Leaders of the Kurdistan Regional Government have been on a mission to promote the semiautonomous region in northern Iraq as a potential exporter of natural gas to Europe. Shortly after the February 24 Russian invasion of Ukraine, Masrour Barzani, the KRG’s prime minister, spoke at an energy conference in Dubai where he declared that the Kurdistan region could become an important source of energy to its immediate neighbors and the world. On recent visits to London, Doha, and Ankara, he conveyed a similar message.

The problem is that Iraq’s Kurdistan region currently has no natural gas to spare, and its oil production has stagnated. While there is potential for the energy sector to grow, the region’s geology is complex, and some of its oil fields are already in decline. Additional gas from the Khor Mor gas field being developed by a United Arab Emirates-led consortium should become available in 2023. But other gas discoveries to date have been few and far between, and discovered fields contain gas that is sour and high in sulfur content, which makes it costly and technically challenging to develop. The region is not producing enough gas for its own consumption, and a power station near the Turkish border is operating at a fraction of its capacity for lack of a pipeline network to bring in gas to run it.

Kurdistan’s Ministry of Natural Resources estimates that the region has 45 billion barrels of recoverable oil reserves and 25 trillion cubic feet of proven gas reserves, which would support higher production, though recent exploration results have been disappointing. The Kurdish energy sector also faces a number of impediments, not least of which is an unresolved dispute with the Iraqi federal government over management of the region’s natural resources and long-standing challenges to the legality of its independent oil exports.

Internal political squabbles between the two main Kurdish parties are holding back construction of a gas pipeline that could eventually be extended to Turkey for onward exportation to Europe, where Russia is a dominant supplier. The European Union is desperately seeking alternatives to Russian gas, but the KRG has some way to go before it can produce excess gas for exportation.

Since the KRG passed its own oil and gas law in 2007, oil production and exports have grown to around half a million barrels per day of crude oil and half a billion cubic feet per day of natural gas with scope to grow both, Masrour Barzani said at the March 28 Atlantic Council Global Energy Forum in Dubai. “We will become a net exporter of gas to the rest of Iraq, Turkey, and Europe in the near future and help meet their energy security needs,” Barzani said. He had earlier touted the region’s “huge gas potential” during talks in Doha, capital of gas powerhouse Qatar. In London, Barzani was lauded by British Prime Minister Boris Johnson for “his efforts to help reduce Western reliance on Russian oil and gas,” according to a statement from Johnson’s office.

Developing the Kurdistan region’s energy sources has not been “an easy journey,” Barzani said in Dubai. The energy sector is being buffeted by new challenges; for example, a January 15 Federal Supreme Court ruling invalidated the legal basis of the KRG’s independent energy policy. The KRG dismissed the judgment as unconstitutional and politically motivated. But absent a negotiated settlement between Erbil and Baghdad, investors might steer clear of Iraqi Kurdistan.

The delay in forming an Iraqi Cabinet over eight months since the October 2021 parliamentary elections is another complicating factor in that any decision made by a caretaker government to implement the federal court ruling risks being invalidated. Here again Barzani’s Kurdistan Democratic Party, which is the dominant power in the KRG’s political structure, and the Patriotic Union of Kurdistan, are at odds over the Iraqi presidency. Without agreement on a candidate acceptable to both parties and their respective allies in Baghdad, a new government cannot be formed. The Kurdish oil sector has fallen prey to the political maneuverings in Baghdad due to the inability of the dominant Kurdish parties to present a unified front and stave off a federal takeover.

To make matters worse for the KRG, federal transfers of the region’s share of the budget have been erratic while Erbil and Baghdad remain in dispute over revenue sharing. Without a steady flow of federal funding, the KRG has struggled to cover public sector salaries and payments to foreign oil companies, which are in arrears. According to Iraq Oil Report, the KRG needs $617 million just to pay the salaries of a bloated public sector. Because Iraqi Kurdistan relies almost exclusively on oil export earnings, its finances are severely strained during periods of low oil prices, and its debt to traders and oil companies has ballooned.

In 2020, when oil prices crashed at the onset of the coronavirus pandemic, the KRG exported an average 435,000 b/d of crude oil through the Turkish Mediterranean port of Ceyhan at an average price of $26.9 per barrel. Kurdish oil sells at a discount to Iraqi crude because of the political risk involved and much of it is pre-sold to international trading houses, which amounts to a debt that the KRG carries.

The recovery in oil prices in late 2021 provided some respite. An audit of KRG finances by Deloitte showed that the KRG’s gross revenue surged to $9.12 billion in 2021, nearly double gross earnings in 2020. But debt obligations, payments to foreign operators, pipeline tariffs, and transit fees took a big slice of the total, netting the KRG $3.96 billion or 43% of gross income in 2021. Higher revenue is expected in 2022 as oil prices soared to a near record in March and have averaged well above $100/bbl for the first quarter. But rather than draw down its debt, the KRG made more oil prepayment sales to commodities traders in the fourth quarter of 2021, which will provide Erbil with cash upfront but push its debt to the traders to $3.8 billion, which essentially cancels out its net earnings.

Overall production from fields in the Kurdistan region, including Khurmala Dome, which is part of the Kirkuk oil field in northern Iraq, averaged 458,000 b/d in 2021, compared to 470,000 b/d in 2020, according to field-by-field data compiled by Iraq Oil Report. The KRG took control of the Kirkuk oil field in 2014 from the Iraqi state operator to prevent it from falling to Islamic State in Iraq and the Levant invaders after Iraqi troops withdrew from the area, which the Iraqi Kurds lay claim to. The result was a significant boost to oil production under Kurdish control to over 700,000 b/d for much of 2015. But control reverted back to the Iraqi National Oil Company following the unsuccessful 2017 Kurdish independence referendum.

The slowdown in exploration and drilling activity in 2020 due to the coronavirus pandemic and a reluctance by foreign operators to commit to further investments while still owed substantial sums by Erbil led to a further slump in production. In December 2021, the KRG owed more than $460 million to five of the foreign oil companies, according to company disclosures at the time, though regular payments resumed in early 2022 as oil prices surged. Activity is expected to pick up as the operators have reported higher profits in the first quarter of 2022, but much will depend on how quickly the Ministry of Natural Resources grants approval for new projects. Some of the foreign oil companies have complained about the slow approval process and arbitrary directives from the ministry.

In July 2021, the ministry informed the foreign companies that they had to end gas flaring within 18 months or face penalties, a surprise decision that is justified on environmental grounds but would require investment in infrastructure that the companies could ill afford in the wake of the 2020 oil price collapse. Earlier that year, Minister of Natural Resources Kamal al-Atroshi informed the companies, without prior warning, that the payment schedule for their invoices had increased from 15 to 60 days from submission of invoices. He also cut the share of incremental revenue for repayment of arrears, a calculation based on oil prices rising above a certain level.

When the KRG first opened up its upstream sector to foreign participation in 2007, it was heralded as a new frontier with huge growth potential. Ashti Hawrami, who was the minister of natural resources at the time and the architect of the KRG’s energy policy, believed the region could produce 1 mb/d of crude oil. With his departure in 2019, the foreign operators lost a hands-on interlocutor and the ministry has been left adrift with competing interests within its ranks.

The KRG’s offer of production-sharing contracts to foreign investors drew independent oil companies into a region where they faced little competition from the oil majors, which had an eye on the more prolific and lower cost oil reserves elsewhere in Iraq. Baghdad had threatened to blacklist companies if they invested in the Kurdistan region, and all but a few of the oil majors complied. ExxonMobil, France’s Total (which is now TotalEnergies), and Chevron were exceptions although ExxonMobil and Total had stakes in Iraqi oil field developments.

ExxonMobil’s move into Iraqi Kurdistan in 2011, when it acquired six exploration blocks, including a gas prospect, was a coup for the KRG, which saw political capital in the engagement of Western oil majors. A decade on, however, the U.S. energy major has relinquished the last of its remaining assets in Iraqi Kurdistan having drilled a handful of wells and produced zero oil or gas. In April, it walked away quietly from the Pirmam block, which contains significant resources estimated at 880 billion cubic feet and 114 million barrels of oil. ExxonMobil is also in the process of exiting Iraq altogether with the sale of its stake in the giant West Qurna 1 oil field in southern Iraq.

TotalEnergies, meanwhile, is also preparing to sell its 18% stake in the Sarsang oil block in Iraqi Kurdistan to Canadian partner Shamaran. The French company instead committed to a $27 billion investment in Iraq’s energy sector in late 2021. Chevron, meanwhile, is downsizing, leaving it with just small stakes in the Sarta and Qara Dagh licenses.

Of the larger foreign companies, Russia’s Gazprom Neft and Rosneft are still present in Iraqi Kurdistan, though they are on the EU and United Kingdom list of sanctioned companies, which raises doubts as to their ability to continue operating due to financial restrictions on dealings with sanctioned companies. Gazprom Neft operates the Sarqala oil field in the southernmost tip of Iraqi Kurdistan in the area controlled by the Patriotic Union of Kurdistan. Rosneft’s role is strategically more significant in that it has a majority stake in the oil export pipeline to Turkey alongside KAR Group, the Iraqi Kurdish company that operates the largest producing field in the region, the 150,000 b/d Khurmala Dome, as well as two smaller satellite fields and an oil refinery. Khurmala also provides associated gas to the underutilized power station at Dohuk, near the Turkish border.

The majority of Kurdistan’s oil is produced by small and medium-sized companies that do not have the deep pockets of the international oil majors. Among the most active foreign operators in the oil sector are Norwegian DNO, Genel Energy, and Gulf Keystone, which are heavily invested in Iraqi Kurdistan and cannot afford the luxury of sitting on unproductive assets.

Genel Energy, one of the earliest entrants into Kurdistan’s energy sector, was dealt a blow when the Ministry of Natural Resources served the company notice in August 2020 terminating its production-sharing contracts for Bina Bawi and Miran, two projects with enormous gas potential that had not moved forward a decade after they were awarded. The two fields were to provide supplemental gas to meet domestic demand and potentially supply Turkey. Genel has launched arbitration proceedings, a move that may further delay development of the two fields that the London-listed company says contain estimated gas reserves of 14.8 trillion cubic feet and 130 million barrels of oil.

Most of Iraqi Kurdistan’s gas currently comes from the Khor Mor field, operated by the Pearl Consortium led by the UAE’s Crescent Petroleum and Dana Gas. Production capacity is being expanded after the consortium secured $250 million in financing from the U.S. International Development Finance Corporation. The funds will allow the consortium to double production from a current 440 million standard cubic feet per day. Dana Gas reported in its first quarter 2022 results that the expansion plans were progressing, and the consortium is on track to deliver first gas in the second quarter of 2023. With Bina Bawi and Miran on hold, the Khor Mor expansion will provide additional gas supplies to power plants and some surplus for exportation to other regions of Iraq and possibly Turkey, but that entails extending the proposed pipeline beyond Dohuk to the Turkish border, where it could tie into the Turkish pipeline network.

The Kurdistan Democratic Party-dominated KRG awarded a contract to KAR Group to expand the domestic pipeline network, but Khor Mor lies in territory controlled by the Patriotic Union of Kurdistan, which considers the Kurdistan Democratic Party’s move as overreach and has withheld permission for work to proceed. Patriotic Union of Kurdistan co-leader Bafel Talabani reportedly said April 28 that the contract of the gas deal and its business model must be clarified for the people of the Kurdistan region, adding that if the Kurdistan Democratic Party does not heed the Patriotic Union of Kurdistan’s demands, the pipeline would be built over his “dead body.”

The proposed gas pipeline, which is intended to expand the regional grid, would provide an outlet for gas from a number of fields and supply power stations that currently run on liquid fuels. Khor Mor supplies gas to power plants in Sulaymaniyah and Erbil, but is not connected to Dohuk, which has more than 1,000 megawatts of capacity but is operating at just 50 to 80 megawatts due to lack of feedstock, according to KRG Electricity Ministry officials quoted by Iraq Oil Report.

The KRG’s gas export ambitions were set out in 2013, when it concluded a strategic energy deal with Turkey that included a gas sales agreement for the supply of 20 billion cubic meters of gas per year. Turkey, which relies heavily on Russia, and to a lesser extent Iran, for its gas supplies, extended its gas pipeline to the border with Iraqi Kurdistan in anticipation of gas flows that have yet to materialize.

Another possible complication is a pending decision by the International Court of Arbitration on a case brought by Baghdad against Turkey’s pipeline operator seeking $26 billion in damages for enabling the exportation of Kurdish oil through the Iraq-Turkey Pipeline in violation of a treaty between the two countries. A resolution is expected before the end of the year and may determine the fate of the gas export pipeline.

Iraq itself could use additional gas. The government of Prime Minister Mustafa al-Kadhimi has been trying to secure alternative supplies of gas and electricity to replace Iranian imports, which are problematic because of U.S. sanctions and unreliable, partly because of Iran’s own need for additional gas during peak demand periods.

Iraq flares more than half the natural gas it produces alongside crude oil because of insufficient infrastructure and is one of the world’s worst offenders when it comes to flaring natural gas. The World Bank’s 2020 Global Gas Flaring Tracker listed Iraq as the second-largest gas flaring country after Russia. This amounts to torching a valuable resource that could generate revenue if monetized and help to eliminate costly imports. It would make sense for Baghdad and Erbil to come to some agreement to share a resource that is available but is serving no purpose while it remains in the ground or is released into the air. But common interest has not always prevailed over the sectarian nature of Iraq’s turbulent political arena and recent events point to a protracted standoff that is holding back progress in monetizing an asset that all factions argue should be developed for the benefit of all Iraqis in all regions and provinces.

The reality is as murky as the blinding dust storms that have been increasingly swirling around the country. Some say desertification due to climate change is to blame. Using the gas and monetizing through exports may perhaps help to clear the air.