x Abu Dhabi, UAEFriday 28 July 2017

Iraq may break Europe's reliance on Russian gas

The EU has been slow to wake up to the threat of growing dependency on Russian energy, but speakers at the Gas Arabia summit in Abu Dhabi were remarkably optimistic of an unexpected solution.

Europeans should be breathing a sigh of relief. Unlike the previous two years, they made it through the recent cold winter without significant disruptions to gas supplies. This was despite disputes over the election in Ukraine, the main transit country for Russian gas to the West. The EU has been slow to wake up to the threat of growing dependency on imports of Russian energy. Yet speakers at the recent Gas Arabia summit in Abu Dhabi were remarkably optimistic that a solution could be emerging. And it is from an unexpected source: Iraq.

European gas consumers face two separate, but linked, issues. The first is the interruptions caused by fractious Ukrainian-Russian relations. New bypass pipelines - one under the Baltic Sea is already under development - tackle this. The second problem, much harder to solve, is the increasing reliance on Russian gas. European domestic production is in decline but there is a desire to step up the use of the clean-burning fuel for economic and environmental reasons. Imports of liquefied natural gas (LNG) are a partial solution, but relatively costly, while development of European unconventional gas resources, as in the US, is potentially transformational but still practically untested.

The political dangers in depending on the Kremlin combine with worries that Russia is not investing enough in the next generation of gasfields. To solve this, Europe is looking elsewhere for new supplies of pipeline gas. A European-Turkish consortium has been working since 2002 on the ambitious Nabucco project, named after the Babylonian king Nebuchadnezzar, to construct a pipeline from eastern Turkey to Austria. The final decision, to be made this summer, has been held up by a need to secure firm gas suppliers.

Technically speaking, Turkey could hardly be better placed, able to access gas from most of the world's top resource holders. But in practice, all are problematic. Nabucco was to have been anchored by gas from Azerbaijan's Shah Deniz field, but several other mostly Russian-backed schemes have also been competing for these supplies. Turkey's recent rapprochement with Armenia, Azerbaijan's enemy since the 1991-1994 Nagorno-Karabakh war, has cooled Turkish-Azeri relations. In any case, Azeri volumes have to be supplemented by another source.

European hopes for Turkmenistan are dampened by lack of investment, the country's own border dispute with Azerbaijan, and competition from Russia, China and Iran. Development of Iran's own huge reserves is stymied by American opposition and Tehran's own paralysis. Qatar is separated from Turkey by awkward transit states and has preferred to seek ship-borne exports of LNG. In the face of these challenges, three new factors have helped Iraq emerge suddenly as a credible cornerstone for Nabucco. First, the security situation has improved considerably.

Second, a string of big new discoveries in Iraqi Kurdistan has revealed mostly oil, but with suggestions of significant gas. The Sharjah-based Crescent Petroleum and DanaGas have made impressive progress in laying a pipeline across rugged, land-mined terrain from two large gasfields, initially to feed a local power station. Third, the central authorities in Baghdad have finally succeeded in awarding a number of massive oil development deals. These will produce large volumes of associated gas as a by-product. Iraq's volume of flared, unwanted gas is already the fourth-largest in the world.

Iraq will, of course, have to satisfy its own domestic need for dependable electricity first. No doubt there will be a drive to establish gas-based industries to provide employment, as in the rest of the Gulf, while Shell and others are considering LNG projects in the south. But even with all these needs, there should still be substantial gas to spare for exports via Turkey. The mix of cheap associated gas with reliable non-associated gas, extracted independently from oil and so not subject to the vagaries of OPEC quotas, is ideal.

There are still hurdles in the way. The most important is the stand-off between Baghdad and Erbil. Agreement has to be reached on the status of hydrocarbon exports from Kurdistan, the sharing of revenues and payment for the international operators. Developing the fields around Basra and building pipelines through sabotage-prone territory to the Turkish border is a formidable logistical challenge. Several non-associated gasfields were offered by the Iraqis in the recent bid rounds, but received no acceptable offers.

For its part, Europeans need to be much more aware of Turkey as a key strategic partner, bordering Iraq, Iran and Central Asia. Genuine good-faith offers of EU membership are key to co-operation. Iraqi exports through Nabucco could revolutionise world gas markets. With foundation suppliers secured, it will be much easier for others to join in, such as Egypt's Arab Gas pipeline. Hence the Russian promotion of competing schemes such as the expensive South Stream, under the Black Sea.

However much Russia and some Central Asian and Middle Eastern countries talk about a "gas OPEC", they are clearly competitors more than partners. Russia dominates EU gas supply; Iraq, Iran, Qatar and others are trying to break in. This explains the intent concentration on Nabucco, not only from European gas consumers, but also energy executives in Abu Dhabi. Nebuchadnezzar is poised for a dramatic return to the land he once ruled.

Robin Mills is a Dubai-based energy economist, and author of The Myth of the Oil Crisis