Ordered by the House of Commons to be published on 6 May 2014
Oral evidence, 6 May 2014.
Witness
John Roberts, Energy Security Specialist and Senior Partner, Methinks Ltd, gave evidence.
Chair
I welcome our next witness, who will talk about the energy side of matters. John Roberts is the energy security specialist and senior partner of Methinks Ltd. Mr Roberts, thank you for coming, and welcome back, having given evidence to us in our Turkey inquiry a year or two ago. Would you describe the Kurdistan region as a good place to do business for British companies?
John Roberts
Yes, but I think it needs to be put into context. May I make a couple of comments first?
Chair
Please. I should have asked you if you wanted to make an opening statement.
John Roberts
First, I want to say thank you to the Committee for inviting me. Then, on a personal note, I want to thank the dedicated, compassionate and overstretched staff of the NHS, because, without them, I would not be here today. Lastly, I want to say a few words about context. Kurdish energy is important for several reasons. It constitutes a set of stranded assets. These are substantial investments that have already been made, so companies actually want a return on their investment. That is the first thing. The second element is that it poses major international problems. Agreements on cross-border sales effectively go to the heart of the question of what is sovereignty in Iraq. If such sales take place without Baghdad’s specific approval, in effect that implies the loss of federal authority over northern Iraq, and we are in the next few days at one of those points at which we will find out whether current Kurdish gas oil sales are indeed to take place with or without Baghdad’s permission. Thirdly, there is the question, to what extent can gas from northern Iraq play a role in what might be termed medium-term European energy security? In other words, in the post-Ukraine context, is northern Iraqi gas one of those elements, along with the east Mediterranean gas—Turkmen gas, extra gas from Azerbaijan—that we need to take into account for our own broad-based energy security? And, of course, how does this stack up with the easiest technical solution, but the toughest political solution—gas from Iran? So that is the context within which I think I see oil and gas development as issues in northern Iraq.
Chair
Can we dig into those points? Do you see any instability ahead that may give British companies pause for thought before investing too much in the oil sector?
John Roberts
There has to be a prospect of instability if there are, as we would expect, actual sales of oil from northern Iraq without Baghdad’s specific or indeed de facto approval, if only because it means in practice that Baghdad’s writ on a major element no longer runs. Whether—at a time when the Iraqi Government is, if not in limbo, because I take it that Mr Maliki is in fact continuing in government, but in which Government formation puts a lot of things in the air—this is also a possibility for immediate crisis and possible military action I think unlikely but, in the long run, I think there has to be a possibility of increased security strains between Erbil and Baghdad as a result of energy issues. That being said, any energy sales that are achieved will be achieved in practice with the official approval of Turkey. That official approval, in practice, is likely to mean a degree of protection of northern Iraq by Turkey as a result of these agreements.
Chair
I suppose the answer to my first question—is Kurdistan a good place to do business?—is that it depends on the business and it depends on how this plays out.
John Roberts
It does depend on how it plays out, but I suspect that even if it plays out in the way we expect it to, i.e. with Baghdad losing authority over oil sales, it will remain a good place to do business because, in practice, the world has managed to do business with—I do not know how one describes this—a semi-state entity quite successfully for the last five or six years and will continue to do so even if that semi-state entity’s constitutional position is even more complex than it was previously.
Mike Gapes
How do you assess the strategy of the Kurdistan Regional Government over the next four or five years, with regard to hydrocarbons? Where does it want to be with regard to its relations both with Turkey and with the rest of the world?
John Roberts
Short and immediate term: continue with export of products. They actually get more money from selling product than they do from selling oil, and much of that goes to Iran—naphtha. Longer term: get as much oil out through the Kirkuk-Ceyhan system, or at least the Turkish element of that, as possible. They are limited in that to around 300,000 or 400,000 barrels a day. The capacity of the pipeline is poor. Beyond that, two things: they need a new dedicated system to get the heavy oil from a giant field, Shaikan, out. That is simply too highly sulphurous and too poor quality to have more than a touch of it blended to go into the existing export systems. It needs a dedicated pipeline for heavy oil. I think that we will see as their first priority, once this current oil sale issue is resolved, the creation of a dedicated pipeline for heavy oil; but in four or five years’ time I think they will be looking to export more than 1 million barrels a day. In practice—this is 2014 now—they might not achieve that until 2018 or 2019, but they will be on a trajectory towards doing that. More interesting, I think, is the pressure on Turkey’s Genel Energy—whether you call it Turkey, or British, or whatever—to develop a gas pipeline, a connection to Turkey for the Turkish market; because they have got a considerable investment already made in Kurdistan and what they have is gas.
Mike Gapes
Given that there would then be a big increase in gas coming out of the Kurdistan region, has that got potential as a game changer to help the European Union diversify its gas away from Russia and Gazprom?
John Roberts
Yes, but be limited about all of these things. The first thing is, the easiest way in which it could help everybody would simply be by supplying the Turkish market. Turkey is the fastest-growing gas market in Europe—indeed, one might almost say the only really growing gas market in Europe; so therefore any gas that can come into Turkey, particularly into southern or western Turkey, which is what you could have with gas from northern Iraq or gas from the eastern Mediterranean, substitutes potentially for Turkish gas imports from the Caspian region and Azerbaijan. Whether or not Kurdish gas goes directly to Europe is less important than if there is a balancing element in Turkey that frees up other gas to go to Europe, but I think it has a role to play. Not a very big one, but if we are looking at the forced, the accidental or the policy-driven diminution of Russian gas supplies, every bit of gas that is available becomes extremely important.
Mike Gapes
Following on from that, given that you have referred to at least one company, Genel, which is a UK-Turkish joint venture, is it in our interests as a country for the KRG to have complete control over its own oil rather than it being subservient in some way to Iraq as a whole?
John Roberts
We could live happily with either system, so long as KRG oil and gas was available for export. The bottom line is if exports are not, in effect, permitted by Baghdad from the north at a time when the existing Iraqi section of the Kirkuk-Ceyhan line is out of action, that damages our energy security interests. If Baghdad is amenable to Kurdish exports within a federal framework, that is obviously the best solution all round. The problem we have to deal with is what happens if that solution is not available.
Mike Gapes
Perversely, it will be in Russia’s interests to have the worst possible relations going on with the west and at the same time Iraq, for whatever reason, stopping the export of gas from the Kurdistan region?
John Roberts
Yes, but then you have got to think: what are Baghdad’s interests in this? It is important that as and when there are northern Iraqi exports of oil and gas, they contribute to overall Iraqi oil funds. So it is not simply a question for Baghdad of lose-lose; there is a gain for Baghdad in resolving this issue amicably.
Sandra Osborne
We have heard suggestions that the UK could have a role to play as a mediator in the dispute between Erbil and Baghdad on the hydrocarbon issue. Do you think we should do that?
John Roberts
With anything to do with the UK and Iraq, we are damned if we do and damned if we do not. We have too much of a history in Iraq to be regarded either as a neutral arbiter in any way or as a disinterested absentee. Whatever we do, it will be judged politically. I would have thought that the best form of assistance we could give would be assistance in some broader-based international context. I doubt that any specific British initiative would be particularly useful, but support for any international initiative—absolutely.
Sandra Osborne
You referred earlier to the question of what is sovereignty in Iraq. Do you have a view on which side—Baghdad or Erbil—is actually right on the constitutional issue about who controls new oilfields in the Kurdistan region, or is it essentially irrelevant what the constitution says?
John Roberts
You could argue both of them perfectly reasonably. You could argue that since Kurdistan was effectively a neglected province, in oil terms, throughout the Ba’athist and pre-Ba’athist eras—I think I am right in saying that there was only one field found apart from the Khurmala Dome—just about everything that has been found in Kurdistan constitutes new oil fields. Therefore, on the constitutional side, the Kurds would appear to be on fairly good ground. How relevant is that in practice? That is the real question about whether or not we argue the point of the constitutional issue. I doubt that it is terribly relevant now. I think the relevant issues are far more the question of control of revenues, sharing, the dispute as to whether or not the Kurds are actually getting what they are supposed to be getting in terms of the 17% share of the federal budget, the delays in payments to the Kurds and the question of whether or not the Kurds are meeting the obligations due to Baghdad. All of those disputes are hard, practical disputes, and I think that the constitution is very often simply used as a sort of disguise, sometimes because they do not want to address the hard nuts and bolts in public of what is being discussed in terms of what kind of financial agreements might be reached.
Chair
What is the extent of the reserves in Kurdistan at the moment? The advice that I have says that it has an estimated 45 billion barrels of oil reserves, and around 110 trillion cubic feet of gas. Is that accurate?
John Roberts
No.
Chair
What do you think the correct figure would be?
John Roberts
It is not accurate for the simple reason that it was a hypothetical claim that derives from the US Geological Survey comment in 2008, as far as I can tell. It is not that it is necessarily inaccurate; we don’t know.
Chair
It’s just too high, is it?
John Roberts
We don’t know. If I were to ask what are Britain’s reserves, you could come up with a fairly good set of figures, because we have had generations of work going into that. In effect, we have had about seven years solid of work on northern Iraq. What we know is that there is at least enough oil in place, and under development, to support a couple of million—maybe much more—barrels a day of oil exports. Over what time frame is a very questionable matter. We know that there are substantial gas reserves, so when Genel Energy talks about 10 bcm of gas exports from the north by 2020, I would say that that was technically doable, but that is not the same as saying that it will be done. There is enough oil and gas to be getting on with, without having to worry about what is the scale of the ultimate resource. There is new stuff still being found, and there will be further amplifications of existing discoveries. We will have a much better idea in two or three years, which will be much more realistic. I would not use the 45 billion barrel figure. As to what a reasonable reserve figure is, to be honest, I don’t even want to make a guess.
Chair
A couple of million a day is a lot of oil.
John Roberts
A couple of million barrels of oil would be, shall we say, the equivalent of 4% of the world’s cross-border oil trade. Not bad.
Chair
Not bad for a relatively small region.
John Roberts
Yes. Enough to be getting on with.
Chair
They are a pretty serious player, then.
John Roberts
They are a genuinely serious player for two reasons: first, because they actually have reasonably extensive reserves—we do not know how much exactly, but there is a lot there— and secondly, precisely because they are one of the few areas in the world that operate new fields on the basis of production-sharing contracts. That means that if a company goes in, it is on a risk and reward basis. There is a lot more oil theoretically available for development in, for example, OPEC countries, not least of all in federal Iraq, but your access to it will be on service terms, which means that you will make a profit, but not an enormous profit, and if you happen, in the course of your work on a field, to make a major new discovery, you are not really going to reap the rewards of making that discovery in anything like the terms that you would on a production-sharing contract.
Ann Clwyd
Could you outline why there seems to have been a radical change in relationships between Turkey and the KRG over the last few years?
John Roberts
If you go back to the last years of the Saddam era, there was extensive Turkish interest in cross-border trade with Iraq at all levels, despite sanctions. When northern Iraq gained some sort of loose autonomy with the no-fly zone, it existed in a very curious state of de facto smuggled goods services coming across the border from Turkey—enormous small-scale, broad-based connections. Once you had the emergence of an effective Government in the north, in the wake of the 2003 invasion and particularly the 2006 political settlement in Iraq, you had the basis for that small-scale trade to be scaled up organically. Here was a market and here was a supply system next door. So you had a trading connection and, of course, if you look at Turkey and its very poor record in domestic hydrocarbons development, Turkish companies looked and saw that there were chances to invest. They were among the early investors in northern Iraq. Genel Energy came in and bought rights all over northern Iraq. It sold some of them off, developed others and went into partnership. So Turkey became organically—it just grew into being—the biggest single hydrocarbon investor in northern Iraq. Take as a parallel track the whole question of Erdogan’s change of approach to handling the Kurdish problem internally in Turkey, and the increasing international acceptance of the Kurdish PUK and the KDP authorities, and I would not like to say how, but it does fairly naturally come together. That does not mean that Turkish authorities love Erbil. It does not mean that there is necessarily co-ordination between Erbil and the PKK. You are still dealing with a whole set of very different actors with different policy agendas, but to a certain extent, they have to work with each other and they all now have to make sure that they do not unnecessarily antagonise one other element in that equation. So you have an ability now for the Turkish Government to develop energy relations with northern Iraq and pursue the peace process with the PKK, without regarding those as being part of the same process. At the same time, you still have very substantial attempts by the Turkish authorities to continue an energy relationship with Baghdad itself. It is proving tough for them, and they may have to choose, but they have never said that it is the Kurds or Baghdad. They have always tried to make sure it is both.
Ann Clwyd
Could you conceive of pressure inside the Turkish Government which would mean that Erdogan would have to cool off a bit and change his approach?
John Roberts
Not automatically. In a purely theoretical context, if conditions deteriorated between Erdogan and the civil—for want of a better word—Kurdish elements within Turkey itself, then I can imagine that strained relations with Erbil would probably follow. But that might be putting the cart before the horse. I am not anticipating that. At the moment, I would have thought we are going to see a continuation of what we had before: namely, continued efforts by Erdogan—if he can—to find some kind of practical solution to the Kurdish problem. I have no idea whether he will be successful or not. At the same time, I think there will be an increasing acceptance that Turkey will have to take the plunge and be responsible for handling what are in practice Kurdish oil exports, in defiance of Baghdad, which is why I think they are trying to do it slightly at arm’s length.
Chair
On that last point, you said in your opening remarks that Turkey may have to assume a security presence in northern Iraq. That is entirely linked to what you have just said, is it?
John Roberts
Exactly. If, as may well happen in the next several days, we finally have the physical sale of Kurdish crude out of Ceyhan on the international market without Baghdad’s official approval and without any intimation of Baghdad’s acceptance of it, formal or otherwise, then do we then go back to Maliki’s threats in the past that he would sanction—if he could find a way of putting sanctions on them—companies who have supplied that oil? Does he move to take any physical action? An enormous amount depends on what kind of response he takes. Does he move to try to get financial sanctions involved? Presumably, the money will in fact go to a Turkish bank account, so does he wish to upset Ankara? An enormous amount depends on Maliki’s reaction, and we have no way of knowing what that reaction will be. But if that reaction were to take a military form, then at that point, I think in practice you will see the question posed to Turkey as to whether it finally understands the diplomatic consequences of this kind of commercial agreement.
Chair
And that would be negotiated between Erbil and Ankara?
John Roberts
And that would mean providing some kind of a security guarantee to Erbil.
Chair
Can the Kurds trust the Turks on this? They are very much putting all their eggs in one basket here. If the Turks wanted to stop crude oil being exported out through Turkey, there is not much the Kurds could do about it, is there?
John Roberts
I would have thought the Kurds would not want a security guarantee, on the grounds that they would not want to be faced with a security threat from Maliki. The point is, what happens if they are faced with a security threat from Baghdad? Particularly given the point that was made earlier—that federal Baghdad has a monopoly of air power.
Chair
We heard earlier that Baghdad has a million troops in uniform at the moment, one way or another.
John Roberts
Yes. I do take the point, though, that a million troops is a million people on the Government payroll. Numbers of troops are not necessarily consonant with the ability to put them into the field in an effective operation.
Chair
As we also heard earlier, Maliki may not be there much longer, but that remains to be seen. That completes the questions—[Interruption.] Sorry, Mike.
Mike Gapes
This is just a little question, but it has implications. If there is an agreement with Iran and therefore a change of relations between the international community and Iran, presumably the Kurdish region-Iran relationship could also become a player in this process.
John Roberts
Yes, the Kurdish region seems to have established reasonable relations with Iran. They are supposed to have concluded an agreement. It’s not much more at this stage than a memorandum of understanding, under which there will be a limited amount of Iranian gas exports to fuel a power station—gas coming into the KRG to fuel a short-term gap in power supplies. In return for that, they are prepared to build an oil export pipeline out through Iran. I don’t know how seriously to take this, on the grounds that, if you were the Kurds right now, in delicate negotiations with Baghdad and with everybody else, you would be wanting to make the point that you have as many irons in the fire as possible. What can be said about good relations is that their trucking of naphtha earns the KRG an awful lot of money, and that goes out to Iran and through Iran. On the longer relationship, I don’t see them as competitive with each other. You don’t compete in that context with Iran, if we are talking about an Iran freed from sanctions as a result of political agreement. Iran becomes sui generis, because, unlike any other gas producer, if—it’s a very big if indeed—there were to be an agreement this summer concerning the Iranian nuclear programme, the lifting of sanctions and the ability of Iran to export gas wherever it wanted, Iran might have, within a year, as much as 10 or 15 bcm of gas available for export. Where it would go would depend on infrastructure. Although the Iranians only the other day mentioned that they would like to sell it to Europe, we are stuck again with the wonderful problem of Turkey, which is a bottleneck, and although bottlenecks can be resolved, there is the problem that in Turkey it always takes longer to ease a bottleneck than it does almost anywhere else.
Chair
That concludes the questions that we had for you. Are there any other points that you would like to make about the energy situation, or have we covered most of the ground?
John Roberts
I think the only other point that I would make is that we have heard the federal Iraqi authorities saying to the KRG, “You are not honouring your side of the agreement, because you are producing too little. We want you to produce in excess of 400,000 barrels a day.” What I think this kind of language and talk does is highlight the emphasis that outsiders put on specific volumes of production in northern Iraq. I do have to say that as and when northern Iraq starts to produce about 1 million barrels a day, which they would like to do within a couple of years—it might take three years; it might take four—that is the kind of level that would support the budget of an independent Kurdistan. So as levels ratchet up, one is going to have to study very carefully the relationship between Baghdad and Erbil and whether the federation of Iraq is going to survive.
Chair
That is a very pertinent point to end on. Thank you very much indeed. That has been very helpful and much appreciated. Oral evidence: UK Government policy on the Kurdistan Region of Iraq, HC 1095 21