Turkey’s Energy Plans with Iraq’s Kurdish Region

STRATFOR

Summary

Turkish Economy Minister Zafer Caglayan visited Arbil, Iraq, on June 8 to sign an agreement under which a Turkish company will build a power plant in northern Iraq’s semi-autonomous Kurdish region. The deal is part of a wider Turkish effort to develop and expand energy infrastructure in northern Iraq, especially within territory controlled by the Kurdistan Regional Government (KRG).

Ankara’s effort comes amid an escalating dispute on control of Iraq’s energy wealth between the Iraqi central government in Baghdad and the KRG. Turkey believes that partnering with the KRG to build energy infrastructure can help it address a number of foreign policy concerns simultaneously. By increasing its economic and political leverage over the KRG, Turkey can compel Arbil to rein in Kurdish militancy in northern Iraq and in Turkey itself; use its ties with the KRG to form a stronger defense against Iranian influence in Iraq and the region; and potentially reduce Turkey’s dependence on Russian or Iranian natural gas imports and become a regional energy hub. But Iran will likely use its considerable influence in Iraq to push back against Turkey’s plans, and Kurdish militants could jeopardize Ankara’s investment by attacking energy infrastructure.

Analysis
The KRG announced May 18 that it is prepared to move forward on the most ambitious part of the infrastructure initiative: building an internal oil transport network with Turkish assistance. Logistical issues such as funding, the precise route and pipeline security have yet to be announced, but Ankara is rumored to have awarded the contract to Calik Enerji, a private company with ties to Turkish Prime Minister Recep Tayyip Erdogan. Turkish Energy Minister Taner Yildiz, who announced that his government would be partnering with the KRG in developing the pipelines, confirmed Ankara’s intent May 20.

The Turkish project would include several phases. The first phase will build a pipeline to connect the northern Taq Taq oil field within KRG territory to a storage depot and would repair a damaged segment in the existing Kirkuk-Ceyhan pipeline. The second phase, expected to be completed in mid-2013, would connect the storage depot directly to the Kirkuk-Ceyhan pipeline, according to KRG Energy Minister Ashti Hawrami. Stratfor sources have indicated that additional lines may be built in the future to transport oil and gas directly from the Kurdish region to Turkey’s Mediterranean port of Mersin.

Overall, the project would increase KRG export capabilities from 500,000 barrels per day (bpd) to more than 1 million bpd, though export levels have never exceeded 300,000 bpd. Turkey is heavily dependent on imported natural gas and crude from Russia and Iran, totaling 115 million cubic meters per day and 700,000 bpd. The new pipelines and the potential to develop routes beyond Baghdad’s control will also help reduce Turkey’s dependence on Iranian and Russian energy.

Additionally, expanded cooperation with Ankara will help the KRG solve its own energy shortage problems. Arbil and Baghdad are currently in a political deadlock over control of Iraq’s energy resources, which resulted in Baghdad shutting off the KRG’s access to export pipelines April 1. Before the shutoff, the KRG had limited its exports through Baghdad-controlled pipelines to about 150,000 bpd to protest the central government’s attempts to control all aspects of Iraqi energy production. Baghdad responded by halting deliveries of refined petroleum products to the KRG, whose own refining capacity is insufficient to handle demand. The Kurds have relied on smuggling crude oil to Turkey and exchanging it for refined petroleum goods, which are then trucked back into the Kurdish region. As part of the energy partnership, the Turkish government has promised to help refine Kurdish crude oil, which would allow the KRG to bypass Baghdad.

Implications of the Baghdad-Arbil Divide
Turkey’s expanded role in the KRG’s energy sector would give the Kurds more leverage in their relationship with Baghdad. The KRG’s position against Iraqi Prime Minister Nouri al-Maliki and Baghdad is weak because the lack of export infrastructure makes it difficult to attract outside investment and to profit from its own energy reserves. The KRG thus depends heavily on shared oil profits from Baghdad, with 95 percent of its revenues coming from the central government.

Ankara’s involvement in Kurdistan would also encourage more international oil companies to invest in Iraq’s northern oil fields instead of its southern ones. Baghdad’s excessive bureaucratic obstacles and harsh contract terms have limited foreign oil companies’ interest in developing southern fields, and ExxonMobil, Statoil and Total have all indicated a greater desire to work with Iraq’s Kurds in the north. In the most recent round of bidding on southern oil contracts, Baghdad issued extensive demands and Western energy companies offered no bids.

Turkey’s Evolving Relationship with the KRG
Turkey’s involvement with the KRG is part of its wider effort to position itself as a regional leader, but Ankara will have to deal with its own Kurdish issues before this can be accomplished. Turkey has faced an internal Kurdish insurgency, especially with the Kurdistan Workers’ Party (PKK), since 1984. The Kurdish separatists of the PKK have pushed for an autonomous Kurdish state, and better rights and political representation for Kurds within Turkey. Recently Erdogan met with the main opposition party in Turkey to discuss plans for setting up a commission to address the Kurdish question.

Because the Kurdish population stretches across multiple sovereign borders from southeastern Turkey, northern Iraq, northwestern Iran and northeastern Syria, Ankara must be careful to avoid too greatly empowering a semi-autonomous Kurdish region through its energy cooperation. Though the KRG’s current semi-independent status is useful for Turkey, if taken too far it could result in the KRG inspiring or bolstering Kurdish separatist groups in Turkey, Syria and Iran. Turkey therefore must strike a balance and court Kurdish favor in a way that does not jeopardize its overall position in Iraq, which Ankara needs for future power projection into the Gulf.

Turkey’s Regional Ambitions
In order to safeguard Turkish investments in the north, Ankara will need the support and cooperation of Iraq’s Sunnis, who share Turkey’s concerns about Shiite political ambitions supported by Iran. Ankara needs to demonstrate to Iraq’s Sunni population that its investment in the KRG represents a potential benefit and not a threat. Turkey’s attempts to align itself with Iraq’s Sunni population in the past have netted mixed results, but it continues to develop the relationship, often offering support where the Shiite-controlled government in Baghdad has not. Turkish investment in the Kurdish electricity development sector could increase current power generation from 450 megawatts to 2,000 megawatts within a year. This would ease blackouts across the country, an important concern for Sunni Iraqis who live outside Baghdad’s electricity grid and are disproportionately affected by power outages.

Ankara hopes to make itself into a major energy transportation hub for the Mediterranean, and a dependent Kurdish entity providing reliable natural gas supplies that Turkey could transport to the European market is crucial to that effort. It could also boost investor confidence in the proposed Nabucco West project, which intends to deliver natural gas from the Caucasus to Central Europe.

Ankara’s Potential Constraints
Turkey’s plans, however, face many challenges. For example, one of the PKK’s most frequently used tactics against the Turkish regime has been attacking oil and natural gas pipelines. Turkey’s investments in the KRG will be a prime target since the PKK will likely use threats against the lines to try to force concessions from Ankara. Even rudimentary pipeline attacks could easily remove the two prerequisites for increased foreign investment in Iraq’s north: a stable security environment and dependable infrastructure. Turkey will have to rely heavily on its partners in the Kurdish government and Kurdish peshmerga paramilitary forces to dissuade separatist attacks and secure the pipelines.

Turkey will also almost certainly face pushback from Iran, especially if it moves to project power into Iraq outside of the KRG. Iran retains considerable influence with Iraq’s Shiite majority, both politically and through links to Shiite militant groups. Though for now Ankara’s ambitions are focused on the KRG, Iran knows that an expanded Turkish presence anywhere in Iraq is a threat to Iran’s influence and attempts at regional hegemony.