Rosneft Signs Kurdistan Oil Deal, Accepts Risk to Establish Beachhead in Region

Russian energy company Rosneft has signed a $400 million agreement with the Kurdistan Regional Government (KRG) to develop five oil blocks there.  Rosneft has also agreed to take control of the region’s main oil pipeline with a 60% stake valued at some $1.8 billion, bumping up its total investment in Kurdistan to $3.5 billion and making it the most significant foreign investor in the region.

Rosneft’s increased stake in Kurdistan comes amid increasing tensions between Erbil and the Iraqi government in Baghdad, sparked by an unauthorized independence referendum conducted by Kurdish authorities on September 25.  While Russian government officials emphasized that economic activities in Kurdistan would be undertaken “in coordination with the Iraqi government,” Rosneft, in practice, has not shown much regard for the concerns of the Baghdad government in its bid for a commanding presence in Kurdistan.

Rosneft’s calculus may be aimed at exploiting a moment of strategic opportunity.  While U.S. authorities have worked closely with the Kurdish Peshmerga in the fight against the Islamic State, an economic presence has not followed.  Since the independence referendum especially, Iran and the KRG’s other neighbor, Turkey, have pledged to isolate the region and defeat its bid for independence.  Accordingly, Kurdish oil and its infrastructure (and the influence it will bring), at present, appears to be Rosneft’s for the taking.  Indeed, with the Kremlin expressing some sympathy for the rationale behind the provocative vote, this decision by the KRG appears in part motivated by security considerations.

The agreement is not without risk: attacks in recent days by the Iraqi military on Peshmerga forces in Kirkuk may portend a severe deterioration both in relations between Erbil and Baghdad and for the Kurdish security situation in general.  In stark contrast to this perilous situation, Rosneft is being rewarded with an agreement giving the company 80% of the region’s oil projects.

Half of the $400 million fee paid by Rosneft to secure this advantageous accord is reportedly likely to be repaid in oil extracted from the deposits it now holds.  The Kremlin also probably calculates that, even in a future KRG debt default scenario, Moscow would lay claim to the underlying assets and perhaps other valuable concessions.

If exploration work is successful, full field production is expected to begin in 2021.