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Developing the Natural Gas Sector in Kurdistan

Presentation by the U.S. Department of Energy, prepared by Dr. Matthew Zais, Principal Deputy Assistant Secretary, Office of International Affairs, January 2021. Presented at the virtual Policy Forum "Gas in Iraqi Kurdistan: Market Realities, Geopolitical Opportunities" (https://www.washingtoninstitute.org/policy-analysis/gas-iraqi-kurdistan-market-realities-geopolitical-opportunities) on January 21, 2021.

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Developing the Natural Gas Sector in Kurdistan

  1. 1. JANUARY 2021 Dr. Matthew Zais, Principal Deputy Assistant Secretary, Office of International Affairs Developing the Natural Gas Sector in the Kurdistan Region of Iraq UNITED STATES DEPARTMENT OF ENERGY Produced by: ROBIN MILLS | QAMAR ENERGY
  2. 2. U.S. Department of Energy | 2021 2 Disclaimer This report was prepared by Qamar Energy as part of ongoing work sponsored by the U.S. Department of Energy, Office of International Affairs.This report offers findings and recommendations based on information gathered to date. Conclusions herein may be revised pending additional data collection, formal review processes, and solicitation of comments by relevant stakeholders.The views and opinions of the report authors do not necessarily state or reflect those of the United States Government or any agency thereof.
  3. 3. U.S. Department of Energy | 2021 3 Sources: Internal Research and Analysis Executive Summary - Issues  Technical potential for KRI to produce ~40 billion cubic metres (BCM) of gas per year by 2035  Domestic demand of ~15 BCM and ex-KRI sales of 25 BCM  Potential markets: federal Iraq  Severe gas and power deficits  Relies on imports from Iran but struggling to make payment and Iran also suffering supply deficits at times  Ambitious development of associated gas capture and non-associated gas could close but not eliminate deficit  Potential KRI sales of ~10 BCM, possibly more with re-exports  Possible sales to Kirkuk area through existing pipeline and to Baghdad via new pipeline  Potential markets:Turkey  Shrinking market in recent years  Contract renewals coming up 2021-26  Highly competitive with diversified supply (Russia, Iran,Azerbaijan, LNG, potential domestic)  Potential KRI gas sales ~10 BCM, mostly replacing Iran  Onward sales to Balkans possible but relatively small, contested and require price competitiveness and infrastructure access
  4. 4. U.S. Department of Energy | 2021 4 Sources: Internal Research and Analysis Executive Summary - Recommendations  Full development of domestic gas market and exports requires:  Dealing with technical and infrastructural challenges (sour gas)  Financing constraints and lack of buyer creditworthiness  Managing political/security disruptions (ISIS, Erbil-Baghdad relations)  Clearer leadership direction and increasing coordination between MNR and IOCs  Stronger gas commercial function within MNR  Electricity sector reform in KRI and federal Iraq  Transparent gas pricing benchmark  Proposed way forward  Consortium of MNR/KRG, IOCs, Kurdish private sector to develop infrastructure and handle gas purchase & sales  Financing from DFC, other IFIs, commercial banks  Phased development: 1. Associated gas capture for power 2. Domestic gas for power, industry, potentially city gas 3. Small-scale sales to federal Iraq andTurkey 4. Large-scale sales toTurkey and federal Iraq; potential gas-to-power for federal Iraq
  5. 5. The Natural Gas Sector in Kurdistan Selected Markets for Natural Gas Sales Federal Iraq Turkey Selected Barriers to Development Recommendations Appendix
  6. 6. U.S. Department of Energy | 2021 6 Sources: Internal Research and Analysis Iraq / KRI natural gas infrastructure and sales options TURKEY SYRIA IRAN KUWAIT SAUDI ARABIA Ninewa Anbar Al Najaf Al Najaf Kirkuk Diyala Wasit Missan Basra Dhi Qir Al Qadisiya Babil Salah Al Din Baghdad Erbil Sulaymaniyah Dohuk Karbala ILLUSTRATIVE Federal Iraq region Note: Kurdistan region Operational pipelines Planned pipelines Destination Prospective Exports and Sale Options KRI (Local)  Local use of gas for power  Plans for industrial and possibly city use Federal Iraq  Discussions over gas and/or power sales from KRI to federal Iraq Turkey  Focus of most KRI gas sales activities to date  Rosneft has committed to fund and build a gas export pipeline of up to 30 Bcm/y capacity intoTurkey  Pipeline has stalled, with Rosneft aiming at phased development of 3 Bcm/y – from original 10-12 Bcm/y Iran  Exports gas to Iraq via pipelines to Baghdad and Basra  Also electricity  Recent supply and payment problems Other Markets  Potential for exports to Kuwait, Jordan if Iraq in surplus
  7. 7. U.S. Department of Energy | 2021 7 Sources: Company Reports and Internal Research and Analysis Kurdistan has the resource potential to export ~25 Bcm / year  Current gas supply is insufficient to cover local KRI demand for power and industry  KRI could satisfy local demand around 2025 and ultimately send ~25 BCM/y to federal Iraq,Turkey and potentially other markets  Industrial demand depends on competitive gas pricing  These developments depend on timely development of infrastructure and markets Supply of Natural Gas from Kurdistan Units: billions of cubic metres per year, Bcm / year 0 10 20 30 40 50 2027 2023 7 2024 2028 2029 39 2030 2031 2033 2034 2035 2036 2037 5 2039 2038 2032 2025 2020 32 42 37 14 2026 2021 2022 2040 9 11 12 15 18 19 5 34 41 42 42 42 42 25 +25 Bcm / year ultimately available for exports +20 Bcm (CAGR: +17%) +17 Bcm (CAGR: +5%) Demand Khurmala Chemchemal Phase-2 Other Non-Associated Chemchemal Khor Mor Other Associated Khor Mor Phase-2 Miran West Bina Bawi
  8. 8. The Natural Gas Sector in Kurdistan Selected Markets for Natural Gas Sales Federal Iraq Turkey Selected Barriers to Development Recommendations Appendix
  9. 9. The Natural Gas Sector in Kurdistan Selected Markets for Natural Gas Sales Federal Iraq Turkey Selected Barriers to Development Recommendations Appendix
  10. 10. U.S. Department of Energy | 2021 10 Sources: Internal Research and Analysis Iraq relies on Iranian gas to cover demand – still suffers from shortages Supply of Natural Gas from Iraq Units: billions of cubic metres per year, Bcm / year 0 10 20 30 40 50 60 2031 2024 2032 2020 2021 2022 2023 2025 2030 2026 53 2027 2028 2029 2033 45 50 2040 43 52 2039 2038 44 2037 2036 52 47 2035 2034 21 31 35 37 39 41 48 48 48 49 53 53 54 Significant increase in flared gas capture Significant decrease in flaring but continues Iraq continues to rely on imports from Iran +27 Bcm / year (CAGR: +10)% +6 Bcm / year (CAGR: +1%) Demand Flared Gas Imports from Iran Non-Associated Gas Production Associated exc. BGC Basrah Gas Company  OPEC+ production cuts have reduced associated gas in 2020, worsening gas supply situation and black-outs  Planned gas capture (e.g. Ratawi) and non-associated gas (e.g. Mansuriyah) would meet demand after 2026 – but risk further delays  KRI gas (~10 BCM/y, possibly more) could cover deficit and even permit some re-exports – dependent on power plant development Key Assumptions:  Major power plant development and oil replacement  Good progress on flared gas capture and, later, non-associated gas
  11. 11. The Natural Gas Sector in Kurdistan Selected Markets for Natural Gas Sales Federal Iraq Turkey Selected Barriers to Development Recommendations Appendix
  12. 12. U.S. Department of Energy | 2021 12 Sources: Internal Research and Analysis, EMRA, Energy Community, BP Statistical Review of World Energy 2020, and Oxford Institute for Energy Studies Turkish and neighboring markets: demand and contracted supply Demand for Natural Gas by Source of Supply Units: billions of cubic meters per year, Bcm / year 0 10 20 30 40 50 60 70 80 90 100 Jan- 26 Jan- 23 Jan- 21 Jan- 20 Jan- 22 Jan- 24 Jan- 25 Jan- 27 Jan- 28 Jan- 30 Jan- 29 Jan- 31 Jan- 32 Jan- 33 Jan- 36 Jan- 34 Jan- 35 Jan- 37 Jan- 38 Jan- 39 Jan- 40 Turkstream-private Azerbaijan-BOTAS Sakarya Nigeria LNG-BOTAS Annual demand Turkstream-BOTAS Sonatrach-BOTAS NIGEC-BOTAS Turkstream-BOTAS Azerbaijan-BOTAS Turkstream-private Domestic Annual + Balkans demand  Window inTurkish market opens 2026  Uncontracted demand 10-30 BCM, but heavily contested by Russia, Iran, Azerbaijan, LNG  If commercial, Sakarya (Turkish Black Sea gas) is highly significant  Quite optimistic view onTurkish demand post-2030: no new nuclear, coal phase-out,and limited renewables  Biggest potential for KRI gas is to displace Iran  Balkans has additional demand potential, but highly competitive and relatively distant Notes: Balkans: Greece, Bulgaria, North Macedonia, Montenegro, Bosnia, Serbia, Albania, Kosovo
  13. 13. U.S. Department of Energy | 2021 13 Sources: Internal Research and Analysis Natural gas delivery costs from Kurdistan to Federal Iraq Delivery costs to Istanbul Units: US$ / MMBtu Delivery costs to EasternTurkey Units: US$ / MMBtu Delivery costs to Baghdad Units: US$ / MMBtu 5.7 0 5 10 2018 2019 2020 7.4 Kurdistan gas to Istanbul 23% cheaper than US LNG TANAP - Azerbaijan Kurdistan Russia LNG, US 3.9 7.7 0 5 10 2018 2019 2020 Kurdistan gas to East Turkey 49% cheaper than Iran Kurdistan TANAP - Azerbaijan Iran 0 5 10 2018 2019 2020 Kurdistan gas to Baghdad is 40% cheaper than Iran Kurdistan - Baghdad, price Basra - Baghdad, price Iran - Iraq price  Natural gas imports byTurkey from KRI could be more cost-competitive than imports from Azerbaijan and Russia.  Could possibly reach Greece / Italy competitively, but depends on infrastructure, relative pricing and incumbent behaviour
  14. 14. The Natural Gas Sector in Kurdistan Selected Markets for Natural Gas Sales Federal Iraq Turkey Selected Barriers to Development Recommendations Appendix
  15. 15. U.S. Department of Energy | 2021 15 Sources: Internal Research and Analysis Political, technical, and commercial barriers Barriers Notes and Comments Political  Unclear leadership at the MNR – new oil minister has just been appointed  Insufficient collaboration between IOCs and MNR around financing for infrastructure and gas treatment  PKK-KDP deteriorating and intensified relations  Turkey keeping its options open  Continuing Erbil-Baghdad discussions on budget, revenue sharing, oil exports, etc. Technical  Mostly sour gas (H2S >10%); requires costly treatment and Sulphur storage solutions / Sulphur exports  Difficult to find generators that will burn sour low-quality gas  Lack of natural gas development expertise on the part of the MNR  Amounts of associated gas at different fields do not reach critical mass  Geographical obstacles (mountainous area, unsafe for gas transportation)  Gas reinjection process unfeasible for some fields Commercial  Payment risk (gas to power)  Insufficient creditworthiness in Kurdistan and Federal Iraq electricity ministries  IOCs have different, sometimes conflicting, interests / plans in terms of export markets, hence infrastructure options (gas pipelines)  MNR proposed gas price is not enough for gas processing/infrastructure  Lack of benchmark price to guide investment decisions
  16. 16. The Natural Gas Sector in Kurdistan Selected Markets for Natural Gas Sales Federal Iraq Turkey Selected Barriers to Development Recommendations Appendix
  17. 17. U.S. Department of Energy | 2021 17 Sources: Internal Research and Analysis Phased development of the natural gas sector in Kurdistan Field Development Infrastructure Commercial Political Kurdistan Electricity Reform Federal Iraq Electricity Reform Kurdistan – Baghdad Agreement Capture Northern Associated Gas Khor Mor Expansion Chemchemal, Miran, Bina Bawi, Topkhana, others 2021 2026 Large pipeline toTurkey Pipeline Extension to Dohuk Connection to Jambur - Kirkuk Network to all power projects Connection to Baghdad Connection on toTurkey Sulphur handling – railways? Technical and Commercial Gas Expertise at MNR Gas buyer and infrastructure consortium Financing agreements Gas sales agreement with Turkey Gas sales agreement with Baghdad
  18. 18. U.S. Department of Energy | 2021 18 Sources: Internal Research and Analysis Recommendations Recommendations Notes and Comments Political Considerations  US representatives can engage further with KRG / MNR officials to:  Offer assistance/advocacy to set up a gas market  Provide advice to KRG and MNR on gas commercial and financing issues  Work with DFC and IFIs on infrastructure funding and gas purchase options  MNR provides more visibility to producers and end-users on acceptable pricing, demand and payment mechanisms  Erbil-Baghdad alignment  Role of international institutions (Energy Community, Energy Charter)? MNR – IOC Collaborations  MNR to develop a clear and detailed roadmap to gas development in the KRI, covering:  Local gas and power demand  Gas flaring regulations  Gas treatment facilities development and payment plans  Infrastructure options and payment plans  Gas pricing benchmark  IOCs and MNR collaborate on collective field gas capture and treatment for local use  Infrastructure, financing and gas sales handled by a consortium of KRG/MNR, IOCs, Kurdish private sector, supported by DFC, other IFIs  Consortium charges a transparent tariff for infrastructure use  Consortium can also act as gas aggregator, especially for smaller fields
  19. 19. The Natural Gas Sector in Kurdistan Selected Markets for Natural Gas Sales Federal Iraq Turkey Selected Barriers to Development Recommendations Appendix
  20. 20. U.S. Department of Energy | 2021 20 Executive Summary – Issues  Currently KRI produces ~5 BCM / year  Technical potential for KRI to produce ~40 billion cubic metres (BCM) of gas per year by 2035.  Local demand of ~15 BCM and ex-KRI sales of 25 BCM  Potential markets: federal Iraq  Severe gas and power deficits  Relies on imports from Iran but struggling to make payment and Iran also suffering supply deficits at times  Ambitious development of associated gas capture and non-associated gas could close but not eliminate deficit  Potential KRI sales of ~10 BCM, possibly more with re-exports by 2025  Possible sales to Kirkuk area through existing pipeline and to Baghdad via new pipeline  Potential markets:Turkey  Shrinking market in recent years  Contract renewals coming up 2021-26  Highly competitive with diversified supply (Russia, Iran,Azerbaijan, LNG, potential Black Sea)  Potential KRI gas sales ~10 BCM, mostly replacing Iran  Onward sales to Balkans possible but relatively small, contested and require price competitiveness and infrastructure access
  21. 21. U.S. Department of Energy | 2021 21 Executive Summary – Recommendations  Full development of local gas market and exports requires:  Dealing with technical and infrastructural challenges (sour gas)  Financing constraints and lack of buyer creditworthiness  Managing political/security disruptions (ISIS, Erbil-Baghdad relations)  Clearer leadership direction and increasing coordination between MNR and IOCs  Stronger gas commercial function within MNR  Electricity sector reform in KRI and federal Iraq  Transparent gas pricing benchmark  Proposed way forward  Consortium of MNR/KRG, IOCs, Kurdish private sector to develop infrastructure and handle gas purchase & sales  Financing from DFC, other IFIs, commercial banks  Phased development:  Associated gas capture for power  Local gas for power, industry, potentially city gas  Small-scale sales to federal Iraq andTurkey  Large-scale sales toTurkey and federal Iraq; potential gas-to-power for federal Iraq

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