Hungarian MOL Enters Gas Projects in Iraq’s Kurdistan Region

On May 16 in Sharjah (United Arab Emirates), the Hungarian oil and gas company MOL signed an agreement to acquire a 10 percent stake in Pearl Petroleum, the holder of exploration and production rights in two gas fields in the Kurdistan Region of Iraq. The fields, Khor Mor and Chemchemal, are earmarked to supply the planned Nabucco gas pipeline to Europe. MOL’s move reconfirms and strengthens this privately-owned company’s commitment to the EU- and U.S.-backed Nabucco project. MOL signed this agreement on the same day when a set of agreements on the rival project, Russian-led South Stream, were also agreed.

MOL has acquired this stake from Pearl’s stakeholders, UAE-based Dana Gas and Crescent Petroleum, through share-swapping. As a result, Dana and Crescent have acquired stakes of 3 percent each in MOL. Along with this transaction, the companies also signed a strategic cooperation agreement.

Dana (rated as the single largest private gas company in the Middle East) and Crescent have thus far invested $610 million in field development at Khor Mor. This field and Chemchemal are expected to supplement the production from Azerbaijan’s Shah Deniz field to guarantee supplies for Nabucco’s first stage from 2014 onward. Gas and condensate reserves at Khor Mor and Chemchemal are not conclusively estimated but are believed to have great potential. Investment at the two fields, and a pipeline from Iraq’s Kurdistan Region to the Nabucco line’s starting point in Turkey, is projected to total $8 billion (Joint press release, May 18; Business Intelligence, May 18).

In a separate transaction on the same day, Austria’s oil and gas company OMV also acquired a 10 percent stake in Pearl, from Dana and Crescent. OMV paid, however, $350 million in cash for that stake. However, this transaction does not include a strategic partnership dimension (Wirtschaftsblatt, May 18). OMV has some disposable cash for acquisitions after having sold its 21.2 percent stake in MOL for 1.4 billion Euros in March-April to Russia’s Surgut Neftegaz oil company, in a scandalous affair with Europe-wide reverberations (EDM, April 3, 6, 22). OMV and MOL are rivals in the oil business in Central Europe, but are at the same time partners in the Nabucco gas project, with stakes of 16.67 percent each in the six-party Nabucco consortium.

All these parties are in consensus with the Kurdistan Regional Government (KRG) that gas deliveries to Europe through Nabucco shall commence after local requirements are met from the early production at the fields. The surplus shall be dedicated in its entirety to the Nabucco project. Given that local requirements are modest, most of the gas produced there should be available for export.

The KRG takes the position that the commercial and revenue-sharing terms for these exports shall be agreed upon by the companies directly with the KRG, not with Iraq’s central government in Baghdad. The KRG announced its readiness to share the revenue from these projects with "the whole of the Iraqi people" under Iraq’s constitution and the Kurdistan Region’s oil and gas law. But at the same time the KRG claims a "lion’s share" of the revenue and holds the Oil Ministry in Baghdad accountable for past and current "failures and inefficiencies" (KRG press release, May 18).

The regional government’s language seems to presage some hard bargaining with the central government over the revenue from these gas projects. The government in Baghdad as a rule does not recognize oil and gas agreements reached by foreign companies directly with the KRG. The central government regards most agreements that bypass Baghdad as illegal. Reacting to the agreements just signed, the Iraqi government’s spokesman confirmed previously stated intentions to supply gas for the Nabucco project, but not from projects in the KRG if the relevant agreements do not include the Oil Ministry (Reuters, May 18).

Iraq’s government was represented on the ministerial level at the Hungarian-hosted Nabucco Summit in January, but did not appear to be represented on any significant level at the EU’s Southern Corridor summit in Prague on May 8 and did not sign the concluding declaration there regarding gas supplies to Europe.

The United States in its triple role as occupying power in Iraq, de facto protector of Kurdish autonomy, and political backer of the Nabucco project, should be well placed to facilitate a compromise between the regional and the central government over jurisdiction and revenue-sharing from these gas projects. This issue may test the level of U.S. political influence in Iraq as the occupation draws to a close.

Turkey will be delighted at the prospect of additional volumes of gas reaching its territory en route to Europe. Deliveries from Iraq’s Kurdistan could advance Turkey’s grand ambitions to become a "gas hub" by receiving, storing, and transmitting gas from a wide range of producer countries. Potentially these could include Russia, Azerbaijan, Iran, Iraq, and Egypt (via Jordan and Syria in the latter case). The AKP government, however, has shown that it can misuse Turkey’s potential role as gas corridor to Europe for political leverage over the EU and financial squeeze of gas producer countries such as Azerbaijan.

Apart from that issue, however, the prospect of gas flowing from Iraq’s Kurdistan region should remove the remaining doubts about supplies to the Nabucco pipeline’s first stage. Accordingly, it should speed up the intergovernmental agreement’s signing in June as announced at the Prague summit.