from Stratfor.com
Summary
Austria’s OMV announced March 8 that it has been in negotiations about energy contracts with the Iraqi government and the Kurdistan Regional Government, making it the first company to announce such talks. In its search for a supplier for its proposed Nabucco pipeline, OMV has faced difficulties from obvious suppliers like Iran and Russia – making Iraq look like more of a possibility.
Analysis
Austria’s OMV is in negotiations with the Iraqi government and the Kurdistan Regional Government (KRG) about oil and natural gas exploration contracts, according to a March 8 statement by OMV CEO Wolfgang Ruttenstorfer. This makes OMV, Central Europe’s largest oil and natural gas company, the first public company to announce that it is in active negotiations on energy deals with the Iraqi government.
OMV is looking for a supplier for its proposed Nabucco pipeline running from Turkey to Austria via Bulgaria, Romania and Hungary. Iran and Russia have previously been considered as potential suppliers. Now, however, not only is Iraq also on the table, it is looking increasingly attractive.
The Iraqi government has been making some progress toward enacting new energy laws, though its drafts still need much work before a final version can be put into effect. Companies worldwide are closely eyeing Baghdad’s progress toward energy agreements, while the KRG recently said it will sign energy deals in 2007 with 10 companies, mostly from the United States and Europe.
Iraq has approximately 3.2 trillion cubic meters of proven natural gas reserves and another 4.2 trillion cubic meters in probable reserves, a figure putting it in the top 10 list of the world’s largest reserves. At present, however, Iraq produces just a sixth of its 1989 production level of 6 billion cubic meters (bcm). Also, approximately 70 percent of Iraq’s natural gas reserves are associated, meaning the natural gas in produced along with oil. The bulk of its natural gas production and reserves are in northern Iraq, which is primarily Kurdish.
Iraq’s main natural gas pipeline infrastructure runs west from Kirkuk to Baji and then on to Jordan, but this line has been dead for decades. OMV would have to build entirely new infrastructure to be able to export the natural gas from Kirkuk. The same goes for the associated oil reserves, though an oil pipeline runs from Kirkuk to Baji before going north to Mosul and then entering Turkey. This line is problematic, however, because it crosses through the territories of various ethnic groups. Moreover, in 2006 there were 78 attacks against energy infrastructure in Iraq, mostly around Baji. If OMV is serious about Iraqi supplies, it will have to build new oil and natural gas infrastructure in the relatively stable northern Kurdish territory. A pipeline from Kirkuk directly to Mosul, thus remaining within the Kurdish territory, would represent a reasonable design, though Kirkuk’s future is in doubt given the dispute between the Kurds and Arabs for control of the northern city.
OMV has the technical expertise and the money to tackle a project like this while it searches for natural gas supplies to feed its Nabucco pipeline. The 2,000-mile pipeline is slated to see construction begin in 2008, be operational by 2011 and have a 30 bcm capacity by 2020.
None of OMV’s options for supplying Nabucco is perfect. Europe has been growing more wary of relying on Russian supplies since Moscow began cutting both oil and natural gas during political squabbles. Meanwhile, Iran labors under U.S. sanctions, and could face the prospect of U.N. sanctions because of its nuclear activities. Europe has sought a way to diversify, but most alternatives also come with a cost – either political or technical. So even though Iraq might not be the ideal choice for diversification, because Europe lacks perfect alternatives, Iraq has possibilities.
Before foreign oil companies can begin to return and invest in Iraq’s energy sector, it needs an internationally accepted and regionally legitimate government and the insurgency must stop. Kurdistan, however, is an exception to these two prerequisites. The Kurdish region already has a stable and well-established regional government, though it would take a company with gall to strike a deal with the Kurdish region to the exclusion of the rest of Iraq – especially given that Iraq’s hydrocarbon law is still being crafted, and differences remain regarding authority over contracts with oil companies. OMV is a big enough company to break the ice as far as entering Iraq is concerned, however. And once it does so, a flood of companies will follow suit.
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