Volatile oil prices and financial turmoil in the developed world have created havoc in markets globally. Kurdistan has been immune to these shock waves to a degree because it has primitive financial structures without strong banking institutions as well as isolation from international markets. Given that the Kurdish Regional Government (KRG) has poor economic records, growth could only come from the oil and gas reserves Kurdistan enjoys, but the sector has suffered from underinvestment historically due to political instability in the region and the landlocked nature of Kurdistan.
By Shwan Zulal
Europe has been reeling from high energy prices and its dependence on Russian gas to a large extent. With the recent events in Georgia and the Caucasus the relation between Russia and Europe has been turbulent and there has been a lot of political rhetoric about Russian dominance on gas markets in Europe. The EU has pushed energy security to the forefront of its political agenda and there are calls to diversify energy supplies and reduce dependence on one source.
After nearly two decades of humiliation and weak economic progress, the Russians have found a new way to reinvigorate their status by using their natural resources, hence gas and oil. The Russian federation is refusing to be pushed around anymore and has been asserting its muscles over the strategic gas pipelines in the region and beyond.
This threat to energy security of the EU has made the Europeans scramble for other sources of gas around the world and in particular from Africa. Recently the EU was back footed again as it has emerged that the Russians have been in advance discussions with the Nigerian government to establish new gas pipelines through the Sahara into Algeria on the Mediterranean sea.
The Energy giant Gasprom owned by the Russian government has been trying to outmanoeuvre the traditional European energy companies working in Africa such as Shell, BP and Total. If the Nigerian government falls for the charm offensives by the Russian Prime Minister and the Russians obtain control over the proposed pipeline, it would be a setback for the EU in its battle to diversify energy sources.
Russian dominance has raised concerns in Europe and the region as it has been becoming clear that Russia would use its monopoly on the energy market as a political tool as the cutting of the gas supply to Ukraine last year is a stark example.
The Kurdish Region has huge oil and gas reserves which are largely underdeveloped but have a substantial potential as a future supplier for the EU and other parts of the world. The KRG has passed hydrocarbon legislation recently which enabled them to award contracts to a few companies to develop the sector. The oil contracts were awarded to half a dozen exploration companies from different parts of the world, and last year the deals were looking promising. However, political deadlock and operational obstacles have prevented exporting oil and this has delayed development as well as putting off further investors.
The Jehan pipeline which connects Iraq to the Mediterranean Sea passes and through Turkey, which should make oil export straightforward from Kurdistan but Ankara is adamant that they would only allow Iraqi central government oil to flow through the pipeline. This has resulted in isolating Kurdish efforts to develop its oil and gas fields as it cannot sell it. The Iraqi central government has also isolated companies investing in Kurdistan from other parts of Iraq and this has further dampened confidence in investing in the Kurdistan Region. These efforts are all part of a political manoeuvre by the regional powers to stop Kurdistan region from gaining economic independency.
What has been happening in the last five years has not been encouraging as the EU and the US have not made any commitments to resolve these issues by finding a viable solution to the problems facing Kurdistan region. It is within their power to pressurise Turkey to allow the Kurdish region to export its resources, nevertheless they have repeatedly failed to do so.
A recent contract which has been signed by the KRG with the Korean Oil Company (KNOC) promises to develop the oil and gas field in Kurdistan which does include a multibillion dollar investment in Kurdistan infrastructure. However the contract depends on the fact that KNOC should be able to export the gas and oil they produce.
Isolation and economic difficulty have stalled political progress in the Kurdish region and political uncertainty and corruption has been rife. Lack of economic independence in Kurdistan and the security situation in other parts of Iraq have discouraged western commitments to invest and sponsor development.
Political reform has been overdue in the region but lack of support by the international community has exacerbated the administrative problems. The EU and the US must step forward and foster the Kurdish oil and gas industry if they want to be the major player in the region, otherwise the future of Kurdistan oil might end up elsewhere.
Although corruption is rife in Kurdistan region, political reforms in comparison to its neighbours in the region have been relatively better than many of its neighbours and are by no means to EU standards, but the KRG has shown they are willing to progress and embrace democracy and human rights.
The EU and the US must take a much more active role in encouraging reforms and supporting the KRG as it is a potential secure source of energy in a volatile region. Failure to support and invest in the Kurdistan region might push the KRG towards possible Kurdish-Russian partnership. The Russians have no interest in political transparency and reform as they would do deals with whomever is in charge if it is in their interest. The first Russian government sponsored Kurdish radio service has just been announced and started to broadcasting in Kurdistan, this is an indication that Russia is showing interest in the region and trying to push through its point of view.
So far the KRG continues to remain loyal to its western allies, but this might change soon as Russia is emerging on the scene and they are very keen to secure a stake in energy markets around the world and further squeeze Europe and NATO members as well as keeping prices artificially high.
The KRG has been seen to be reluctant to think about partnership with Russia but this could change as already TNK (BP sister company in Russia) has secured a contract in the Kurdish Region. If the KRG is seen to be discussing possible ventures with Russia, the EU could come under pressure to facilitate Kurdish oil and gas exports through Turkey.
An opportunity has arisen for Kurdish politicians to argue their case and leverage pressure on the EU to pressure Turkey into accepting the reality and open its borders for energy export from Kurdistan. Turkey has ambitions to enter the EU and this could be used to pressure them to recognise the KRG.
The plans for new gas pipelines agreed between Turkey and Iraq running parallel to the Jehan double oil pipeline have not instigated actual work yet. The KRG must take a hard look at its options and more needs to be done to gain energy and economic sovereignty. If the EU and the US are reluctant to invest and provide partnership, Russia and China could be the new partners to further Kurdish ambitions and the threat of such alliances could be used as a bargaining chip to end the KRG's isolation.