By Vanand Meliksetian | OilPrice.com
Where some see hardship, others see opportunity. Russia’s most valuable export products are oil and gas of which the top producers are Rosneft and Gazprom, respectively. The latter’s dominant position on the European gas market has put it in the spotlight as a foreign policy tool of Moscow after the crisis in Ukraine and the annexation of Crimea.
Rosneft, on the other hand, has had fewer setbacks while propping up its engagement in multiple countries on several continents. The impact of these deals could have a far-reaching effect on the global energy market and domestic politics. One of the regions of attention is Iraq’s northern Kurdistan area where Rosneft CEO Igor Sechin has made several important deals, cementing the company’s position. With preparations underway to start extracting oil, Bagdad has voiced its discontent concerning Rosneft’s activities.
Rosneft’s balancing act
As Russia’s largest oil producer, Rosneft is a highly valuable company. The Russian state owns 50.00000001% of its shares while Sechin also maintains close personal relations with President Putin. The Kremlin has not been shy to exert control over the energy company. While this doesn’t mean that Rosneft isn’t a commercial organization, Moscow’s foreign policy objectives have been taken into consideration. The energy company has to walk a fine line between the Russian state’s interests and its commercial opportunities.
For a regular company, this would be a hard task. However, the backing of the Russian government gives Rosneft some advantages over its competitors. The company has lent $6 billion to Venezuela where it could end up owning Texan refineries currently in the possession of Venezuelan PDVSA because the assets are collateral against the debt. In India, Rosneft has invested $13 billion in a refinery which was above the market price but the company was required to outbid Saudi Aramco in order to cement Russian, Indian ties.
Arguably Rosneft’s deal with the Kurdish Regional Government or KRG in Northern Iraq has the most potential in terms of political and financial dividend. The KRG’s independence referendum in the fall of 2017 was a fiasco. During the crisis, Bagdad regained control over the significant oil fields near Kirkuk and nullified hopes for Kurdish independence. At the height of the crisis, when Secretary of State Rex Tillerson was trying to defuse tensions, CEO Igor Sechin was busy negotiating the acquisition of the Kirkuk-Ceyhan pipeline.
Instead of easing tensions, Sechin doubled down in a letter to Bagdad in which he stated his support for the Kurds which showed “a higher interest in expanding strategic cooperation”. The deal to transfer control over the pipeline and several oil fields was struck on October 20th, 2017 at the height of the post-election chaos.
Iraq’s weakness and opportunities
Bagdad opposes any deal the KRG strikes without the consent of its parliament. Rosneft, however, maintains the right to engage with the Kurds according to the existing power-sharing agreement between the central government and Erbil. The meeting between Iraqi oil minister Jabar al-Luaibi with Sechin’s right-hand man Didier Casimiro in Bagdad in April was a sign of acquiescence by the central government.
Despite its discontent, Bagdad prefers to maintain good relations with Russia for several reasons. First, Moscow in recent years has acquired a formidable position in the Middle East by maintaining good diplomatic relations with all regional actors. Second, the Coordination and Information Centre set up in September 2015 by Russia, Iran, Iraq, and Syria in Bagdad to coordinate the fight against ISIS, has also functioned as a trust sharing platform. Furthermore, Iraq is the second largest importer of Russian arms after India.
From a strategic point of view, Bagdad’s relations with Moscow provide it with a highly needed balance against the two other important foreign actors in Iraqi politics: Iran and the U.S. Although Russia cannot provide financial and political support on the same level as Washington or doesn’t share the same cultural and religious background as neighboring Iran, Moscow is able to provide strategic balancing if required.
Moscow’s green light
Besides oil, natural gas is also a topic the KRG and Rosneft are discussing. A pipeline could provide Turkey and Europe with an additional source of energy. Gazprom in Russia has a monopoly concerning the export of gas through pipelines. The opening of the Iraqi gas market could go at the expense of Gazprom’s market share in Turkey and Europe. Moscow has on several occasions intervened to confirm the Russian gas giants monopoly vis-à-vis pipeline exports.
The Kremlin, however, has remained silent concerning Kurdish gas. Its muted acquiescence is based on maximizing financial dividends and increasing or at least maintaining, political influence in Europe. The opening of a second ‘Russian controlled gas corridor’ from Iraq could possibly go at the expense of Gazprom’s market share. However, relatively expensive LNG imports could be hit even harder. Furthermore, the KRG could prefer Rosneft constructing and exploiting the pipeline as the company has supported the regional government during the past year while other governments and companies have kept their distance.