Developing the Natural Gas Sector in Kurdistan

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

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.

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

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

The Natural Gas Sector in Kurdistan
Selected Markets for Natural Gas Sales
Federal Iraq
Turkey
Selected Barriers to Development
Recommendations
Appendix

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

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

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

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

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

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

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

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

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

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

Developing the Natural Gas Sector in Kurdistan

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