estimate that oil production from their undisputed regions have the potential to rise to 1 mbd, and the disputed territories (namely, Kirkuk, Mosul, Salahuddin and Diyala provinces) could add another 1mbd.

Under optimal conditions, and including routes through both Syria and Saudi Arabia that are now closed or being utilized for other purposes, Iraq’s oil export infrastructure could handle oil throughput of more than 6 mbd (2.8 via the Gulf, 1.65 via Saudi Arabia, 1.6 via Turkey’s Kirkuk-Ceyhan pipeline, and perhaps 300,000 or so via Jordan and Syria). Iraq’s oil exports are currently going overwhelmingly through the southern port of Basra. Since the war, Iraq’s northern route to Turkey has been largely inoperable due to war damage and frequent sabotage. Iraq also plans to increase its natural gas output, which could potentially be plugged to the Nabucco pipeline, dubbed as the “fourth artery” for gas supply to the EU market via Turkey.

Despite the mammoth size of Iraq’s reserves only 2,300 wells have been drilled in total, fewer than in the North Sea. Hence, the appetite for access to Iraq’s abundant reserves is sufficiently robust to attract foreign investors in this high-risk environment. If the country were to open up and the security situation stabilizes, then companies are likely to go ahead even if terms are not ideal. While moves are being made in the Green Zone to introduce a new federal hydrocarbon law and investor-friendly policies necessary to harness these resources ($20 bn of foreign investment is needed over the next five years), the problems with agreeing and then implementing these policies are enormous, given civil unrest, outright violence and the breakdown of state institutions in the rest of the country. Until these disputes are put to rest, any near-term investor return looks unlikely, despite talk of this in Baghdad, with Iraq’s current oil targets to raise production to 6 mbd by 2012 seen as unrealistic.

One of the controversial issues is how much control the new constitution gives regional governments over existing oil fields and new discoveries. Local powers over the latter appear stronger. Senior government officials in Baghdad say they hope for an agreement by March of this year that will resolve discord among the major sectarian and ethnic factions and open the way for much-needed foreign investment. The Kurds are particularly proactive in enticing potential investors and indeed inspiring Shiite Arabs in Iraq’s oil-rich south to pursue similar approach. They want responsibility for A- Z in the energy sector from exploration to marketing. They have also included Kirkuk and a number of other oilfields outside the recognized KRG areas to their remit under the heading of “disputed areas,” a point which the rest of Iraq and neighbouring countries contest.

Ironically, Turkey, widely feared today to militarily intervene, had contributed significantly to the consolidation of Kurdish self-rule in northern Iraq in the 1990s and even provided Kurdish leaders Barzani and Talabani with diplomatic “red passports.” For the Kurdish leadership and people it appears that the continuation of the current level of autonomy at least within the new Iraq is nonnegotiable.

In this situation, Turkish leaders will be wise to keep away from being sucked into the Iraqi quagmire through the use of military force. Other instruments that are available to Turkey including its powerful economic and diplomatic muscle (plus its unique geographical asset) should be deployed to the fullest extent. Almost $2 bn in Turkish trade and investment are already financing the construction of the Middle East’s largest new conference centre, a new international airport, government buildings, hotels, parks, bridges, tunnels, overpasses, university campus, a refinery and an electrical plant in the KRG area. The wealth of petroleum in northern Iraq has become both a boon to the Turkish economy (particularly for cross-border trade and investment, construction contracts and transit fees) as well as a curse since it will enhance the region’s prosperity, which could in turn become a focus of attraction for Turkey’s relatively less-developed Kurdish-populated regions. The alienation of Iraqi Kurds will work against Turkish interests in the longer run as they may turn the KRG region into a regional nest for anti-Turkish hostilities.

The Kurds themselves must also understand how much they would need a friendly Turkey, particularly if fragmentation is truly looming. Turkey is a geographical sine qua non for their opening to the world and their lifeline in ways that a much more self-interested Iran would not be. They should also bear in mind that neither Turks nor Arabs would allow the absorption of the oil-rich province of Kirkuk and other “disputed territories.” Reasonable minds on both sides of the border see this, but not everybody is reasonable.

In this complicated picture, a key strategic interest for Turkey would be to team up with Iraq and foreign partners more systemically and energetically than hitherto on building energy infrastructure including power, refining and petrochemicals, exploring new oil and gas fields and getting these supplies to international markets. There are already two major Turkish oil groups (Genel Enerji and PetOil) and several power plant investors operating in the north. Ankara should financially and politically support Turkish companies and mobilize the EU as well as multilateral institutions to help Iraqi reconstruction. Do not forget that the existing capacity of the Kirkuk-Ceyhan pipeline is 1.6 mbd of oil — more than what the most publicized Baku-Tbilisi-Ceyhan pipeline could carry at full capacity.

A stable and economically dynamic, increasingly secular and democratic state is a “rare bird” in the region. If Turkey resumes rapid rates of growth, maintains its cohesion, and deals with the Kurdish issue in some real fashion, it could indeed become a more significant force in the changing politics and economics of Eurasia and the Middle East.

If Turkey were to be a reliable energy partner as consumer, transit, terminal and investor country in the current global energy arena, there should be no room for threats or blackmail each time a problem emerges to “cut back the flow of energy,” “close down the borders” or “punish political actions by economic sanctions.” Not only for Russian, the Caspian and Central Asian supplies of oil and gas, Turkey should show the same degree of sensitivity for Iraqi supplies as well. This way, Iraq’s energy future could also be Turkey’s business.