In the Kurdistan Region of Iraq (KRI), gas is a relatively new industry rapidly growing in importance. The region has a massive amount of gas, accounting for an estimated 3 percent of global reserves. Domestic, regional, and international demand for gas is increasing for several reasons. Despite this potential, the sector faces many local, national, regional, and international challenges. Some of the region’s influential players are irritated that the gas could empower the Kurdistan Regional Government (KRG). This article investigates the significance of this emerging industry and its various challenges.
The gas sector in Iraqi Kurdistan is receiving much attention these days, perhaps too much. The entire industry is still in its early stages and has yet to meet local demands. The three attacks on the Khor Mor natural gas field in Sulaymaniyah Governorate in June and July 2022 were one of these puzzling events that affected the industry’s prospects. On July 26, the attacks occurred again, albeit under different circumstances.
So far, no one has claimed responsibility, and neither the KRG authorities nor the Patriotic Union of Kurdistan (PUK) as a local power holder, nor the Iraqi Government nor US governments is willing to blame anyone directly. Several new issues in the region and beyond have complicated the mystery. The attack highlights the potential and challenges of Kurdistan’s gas development.
This policy analysis attempts to evaluate this sector from political, economic, and geopolitical standpoints. Recently, the KRG gas sector has piqued the interest of regional powers like Iran, Turkey, and Gulf countries and superpowers like the United States and Russia. While the Chinese are active in the region, they have not yet invested in its gas sector.
According to the KRG Natural Resources Ministry, the KRI region has 200 trillion cubic feet (5.67 trillion cubic meters) of natural gas reserves, accounting for approximately 3 percent of the world’s total reserves. While Kurdistan can “produce approximately 40 billion cubic meters (BCM) per year of marketable (sales) natural gas by the mid-2030s,” according to a US Department of Energy Report, the KRI’s current marketed natural gas production is limited to one non-associated (Khor Mor/Sulaymaniyah) and one associated (Khurmala/Erbil) gas field.
According to the report, “fractured carbonate reservoirs with hard-to-predict performance; the need for expensive sour gas processing; and mountainous terrain, commercial and economic challenges, and unclear or contradictory corporate and government objectives” are among the reasons for the lack of production in the other fields. Unlike oil, gas has no history and is not regarded as a mythical substance by the elites or the general public.
However, it has emerged in a meteoric fashion, and its significance has grown alongside national, regional, and international developments. Furthermore, as public awareness of climate change and air quality grows, gas becomes a viable alternative to petrol, diesel, and kerosene. This is in addition to other factors such as rapid urbanization, car culture, and energy waste due to outdated infrastructure.
While Iraq relies primarily on gas to generate electricity due to climate change (hot summers, reduced rainfall, and draughts) and social changes (lifestyle and expectations), society demands more and more electricity, not to mention the waste of electricity due to old infrastructure. Furthermore, the rise of a modern lifestyle (car culture) and economy consume a growing amount of energy, including gas. Other factors influencing energy consumption in Kurdistan include internally-displaced people (IDP) and migration. The KRI controls the majority of Iraq’s non-associated gas fields. As a result, it will be a close and feasible gas source for Iraq.
Gas Politics and Administration
Following the Khor Mor attacks, it became clear that the primary targets were the field’s planned expansion, financially supported by the US government. While denying any anti-Iran motivations for backing the field, the latter hopes the KRI will export gas to the rest of Iraq and possibly Turkey. However, Iran and its proxies do not view this goal favorably. The attacks created security, political, energy, and market environment that combined KRI, Bagdad, and Iran. As a result, any action these parties take in these areas impacts others directly and indirectly.
For these reasons, oil and gas are considered game changers in Kurdistan. It has been argued that energy has the potential to change the nature of the Kurdish question because it is no longer used as a tool for political stability or a proxy force. With the emergence of oil and gas, KRI gained energy security and economic and political values, particularly following the signing of an agreement between Ankara and Erbil in November 2013, as Gareth Stansfield put it in 2014. Behind all these developments, there is a man called Ashti Hawrami. He was appointed Natural Resources Minister in May 2006 and was instrumental in developing the KRG energy vision.
He was a former Iraqi National Oil Company engineer who worked for the British National Oil Company in the North Sea. This contrasts sharply with most of his colleagues in Baghdad’s Ministry of Oil, who had no private-sector experience and had never worked outside Iraq. Hawrami was invited by the PUK, which later allied with the KDP and advocated for investor-friendly policies, production-sharing contracts (PSC), and block allocation. His direction has hastened the development of the Kurdish energy sector.
His confrontational approach toward Baghdad hampered the resolution of the various oil-related disputes. Unless someone like Hawrami is understood, any attempt to comprehend the KRG’s oil and gas projects would be futile. Hawrami was an oil expert. It has been claimed that Dana Gas’s problems were caused by his lack of experience in the gas industry. Bilal Wahab, a Washington Institute fellow and Kurdistan energy sector expert, said Hawrami’s strategy was to sign as many contracts as possible with wildcatters and small companies in a short time. He hoped to pave the way for medium and large international oil companies (IOC) to follow.
In a relatively short time, he could place Kurdistan on the global energy map (a phrase that became a sort of slogan in the KRG for a while) and attract oil and gas companies of various sizes and from various countries, including Exxon, Chevron, Total, Gazprom, and Shell. Ashty Hawrami was portrayed as a man carrying his ministry in a bag, a common manifestation of personal importance and a lack of institutional support. While there was an Oil and Gas Council, “he became the Council’s de facto sole decisionmaker because he was the only person with extensive background and expertise in the oil and gas industry.” As a result, ministries dominated the emerging petroleum governance model. This, combined with a lack of adequate institutional building, expertise, history, and a polarized political environment, fit Hawrami’s vision of a one-man ministry.
The opposition’s relationship with him was complicated. “At first, he tried to accommodate and manage us,” said Ali Hama-Salih, an independent MP from Kurdistan’s parliament, “but when we criticized him for personal gain through various contracts, he ended the relationship.” He was close to a faction within the KDP, and when that faction left the government’s executive branch, he was marginalized and disappeared.
KRG Gas Contract Models and Companies
Except for Khor Mor, a profit-sharing contract, the rest of the KRG’s contracts are production-sharing contracts (PSC). The KRG was forced to use the production share contract model to attract international gas companies due to a lack of capital, infrastructure, and expertise. This model differs from Baghdad’s central government’s risk service contract regime.
Many people would prefer PSC in Baghdad, but the close relationship between oil and nationalism would prevent that. Notably, in contrast to the KRG fields, the risk in major Iraqi fields is low. “Under the PSC model, KRG, as the owner of the petroleum, engages international oil companies (IOCs) as contractors to provide technical and financial services for exploration and development operations.” This applies to gas too.
Gas is more capital intensive, time-consuming, and thus riskier than oil. When the PSC places the entire exploration risk on the IOCs, the KRG is saved from an adventure it cannot afford. If PSC criticism is justified in the case of oil, it is less so for gas. Without PSC, it is difficult to entice companies to risk their capital in an area fraught with legal, geological, and security risks. Unlike the oil sector, the KRG gas sector has not attracted major international companies, except Rosneft, which is not directly involved in exploration. It is focused on exports and pipelines, with little or no progress. Crescent Petroleum and its affiliates, Dana Gas in Khor Mor, Genel Energy in Bina Bawi, and Miran, are leading gas companies.
Following a lengthy and costly arbitration between KRG and Dana Gas, the development of the Khor Mor gas sector was halted. In October 2013, Dana Gas and KRG began the arbitration process. The former accused the KRG of paying too little for gas liquid production. The KRG was forced to pay Dana Gas US$ 1 billion before the 2017 referendum. Dana Gas received additional benefits in addition to the financial award, such as an extension to the Khor Mor block boundaries, investment opportunities in new blocks, and the length of the licenses being extended by 12 years, with the licenses now expiring in 2049.
Furthermore, following the arbitration, the initial contract between the two parties was changed into a profit-sharing arrangement to bring it “in line with that received by other international oil companies operating in the region,” according to the company. KRG Cabinet Secretary and Chief Legal Advisor Amanj Raheem said, “the contract is now more akin to a service contract that the central government follows.”
Dana Gas was not the only company that the KRG had issues with. On December 12, 2021, the KRG stated that it would “vigorously defend any [compensation] claim” made by Anglo-Turkish Genel Energy in connection with the termination of the PSCs for the Bina Bawi and Miran fields. Genel believes the KRG’s notice of intent to terminate is invalid. The company seeks compensation from an international arbitration court in London for the KRG’s termination of the production sharing contracts at the two fields.”
Erbil-Baghdad Gas Relationships
Unlike oil, gas was once considered the glue that held Erbil and Baghdad together. KRG gas was viewed as “the major contributor and can almost entirely replace Iranian imports, except during the summer months, when peak demand will necessitate a small volume of Iranian natural gas,” supplier and replacer at a lower price. KRG gas is more appealing than Iranian gas, let alone the complex geopolitical aspect of it. This may become less realistic after the Iraqi oil ministry added Russia’s Gazprom and the UAE’s Dana Gas to its list of legal targets in a campaign to invalidate the KRG’s contracts with international oil companies on August 9, 2022.
In terms of natural resources, there is a de-facto KRG energy sector, but achieving a de-jure situation has been difficult thus far. This formula is the foundation of the Erbil-Baghdad relationship. The KRG requested negotiations and a deal with Baghdad, the latter for political reasons, especially given the current complicated situation, pushing for control or using it to change political behavior.
Baghdad has recently gone to extremes, endangering the entire process. Some see it as a zero-sum game, while others see it as a win-win situation. This is significant on constitutional, legal, political, and regional levels. The constitution serves as the primary framework for guiding the relationship. According to Article 112 of the Iraqi Constitution, the oil and gas sector must be regulated by law. However, no such legislation has been enacted to date.
The Council of Ministers approved an initial draft of oil and gas law in February 2007, which was later revised in April 2007. The 2007 draft law was never enacted due to disagreements over its terms. In 2011, a revised draft of the law was presented to the Council of Ministers but it has yet to be enacted. Currently, the country is in a political impasse, which gives little hope of passing any laws. The passage of the oil and gas law by the Federal Parliament is seen as one way out of the current crisis between Baghdad and Erbil. However, since the Iraqi Federal Supreme Court’s decision on February 15, 2022, to declare the entire KRG oil and gas sector illegal, the relationship has grown more distrustful and punitive.
The court decision, among other things, purports to (i) repeal the Kurdistan Region Oil and Gas Law (No. 22 of 2007), based on which the KRG has entered into production sharing contracts (PSCs) with international oil companies, (ii) rule that the federal ministry of oil is entitled to pursue the nullification of any contracts entered into by the KRG with third parties regarding oil exploration, extraction, export, and sale, (iii) rule that the Ministry of Oil and the Federal Board of Supreme Audit is entitled to review and revise any oil contracts entered into by the KRG; and (iv) order the KRG to hand over to the federal government all oil production it has extracted from oilfields.
The ruling ends oil federalism and signals a dangerous return to centralization, leading to authoritarianism. If Baghdad attempts to limit or control the KRG gas sector, the regional countries and international powers have different priorities. The KRG has recently progressed from de facto to de jure status. This has resulted in a mindset and a role model for the Kurdish political elite; in other words, if they can establish a de facto reality, they will be able to negotiate and obtain legal recognition. This is how the KRG came to be: de facto status from 1992 to 2005 and constitutional recognition from 2005 to the present. This framework applies to the gas industry also.
KDP and PUK Gas Relationship
Natural resources, including gas, are governed by the Ministry of Natural Resources in the KRG. The ministry has yet to establish a Gas Directorate in charge of policy, strategy, regulation, enforcement, supply security, and external affairs. Furthermore, gas is emerging when the KRI as a region and polity is experiencing severe polarization. In general, the KRG follows legal and governing principles similar to the federal constitution, such as government ownership of natural resources.
The KRG, on the other hand, struggles to be a unified government. It is officially divided into two zones of influence: the KDP zone (Yellow Zone) and the PUK zone (Green Zone), a relic of the 1990s Kurdish civil war. The two zones have unequal gas and oil distribution. The PUK zone contains most of the gas fields, including Khor Mor. The shift in focus to the gas sector, especially following Russia’s invasion of Ukraine, has widened the schism between the two major political parties.
Recently, gas has emerged as the primary issue between the two parties. While the KDP advocates exporting gas not only to Turkey but also to Europe, the PUK opposes this. Bafel Jalal Talabani, the new PUK leader, has been outspoken about it. He recently said that “only through my dead body can it [gas] be exported, and this is a demand of the Kurdish masses.”
While the PUK may have the land (territory) and armed groups to provide or threaten security in Khor Mor and other fields, the KDP has institutional, legal, and de facto ruling authority over contract signing and sector governance, according to Bilal Wahab. This political, governing, and economic division is expanding as both parties establish large corporations such as Kar (KDP) and Qaiwan (PUK).
The KAR Group is also involved in oil and gas transportation, refineries, and pipeline construction. It was founded in 1999 in Erbil, where its headquarters is located. It owns the Khurmala Oil Field and the Erbil Refinery. The KAR has a 40 percent stake in a pipeline infrastructure project in the KRG, being implemented in collaboration with the Russian company Rosneft.  Qaiwan was founded in 1993 in Sulaymaniyah as a multi-sector holding active in the energy sector. The two large corporations represent a new era of party-affiliated businesses. High-level party officials have confirmed this.
The two major parties are struggling to overcome the legacy of the civil war. This has several negative consequences for the gas industry. “Resource dependence tends to make countries more vulnerable to civil war,” according to the literature. Before the discovery of natural resources, Kurdistan experienced civil war, which hampered the development of inclusive  institutions required for natural resource governance and, eventually, growth.
The disparity between nominal people’s ownership and actual government or elite benefits has led to public disillusionment. People expect petrol and gas to be cheap, necessitating government subsidies, which the World Bank and other institutions are hesitant to recommend. As a result of this disparity, there are public outrages, a rise in gasoline prices and price volatility, exporting from abroad, and demonstrations. These confirm the region’s failure to prepare for such a seismic shift: the region’s economy is not free, the car culture is an old habit that dies hard, a lack of awareness of environmental consequences, a sense of entitlement, and, most importantly, poor public transportation.
Meanwhile, there are indications that the high price of gasoline has influenced consumer behavior, with people opting for small cars and hybrids, as Aram Kokoy,Assistant Lecturer at Komar University of Science and Technology and economic observer, informed me.
Economic Aspects of KRG Gas
KRG Gas appears to be promising but faces numerous obstacles. The region could hold up to 200 trillion cubic feet (5.67 trillion cubic meters) of natural gas reserves, accounting for roughly 3 percent of global reserves. According to the KRG ministry of natural resources, this places Kurdistan in a prominent position in regional and global gas markets. If this sector grows smoothly, it “could result in gross external revenues to the KRG of around US$ 4 billion annually by 2032, and net revenues (after costs and financing) of around US$ 1.2 billion annually.”
Aside from domestic demand, Turkey and Iraq are potential markets. In 2013, the KRG and Turkey signed what is known locally as the 50-year agreement. So far, the actual content is largely unknown. However, according to sources, it “solidifies Kurdistan’s role as Turkey’s major strategic energy partner. Under the gas sales agreement (GSA), the KRG will ultimately sell 20 billion cubic meters annually (bcma) of natural gas to Turkey – nearly half of the country’s current consumption – at a price that significantly undercuts Turkey’s other major suppliers.”
The region is having difficulty locating the necessary capital and markets. While the current gas market and Kurdistan’s geographic proximity to Turkey and potentially Europe could have enticed multinationals, legal impediments and security have created sufficient barriers to prevent that from happening.
Exporting to Turkey before satisfying domestic demand is problematic from a public demand standpoint. As a result, Iraq is the most viable domestic market. By 2030, Iraq’s natural gas demand is expected to reach 60 BCM/y, primarily for power generation but with an increasing share for industrial use. KRG gas could compete with Iranian gas in terms of price and viability: KRG gas may be less expensive and more reliable than Iranian gas. Gas-to-power is one area that is already taking shape.
Kirkuk already has limited access to the Kurdistan electricity grid. There are also three new/expanded connections to Mosul. Iraq’s demographic boom, climate situation, and urbanization make it a desirable destination.
KRG Gas: The Geopolitical Factors
Regional powers see the development of the gas sector as part of the KRG’s empowerment. Gas has a higher geopolitical value than oil. The oil relationship could be terminated or transferred in more than one way at any time. Gas, on the other hand, is expensive to transport and export. Gas contracts are long-term, and the receiving country has difficulty quickly switching to other sources or diversifying.
Iran is most likely concerned about the KRG’s gas development. Energy consultant Harry Istepanian  contends that “Kurdistan has close to 40 trillion cubic feet of proven gas reserves from 14 oil and gas fields, while Iran has 1,200 trillion cubic feet of proven reserves, ranking second in the world and accounting for approximately 17 percent of the world’s total natural gas reserves of 6,923 Tcf. I do not see how Kurdistan gas could endanger Iranian gas.”
Notably, Iran is concerned about something other than obvious traditional market competition. It is concerned about the KRG’s empowerment, particularly the possibility of the latter becoming the source of gas supply to the rest of Iraq, thereby ending Iraq’s reliance on imported gas from Iran.
Furthermore, Iran is concerned about the KRG PM’s statements about KRG gas exports to Turkey and Europe, as Turkey is one of Iran’s leading clients. During the Khor Mor attacks, this became clear. The main goal of the attacks was to halt the US$ 640 million expansion, partially funded by a US$ 250 million loan from the US International Development Finance Corporation. Iran has long attempted to harm the developing KRI gas sector by linking it to Israel. “Israeli-Kurdish cooperation provides Iran with a useful narrative,” writes Amatzia Baram. Many people who would otherwise ignore the gas industry are drawn in by such a story.
If Iran opposes the sector’s development, Turkey will consider importing gas from KRG. Turkey has pursued a policy of becoming a gas hub  for Middle Eastern and Central Asian countries over the last decade. Ankara’s relationship with the KRG is hazy at best. The two parties signed a 50-year agreement in 2013: while everyone is aware of it, very few are aware of its actual content. Over the last decade, both parties have expressed a desire to trade oil and gas. So far, the gas portion is merely a wish.
One distinguishing feature of KRG geopolitics is the KRG’s difficulty in maintaining equal relationships with more than one neighboring country simultaneously; for instance, the KRI relationship with Turkey is one of the core issues in the Erbil-Baghdad relationship. This is especially difficult when neighboring countries have a geopolitical rivalry, as Iran and Turkey do. Furthermore, the PUK and other KDP opponents [PKK] oppose Turkey-KRG relations.
On a global scale, the US is assisting in developing KRI’s gas sector in several ways. During the Trump administration, the US Department of Energy conducted one of the most comprehensive assessments of the KRG gas sector. The report is extensive and somewhat technical. Nonetheless, it is a show of administration support. More importantly, the United States is contributing financially to the expansion of the Khor Mor gas field, the largest in the region. While US diplomats try to separate KRI’s gas development from US policy toward Iran, the latter remains skeptical. The fact that KRI can supply gas to the rest of Iraq and Turkey is enough to anger Iran.
While Iranian involvement is multifaceted, Russian engagement with KRI’s gas sector is limited, primarily geopolitical. The involvement in the KRG’s energy sector has resulted in several contracts for oil and gas pipelines. It aims to “transform Erbil, a long-standing US ally, into an important partner for Moscow as Russian President Vladimir Putin seeks to expand his influence in the Middle East.” Furthermore, the gas pipeline contract is designed to maintain Russia’s monopoly on EU gas imports [prior to the Russia-Ukraine war] while limiting the EU’s diversification capacity.
While the EU talked about diversification, it did little on the ground. For infrastructure, quantity, Iranian and Russian involvement, and their impact on the sector, not to mention Iraq’s legal and political challenges, talking about exporting KRG gas to Europe is, at best, a pipe dream now. According to Clarisse Pásztory, former head of the EU liaison office in Erbil, “the EU could have made a strategic investment in KRI/broader Iraq years ago, securing alternative gas supply routes and leveraging political influence at the same time, alas… instead we spent ‘humanitarian’ billions that only prolong their crises and don’t solve ours.”
As illustrated above, the KRG gas sector is emerging, albeit with many challenges ahead. One of the major challenges is the bad blood between Baghdad and Erbil. The KRI and the central government are becoming increasingly interdependent. One way to reduce tensions between the two sides is to depoliticize the gas sector and treat it as a commercial commodity rather than a source of national pride or any other nationalist attachment.
This is difficult to imagine now as energy facilities as strategic assets are increasingly becoming the primary target of those attempting to put pressure on the KRI. Furthermore, local and regional tensions, rapid urbanization, and a deteriorating climate will increase gas demand and consumption in Iraq and Kurdistan. Putting political differences aside to improve energy relations is a win-win situation. Following the KRG PM’s visit to Baghdad, there are hints in this direction, but it remains to be seen. More than ever, Iraq needs to pass an oil and gas law.
Aside from the complex relationship with Baghdad, Kurdistan’s local and domestic relationships also challenge the gas sector’s development. This division has invited tribal groups to request a payoff, putting a strain on the sector’s revenue while on the national and regional level, resulting in further obstacles to developing the sector. When it comes to gas, the two Kurdish factions have opposing goals.
These objectives are not incompatible, but tensions are high for reasons other than gas management. The direct influence of regional players – Iran in the case of PUK and Turkey in the case of KDP – plays a significant role in stimulating and challenging the sector. Iran does not want KRI gas to be perceived as another diverse source for the Turkish market, despite Iran being a supplier. Russia and Iran share this goal.
Meanwhile, domestic gas demand will skyrocket in Kurdistan and Iraq as climate change, draughts, heat, and urbanization contribute to increased gas consumption. The current consumption pattern and energy-intensive lifestyle will be unsustainable. KRI must fly cautiously and avoid getting too close to potential hazards, as the title alludes to the Greek myth of Icarus. KRI must establish more institutions to manage the gas sector to avoid repeating the oil experience. Society’s support is critical for the industry’s legitimacy.
 Douglas A. Ollivant, Barzani Goes to Baghdad: Trouble in the Kurdish Oil and Gas Sector, Warontherocks.com, July 18, 2022: https://cutt.ly/6XKmL7j