Energy hotspots & strategic dynamics in the Middle East

Key Opportunities stemming from lower oil prices

• Progressive fiscal systems: Pressure on governments to adopt more investor

friendly fiscal systems and petroleum contracts

• ‘Cash rich investors’: Preference investors and operators able to ‘front load’

investments and absorb deferred returns (XOM, CNOOC,

• Industry consolidation: Increased M&A activity and drive for organizational

excellence

• Gas regionalization: Opportunity to deepen strategic gas investment and

trading projects throughout region

• Strategic ties with ASEAN: Still unexplored potentials in the full oil & gas value

chain between Middle East producers and ASEAN

0

2000

4000

6000

8000

10000

12000

2015 2017 2020 2025

Pro

du

ctio

n (

kbp

d)

Manaar low case Manaar mid case

Manaar high case Original plateau targets

New plateau targets National Energy Strategy mid case

Federal Iraq: lower production growth in short term

3

Factors of influence

Politics & Security

Fiscal system

Infrastructure & Export capacity

Government bureaucracy and approvals

Source: Wood Mackenzie; Iraq National Energy Strategy; Ministry of Oil; Forecasts: Manaar projections

4

Scenario Probability Petroleum sector implications

National Unity

Baghdad, Kurds in federal

system

BASE CASE

55% Macro Level

• Exports under federal system, with increasing Kurdish autonomy

• Increased Bi-lateral co-operation with Iran

• Deepening relations with Asian investors, operators, traders

Domestic & local dynamics

• Frequent disagreements, fragile alliances

• Turkey becomes key export route especially for Kurdish gas

Kurdish independence

KRG independent; Baghdad

shaky control of North Iraq

30% • Turkey becomes principal gas market from 2018

• KRG excluded from Iraq market

• Competition with bilateral gas projects with Iran

• LPG confined to supplying Turkey

Chaos*

No central control

ISIS, militias & factions

10% • Shifting political alliances between Ankara, Erbil, Baghdad,

Tehran)

• Tactical, short term consolidation

• Priority on trading and short term gas deals

3+ state solution*

Independent KRG, North Iraq,

South Iraq

5% • Ankara/Erbil, Baghdad/Tehran alliances

• Short-term domestic gas & LPG

• Exports to Turkey accelerated

The main gas sector driver - politics

112/99BCM

87/152BCM

0/364 BCM

Current 2P/2C Gas Reserves

• Central Kurdistan will lead production

• Needs infrastructure for export to

Turkey

• Relatively small southern production -

needs unique market options

• From 2017-18, Kurdistan might have

surplus gas for export

Kurdistan Kurdish gas – the reserves potential

Note: definition of each reserve category in appendix 14

The decision to use 2P, 2C and 3C to forecast

production reflects the combined technical and

political uncertainty in KRG

0

10

20

30

40

50

60

Gas

Res

erve

s (B

CM

)

2P North 2P Central 2P South 2C North

2C Central 2C South Total 3C

Supply side gas: Strategic options for Iran

Strategic capabilities

Risks

Supply: South Pars development priority

Demand: Meeting domestic demand

Risks

• Iran’s strategy still unclear in terms of supplying domestic, regional and global gas markets

• Priority appears to be supply of domestic market + friendly regional deficit markets

• Iraqi TSC likely to provide ‘lessons learned’ and improved Iranian fiscal system

• Strategic objectives are underpinned by improving infrastructure, operating conditions, skills and talent of

state petroleum sector

• Cause for optimism that Iran is poised to attract investment and achieve above strategy

throughout the nest 3-5 years

Gas Demand Side: Turkish Gas import options

7

0

10

20

30

40

50

60

70

80

90

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

Gas

imp

ort

s, d

em

and

/ B

CM

LNG (undifferentiated)

LNG (Egypt)

LNG (Trinidad)

LNG (Nigeria)

LNG (Algeria)

LNG (Yemen)

LNG (Oman)

LNG (Qatar)

LNG (Other Europe)

LNG (Norway)

KRG

Iran

Russia

Azerbaijan

Domestic production

Domestic demand + exports

Domestic demand

Russia continues as main supplier

Azerbaijan (SCP / TANAP)

KRG gradually displaces Iran from 2030

Turkey needs spot LNG 2015-16

Turkey transits 10 BCM to EU from 2019

Planned expansion of Iranian supplies

Source: IEA; media reports; Forecasts: Manaar research – Base Case economy, power sector

• Turkey is key potential market for Kurdish gas – diversifying from Iran & Russia• Can take 20 BCM from early 2020s & transit more to EU

• But price competition – numerous competing suppliers• New Russian pipeline (14 BCM to Turkey, 49 BCM to EU)

• Gas demand forecast to slow down in 2020s as power sector diversifies

Concluding remarks

• Hotspots: The key energy hotspots in the Middle East are Iran, Iraq, Turkey,

with varying but significant ‘trade offs’ in risks and rewards

• Geopolitics: Politics and security to continue as key development constraints,

with more unilateral and bilateral attempts to create sustainable strategic

relationships independent of US initiatives

• Uncertainty: Lower oil prices likely to add more uncertainty in Iraq’s

hydrocarbon sector, flatter growth, limited opportunities for fiscal improvement

• Hope: Emergence of Iran and Turkey steps towards organically driven regional

gas market and investment environment

• Ambition: relationship between the hotspots and ASEAN appear still under

exploited, growing opportunities but continuing challenges throughout energy

value chain

Appendix

Iraq political SWOT analysis

• Survival & Domestic politics

• Regional geopolitical interests

• Oil Prices

• Domestic reconciliation

• Bi lateral energy ventures

• Rebalancing of regional geopolitical alliances

• Political & economic vision

• Security & politics

• State institutions

• Evolving identity

• Stagnant economy

• Hydrocarbon Wealth

• Economic potentials

• Legacy of state building

• Strategic location

• Talented labor force

Strengths Weaknesses

ThreatsOpportunities

11

Description Impact Mitigation

Political• Geopolitics, e.g. US• Baghdad-KRG relations: oil/gas exports,

budget payments, joint projects• Turkey, Iran influence: markets, export

routes, supply competition• Intra-KRG politics

• Political engagement• Market engagement with top

players in Turkey• Flexible strategies• Bilateral high-level political

backing

Economic & commercial

• Local oil/gas/electricity markets• Gas, oil product pricing• Tax and PSC terms• Cooperation with other operators

• Local market development• Local partners• Federal Iraq engagement

Technical and operational

• Seismic and exploration prospectivity• Gas vs oil reserves• Drilling challenges• Access to infrastructure

• Further data gathering• Cooperation with MNR & other

operators

Security and CSR

• Local community protests• ISIS

• Holistic CSR programmes• Security & situation monitoring

High

Medium

Low

Risks for Companies Operating in Iraq

Iraq’s political outlook

• National vision: Developing a functional gas sector is the ultimate test of a

concerted political and economic vision which Iraq so far looks unlikely to meet

• Opportunities: Iraq's government is still struggling with understanding its dire

need for the global private sector and how best to interact with it

• The South: With the country’s largest gas reserves, these are mostly associated

gas with an evolving program for development, but no sustainable non

associated E&P program

• The North: While far ahead of federal Iraq in its gas strategy, Kurdistan suffers

from many of Iraq's constraints (politics, infrastructure, incoherent strategy)

• The Strategy: Over-simplication and fundamental misunderstanding of strategy

at government and investor levels is likely to increase the challenge in

developing a viable gas sector anywhere in Iraq

Iraq gas flows example: medium case exports, 2025 (BCM) - a patchy long term vision

13

Production

Power

Transfer

Export

Import

14.6

11.1

11.8

30.4

4.1

10

1.6

• Location of consumption approximate

• Assumes no imports from KRG

11.5

24.6

15.5

Other consumption

5.6

1.9

5.2

14.4

18.3

8.8

0.6 5

• In this 2025 scenario, Iraq would have ~20 BCM gas deficit without Iranian (or KRG) imports

• South Iraq approximately self-sufficient (nearly all associated gas) – transits Iranian gas to Kuwait and middle Iraq

• Middle Iraq (mostly non-associated gas) has large deficit but Iranian gas imports allow some supply to north Iraq

• North Iraq has significant deficit• West Iraq (Akkas) sends small amounts to Jordan & north

Iraq

14

Chemchemal 97.6

Miran 99.05

Kurdamir 63.9

Khor Mor 125

Shaikan 36.7

Bina Bawi 138.7

Bijeel 0.37

Khurmala 102.3

Topkhana 47.2

Summail 41

Barda Rash 12

Chia Surkh 8Taza 10.1 Shakal 3.9

Source: Manaar; MNR;

Wood Mackenzie; company

reports

• Figures in BCM (2P + 2C);

associated gas in blue

• Total 199 BCM reserves (2P)

and 615 BCM contingent (2C)

resources Total 814 BCM

• 72% (585 BCM) - non-

associated & gas caps

• 28% (229 BCM) – associated

• 1352 BCM of Gas Initially in

Place (GIIP) – ‘geological

reserves’

• Still under-explored for gas, and

lack of sufficient data

• Deeper reservoirs potential

(Permo-Triassic) and southern

area?

KRG: Gas reserve and supply analysis

Regional existing and planned gas pipeline capacity and utilisation (BCM for 2013; capacity in 2020 only for planned pipelines)

Pipeline Capacity

(BCM)

Flows 2013

(BCM)

Diameter

inches

Start

year

Status / Issues

1: Blue Stream (Russia-Turkey) 16 12.7 48 2003 Operational

2: Khor Mor (KRG) 3.4 3.4 24 2008 Dana-KRG dispute

3: Tabriz-Ankara 12.8 8.7 16 2001 Winter supply disruptions

4: SCP (Azerbaijan-Turkey) 7.4 3.3 24/34.5 2007 Operational

5: Turkmenistan-Iran 7.7 4 39 1997 Supply disruptions

6: Iran-Mansuriya 9.1 0 (2014) 48 2016? Insurgent attacks in Diyala

7: TANAP (Azerbaijan-Turkey) 16 56 2018 In construction

8: TAP (Turkey-Italy) 9.9 48 2019 Construction start 2015

9: KRG-Turkey 10 2017-18 KRG-federal relations

10: Iran-Basra 18 2022? Politics; high price

11: Iraq-Kuwait 4-10 40 2016? Existing line needs repair; politics

12: Iraq-Jordan 2.6 2020? Anbar insurgency

13: Iran-Pakistan 22 56 2017? Iran side complete; sanctions

14: Iran-Oman 10 2020? Sanctions

15: Russia-Turkey new 63 4 x 32 ? 14 BCM to Turkey

16: IGAT (1, 2, 6, 9) 11.7-16.8 56 Multiple pipelines (1970+)

11

16

Political

• Military gains against ISIS, immediate priorities being Baiji, Tal Afar, Mosul

• Stable bilateral relations between Iraq-Iran, Iraq-Turkey, Iraq-US

Economic

• Domestic interdependence and integration of Kurdistan in domestic market

• Kurdish budget share (nominal 17% - deal could be actual ~13.6%) and oil exports in

federal system

• Proactive domestic initiatives from existing oil & gas operators, promoting projects

between Kurdistan & federal Iraq (e.g. KAR, potentially BP in Kirkuk)

• Low oil prices – weaken KRG financial independence

Triggers and signals

• Baghdad / Erbil dialogue concerning long term reconciliation & Kirkuk

• Agreement on 2015 budget and smooth operation of oil-export sharing deal

• Continued Turkey, Iran, US pressure for unity

KRG: Driving factors for ‘National Unity’ scenario

Federal Iraq: Existing and planned refining infrastructure

17

Planned Refineries in Iraq Capacity (kbpd)

Nassiriya 300

Kirkuk 150

Maissan 150

Karbala 140

Total 740

Location Design Capacity (Kbpd)

Available Capacity (Kbpd)

North Refining Company (NRC)

BaijiNorth-Central Iraq 310 250

Haditha North-West Iraq 16 10

Kisik North Iraq 20 16

Kirkuk North-East Iraq 30 25

Qaiyarah North Iraq 34 28

Siniya North Iraq 30 20

Al Jazeera North Iraq 20 0

Midland Refining Company (MRC)

Daura Baghdad 185 120

Diwaniya East of Najaf 20 18

Najaf Najaf 30 27

Samawa Najaf 30 27

South Refining Company (SRC)

Basra Near Basrah 140 130

Missan South-East Iraq 30 24

NassiriyaSouth-Central Iraq 30 20

Grand Total 925 715

Baiji Refinery

0

10

20

30

40

50

60

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

Gas

dem

and

(B

CM

/yea

r)

Exports- Federal Iraq

Exports - Turkey

Other

Industrial

Power

Gas supply

18

• Turkey is natural export market in any scenario (20 BCM by early 2020s and in the long-term) – preliminary GSA

already signed

• Federal Iraq is potential export market in the right domestic political conditions

• Even with National Unity, federal Iraq will come later than Turkey because (a) politics (b) later in planning (c) lack of

Iraqi infrastructure (d) insecurity in Diyala, Kirkuk

• Baghdad/ Erbil negotiations part of ‘national program’ if there is national success against ISIS

• Key issues for Kurdistan to be viable long term supplier for Turkey & federal Iraq:

• Commercial / fiscal model

• Domestic and regional political alignment

• Iran response to competition

Degree of exports to Turkey

decided on basis of negotiations

with Baghdad

Final status of negotiations

with Baghdad & Ankara on

gas programmes

Development priorities on North &

South fields (eg: Miran, Bina Bawi,

Shaikan)

KRG: Key gas market drivers

Further non-associated gas developments

depend on geological, commercial factors