The Last Truly Underdeveloped Oil Frontier In The Middle East

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By Simon Watkins

Over and above the petty party squabbling that characterises the politics of Iraq’s semi-autonomous northern region of Kurdistan, it can safely be conjectured that at least two groups of people were delighted at the appointment of Masrour Barzani on 11 June as prime minister of the region’s government (the KRG): the Barzanis and the Russians. The Barzanis had three reasons for jubilation: Masrour was now prime minister, his cousin, Nechirvan was president, and the former president – and father of Masrour – Masoud Barzani remains the driving power behind the throne. The Russians had just one reason – but a big one – for celebration: the Barzani family is “highly accommodating to any suggestion that is good for the Barzani family,” as one senior source who works closely with Iraq’s Oil Ministry told Oilprice.com last week. “This means it’s still open season for Russia in Kurdistan, which is perhaps the last truly under-developed oil and gas frontier in the Middle East,” he added.

An indication of the Barzani’s historical appeal to Russia is that under the presidency of Masoud Barzani from 2005 to 2017 the family’s net worth increased from the negligible amount that any U.S. middle office manager might have in the bank to just under US$50 billion, according to various estimates. All of this was done whilst the official base salary for the president of the KRG was between US$2095 and US$2515 per month, which means that this accumulation of wealth was either an object lesson to savers everywhere or, as inferred at the time both by neighbouring Iran and by the U.S., evidence of something altogether less wholesome. Given the disposition of the key vested foreign interests in Iraq at the time – Iran and the U.S. – it was such (privately-made) accusations of impropriety that prompted Masoud’s unexpected announcement in October 2017 that he would resign the presidency, according to the senior Iraq source.

A few months year before the scheduled September 2017 referendum in Iraqi Kurdistan to vote on whether the Kurdish population wanted independence from Iraq, the perennial disagreements between the Federal Government of Iraq (FGI) in Baghdad and the KRG over the ‘oil for budget payments’ deal were threatening to destabilise the FGI’s entire budget. At that time, Iran was the most dominant power in Baghdad, wielding political, economic, and military influence through its militia proxies across the south, and did not want the Iran-sympathetic government in Iraq to be even more financially pressed than it already was. It also did not want the Kurdish independence movement in Iraq’s north gaining momentum in its own Kurdish population, comprising around 9% of Iran’s total populace, or in the Kurdish population of its other major ally in the region, Syria, whose Kurdish population constituted around 11% of its total.

On the other side of the power equation operating at that time across Iraq, the U.S. wanted to keep all of the region’s 28 million or so Kurds onside, as their fearsome Peshmerga army was functioning effectively as the West’s on-the-ground military proxy in the fight against Islamic State. The U.S. though, despite private assurances to the Iraqi Kurds that they would be given their own independence in return for their efforts fighting Islamic State, did not want to jeopardise its chances of resuscitating its oil and gas interests across Iraq as a whole. This meant in private not supporting independence but in public supporting the September 2017 referendum. In this context, although the referendum result would be permissive not mandatory from a legal perspective, a ‘yes’ vote if backed by a superpower such as the U.S. was regarded by all of the key states involved as almost certain to stoke discontent across the region’s Kurdish population. Masoud Barzani was seen as a pivotal figure in the Kurdish drive for independence by all sides, whatever his personal or professional motivations might have been.

It was against this backdrop that a meeting was held in early August between Iraq’s then-Prime Minister, Haider Al-Abadi, and his senior advisers, and Iran’s Supreme Leader Ayatollah Ali Khamenei, Major General Qasem Soleimani (the commander of the Islamic Revolutionary Guard Corp’s elite Quds Force that focuses on foreign operations) and senior members of Iran’s Vezarat-e Ettela’at va Amniat-e Keshvar intelligence service. “The Iraqis were given all of the files that Iran had gathered which alleged multi-layered corruption and theft by President Masoud and his son Masrour, who’d been Chancellor of the Kurdistan Region Security Council – its intelligence service – at the time,” said the Iraq source.

“The files contained details of alleged secret bank accounts for the stolen funds, money transfer vehicles and routes, methods of payments for bribes, and even the names of high-level couriers and other officials believed to be involved,” he underlined. “One of the most damaging was represented as being an internal use-only report from what was essentially the Finance Ministry of Kurdistan that Iran said showed that Iraqi Kurdistan was running an operational deficit of US$3.2 billion at that point – increasing at a rate of around US$100 million per month – in large part as a result of 28% of the KRG’s entire oil export stock disappearing from official export channels and the resulting funds not going into Erbil’s treasury,” the Iraq source told OilPrice.com.

“According to the Iranian personnel there, independent auditors said that this missing 28% had been diverted by Masrour Barzani and sold on via middlemen in Turkey, with the resulting funds then being deposited in an account in a bank in Northern Cyprus under the name of a close female friend of Masrour Barzani, who, Iran said, was connected to Russia’s SVR [the Sluzhba vneshney razvedki foreign intelligence arm of Russia],” the Iraq source underlined. “Iran saw the SVR involvement as an early sign that Russia was looking to build up its influence in Kurdistan to use as leverage to do the same in the south of Iraq as well,” he said. “[Masoud] Barzani was then shown this evidence by the Iranians and told that he could either enjoy a comfortable retirement or that all of the documents would be released both publically in English and in Arabic and the Kurdish people would decide whether the Barzanis had stolen the money or not,” he added. For his part, then-President Barzani maintained that these diverted funds must have been an attempt by his son Masrour to build a war chest of funding that would act as a safety net for the moment when the KRG officially broke away from the rest of Iraq.

As it stands, with the Barzanis still in place, the Kremlin’s lead corporate proxy in the region, Rosneft, recently announced that it is to conduct a massive geological exploration across Iraqi Kurdistan this year. Already effectively in control of Kurdistan’s oil industry through a deal done in November 2017, Rosneft believes that the region has a lot more oil than most in the oil industry believe and equally importantly believes that it can use its presence in Kurdistan to expand its presence across the whole of Iraq. Only recently in this context, Gazprom Neft – the oil producing subsidiary of Russian state gas giant Gazprom – commissioned a third production well at its Sarqala field in the Kurdistan region, whilst Lukoil pledged to Baghdad that it would dramatically increase crude oil output from the supergiant West Qurna 2 field in the south.

The most recent estimate of all of Iraq’s proven reserves is around 150 billion barrels but, according to the International Energy Agency (IEA) and derived from the United States Geological Survey (USGS) 2000 assessment and subsequent updates, the level of ultimately recoverable resources at that time was around 232 billion barrels of crude and natural gas liquids. The IEA added that a detailed study by Petrolog around that time reached a similar figure but did not include the parts of northern Iraq in the KRG area, among others. Before the relatively recent spate of exploration in the KRG area, official estimates of proven oil reserves were only around four billion barrels. Subsequent to a broader drilling programme, the KRG said that this figure is closer to 45 billion barrels. According to Russian oil analysts spoken to by Oilprice.com in the past few weeks, this is a figure that Rosneft believes likely.

The prospects now are even more appealing, given the relatively low costs now in developing oil projects in Iraq. The ‘lifting cost’ per barrel in Iraq ranges from US$2 to US$3 per barrel, according to the IEA, as competitive as Saudi Arabia. Equally competitive on a global basis are the capital costs of development, which ranges from US$7,000-12,000 per barrel (pb) for expansion of a supergiant field in the south, through US$10,000-15,000 pb for the development of a new supergiant field in the south, to a maximum of US$15,000-20,000 pb for a medium-sized field in the north.

Rosneft is also ideally placed to open the way for Russian expansion into its gas sector, either for Russian gas behemoth, Gazprom, or for itself, given expectations that Gazprom’s monopoly on exporting Russian gas through pipelines is to end in 2020. Iraqi Kurdistan’s Ministry of Natural Resources (MNR) estimates that there is 25 trillion cubic feet (Tcf) of proved gas reserves and up to 198 Tcf of unproved gas resources in the region, around 3% of the world’s total deposits. The USGS believes that undiscovered resources in just the Zagros fold belt of Iraq, a large part of which falls in the Kurdistan region, amounts to around 54 Tcf of gas.

Crude Oil

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