Non-binding it may have been, but the people of three Kurdish governorates and the city of Kirkuk have voted overwhelmingly to seek independence from Iraq. The movement for this has been building up over the years – Saddam Hussein’s administration kept it quashed but the subsequent political landscape in Iraq has encouraged it. The referendum, and its results, was quickly condemned by the central Iraqi government, as well as Kurdistan’s neighbours of Turkey and Iran.
The central Iraq government considers Kurdistan a renegade province, asserting that it holds sovereignty over the land and – more importantly – its oil riches. Yet, the Kurdistan Regional Government (KRG) still calls the shots, and despite central protests, sells its own oil that powers its own economy. It is a situation analogous to China and Taiwan or Spain and Barcelona. The original proposition for the referendum was for the three major Kurdish regions. This had been given a lukewarm response by Iraq’s central government, but when it was expanded to include Kirkuk – where oil was first discovered in Iraq in 1927 – hackles were raised and retaliation was threatened.
At Iraq’s requests, Iran closed its airspace surrounding the Kurdish regions, preventing flights, while also conducting military exercises at the border in a show of force. Turkey condemned the referendum in no uncertain terms, going as far as threatening military intervention. The issue is optics. Turkey is dealing with its own restive Kurdish minority population, as is Iran, and the worry is that the referendum would spur Turkish and Iranian Kurds to band together to force an independent Kurdistan carved out of bits of Iraq, Iran and Turkey.
It is Turkey that the KRG should worry about. Even though the vote was declared as non-binding – merely an indication of the people’s desire of independence – Turkish Prime Minister Binali Yildirim said the vote was ‘laying the ground for conflict.’ This is crucial because Turkey is the only conduit for Kurdish crude oil to reach the wider market, shipped via pipeline to the port of Ceyhan on the Mediterranean. Kurdish oil could pass through Iraqi ports, but because the Iraqi central government considers all oil produced within its borders under the authority of state crude marketing agency SOMO, the KRG would receive no revenue from this. And now Turkey is threatening to close this sole valve, which would leave the landlocked KRG with much oil and no place to sell it. And the KRG has a lot of oil. The region produced some 550,000 b/d of oil last year, and looks set to boost output to 600,000 b/d, putting it on par with OPEC members Qatar and Ecuador. The entire region itself is estimated to hold some 45 billion barrels of crude reserves, which is more than Nigeria. This is the root of the conflict. The region is rich – very rich – in oil. And the Iraqi government will not let it go without a fight.
Worst still for the KRG is that Turkey is now leaning to treating all oil originating from Iraq as under Iraqi central control through SOMO. The current pipeline leading to Ceyhan is controlled by the Kurds and piggybacked upon by the federal North Oil Company; Turkey’s new policy would mean that revenue from all that oil will go to Iraq, not split between the KRG and Iran as it now is. It may not lead to that. Most signs are pointing to this being political bluster and grandstanding to indicate disapproval. Oil continues to flow through the Turkish pipeline without any interruption, and looks set to do so for a while. The KRG has recently signed plans with Russia’s Rosneft to build and expand natural gas pipelines in Kurdistan, while Chevron drilled its first exploration well in the Sarta block in Iraqi Kurdistan in two years.
What the referendum has achieved, is to draw the lines in the battleground for Kurdistan. These lines will not be crossed. They will form the basis of negotiation between the KRG and the Iraqi government on how best to move forward with their relationship. The KRG cannot afford to make new enemies; their ‘friends’ in Turkey and Iran are problems enough. But what they have is oil. And that is a very good bargaining chip in their quest for independence.
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It has been 21 years since Japanese upstream firm Inpex signed on to explore the Masela block in Indonesia in 1998 and 19 years since the discovery of the giant Abadi natural gas field in 2000. In that time, Inpex’s Ichthys field in Australia was discovered, exploited and started LNG production last year, delivering its first commercial cargo just a few months ago. Meanwhile, the abundant gas in the Abadi field close to the Australia-Indonesia border has remained under the waves. Until recently, that is, when Inpex had finally reached a new deal with the Indonesian government to revive the stalled project and move ahead with a development plan.
This could have come much earlier. Much, much earlier. Inpex had submitted its first development plan for Abadi in 2010, encompassing a Floating LNG project with an initial capacity of 2.5 million tons per annum. As the size of recoverable reserves at Abadi increased, the development plan was revised upwards – tripling the planned capacity of the FLNG project to be located in the Arafura Sea to 7.5 million tons per annum. But at that point, Indonesia had just undergone a crucial election and moods had changed. In April 2016, the Indonesian government essentially told Inpex to go back to the drawing board to develop Abadi, directing them to shift from a floating processing solution to an onshore one, which would provide more employment opportunities. The onshore option had been rejected initially by Inpex in 2010, given that the nearest Indonesian land is almost 100km north of the field. But with Indonesia keen to boost activity in its upstream sector, the onshore mandate arrived firmly. And now, after 3 years of extended evaluation, Inpex has delivered its new development plan.
The new plan encompasses an onshore LNG plant with a total production capacity of 9.5 million tons per annum. With an estimated cost of US$18-20 billion, it will be the single largest investment in Indonesia and one of the largest LNG plants operated by a Japanese firm. FID is expected within 3 years, with a tentative target operational timeline of the late 2020s. LNG output will be targeted at Japan’s massive market, but also growing demand centres such as China. But Abadi will be entering into a far more crowded field that it would have if initial plans had gone ahead in 2010; with US Gulf Coast LNG producers furiously constructing at the moment and mega-LNG projects in Australia, Canada and Russia beating Abadi’s current timeline, Abadi will have a tougher fight for market share when it starts operations. The demand will be there, but the huge rise in the level of supplies will dilute potential profits.
It is a risk worth taking, at least according to Inpex and its partner Shell, which owns the remaining 35% of the Abadi gas field. But development of Abadi will be more important to Indonesia. Faced with a challenging natural gas environment – output from the Bontang, Tangguh and Badak LNG plants will soon begin their decline phase, while the huge potential of the East Natuna gas field is complicated by its composition of sour gas – Indonesia sees Abadi as a way of getting its gas ship back on track. Abadi is one of Indonesia’s few remaining large natural gas discoveries with a high potential commercialisation opportunities. The new agreement with Inpex extends the firm’s licence to operate the Masela field by 27 years to 2055 with the 150 mscf pipeline and the onshore plant expected to be completed by 2027. It might be too late by then to reverse Indonesia’s chronic natural gas and LNG production decline, but to Indonesia, at least some progress is better than none.
The Abadi LNG Project:
Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference