Rosneft in Kirkuk Talks Ahead of KRG Vote

Rosneft is in advanced discussions with the Kurdistan Regional Government (KRG) for a stake in the giant Kirkuk oil field in northern Iraq, two sources with knowledge of the situation told International Oil Daily. The talks follow the June announcement that the two had inked a cooperation agreement, which includes production-sharing agreements for five blocks, Rosneft's investment in the expansion of the Kirkuk-Ceyhan export pipeline, as well as an oil offtake deal under which the Russian state-controlled oil major will lift up to 300,000 barrels per day of crude from Iraq over 20 years, starting in 2019 (IOD Jun.5'17). On Sep. 18, Rosneft also announced its intention to build a gas pipeline from Kurdistan to Turkey (IOD Sep.19'17). Russia's interest in the Kirkuk oil field is largely political, as it aims to be a prominent influence in the region, especially throughout Iran and Iraq, the two sources say. Rosneft's role in oil exports from the KRG and northern Iraq, plus its hand in future KRG gas exports, gives Moscow significant influence over several economic lifelines in Iraq. The sides are discussing a hybrid contract, which could combine parts of a service contract – where a fee is paid for each barrel produced, as in southern Iraq – and a traditional profit-sharing agreement (PSA), which are common in Kurdistan. Easier parts of the field could be remunerated with a fee, while more complex developments could be rewarded with the more lucrative terms of a PSA. The current production costs run around $10 per barrel, says a source close to the Russian side of the negotiations, putting them among the cheapest output in the world -- an attractive proposition with oil prices still low at around $50/bbl. There are three major oil formations in Kirkuk: the Avana, Baba and Khurmala domes. The idea is to develop all three as a single field, the source adds. Such an approach could be highly controversial. Kirkuk lies outside the official boundaries of Kurdistan, although it is claimed by both the Kurds and the central government in Baghdad. Kurdish peshmerga fighters seized the province in 2014 when the Iraqi army crumbled at the hands of an Islamic State assault, preventing Kirkuk from falling into the militants' hands. Erbil-based Kar Group has historically operated Khurmala, which is considered to be in the KRG's sphere of influence. Federal Iraq's North Oil Co. (NOC) in the past has operated Avana and Baba. But since the war against Islamic State, the Kurds have fully taken over the field. Still, Baghdad still lays claim to its ownership. BP is also in discussions over Kirkuk, both sources said. Baghdad awarded the UK major an 18-month study in September 2013 to provide technical advice for the parts of the Kirkuk field -- the Baba and Avana Domes (IOD Nov.11'14). BP owns a 19.75% equity stake in Rosneft. Kar Group, which also operates Avana as well as the nearby Bai Hassan formation within Kirkuk, would need to be party to any final agreement, one source highlights. "It is an aging field and has been producing for decades. It needs major work to slow declines," he notes. Tensions in Iraq are high due to Kurdistan's plans to hold an independence referendum on Sep. 25, which Baghdad opposes. Iraqi Shiite militias have threatened to dislodge the peshmerga from Kirkuk should the Kurds persist in holding the vote. Kirkuk has also seen a surge in violence in the past week as violent clashes have broken out due to the referendum. Any misstep in the negotiations over the oil field could result in conflict, both sources noted. "Russia has a very delicate balancing act to perform," the source adds. An agreement could be signed as early as the beginning of October, one source states. Although this will likely take the form of a memorandum of understanding that will allow the deal to develop gradually and carefully negotiate the myriad of diplomatic issues, both sources say. Russia has also said it supports a unified Iraq and would most likely need to involve Baghdad in the Kirkuk negotiations at some point. Russia is fast becoming a financial lifeline to cash-strapped Kurdistan. In the past year, Erbil borrowed several billion dollars from trading houses, including Glencore and Vitol, guaranteed by oil exports. The debt repayments, however, stumbled due to lower oil prices. Russian banks are now in talks to refinance this debt, which could serve to give Russia an even larger foothold in Kurdish affairs. Rosneft declined to comment. Katie McQue, Dubai