Pipeline, Politics and Power

“ISARR Insights”

The first in a new series in which we discuss current topical events and highlight ways in which the ISARR system can help to to reduce risk and increase opportunity for competitive advantage.

Iraq is awash with oil.  Federal Iraq estimates it has 150 billion barrels of reserves, with some 45 billion in the semi-autonomous Kurdistan.  Kurdistan has enough oil production to supply a 200,000 bpd pipeline to Turkey which would generate some $20M per day in revenue.

However, a major challenge, over and above the problematic security environment, is that there is insufficient pipeline capacity to export the crude to market.

There is therefore a surge of both domestic and international activity in the downstream to create a pipeline network that would allow the Kurdistan Regional Government (KRG) to export oil to Turkey, and then to the lucrative crude markets – although this is fraught with both political and security difficulties.

Chief Executive Officer Tony Hayward of Genel Energy Plc – the former head of BP Plc – anticipates just such a pipeline will be completed by mid-2013.

In an interview with Bloomberg he said: “The conversion of an existing gas line to an oil line can get nine-tenths to the Turkey border” and the rest of the capacity will be newly built. “They’ll have that infrastructure by the middle of the year.”

Such a pipeline would allow the KRG to circumvent export controls imposed by the Ministry of Oil in Baghdad and ship the oil directly to Turkey.

This is a hugely attractive option for companies such as DNO International, ExxonMoil and Genel Energy, all of which are embroiled in disputes between the KRG and Baghdad.

It is worth noting that a gas pipeline that will link Taq Taq in Kurdistan with the Iraq-Turkish pipeline at Fishkabur is under construction. This could potentially supply several hundred million cubic feet of natural gas a day to Turkey.

TPAO – Turkey’s national oil company – would be heavily involved under this arrangement whereby it would acquire the rights to five exploration blocks in Kurdistan.

Genel announced in February 2013 the pipeline was expected to reach the town of Duhok – some 40 km from the Turkish border – in summer 2013.  Genel hopes to boost Taq Taq’s capacity to 200,000 barrels a day – and with it a huge rise in revenue.

These pipelines would also give Turkey market entry into the sub-regional energy sector.  Ankara has already informed Baghdad that it is ready to construct new pipelines to transport oil from Kurdistan, which has signed a commercial agreement with Turkey based on its constitutional right to 17% of Iraq’s oil revenue.

In April 2013, industry sources reported crude from the Taq Taq oilfield was transported by truck to Turkey and sold via tender for loading.  Media reports also say that the cargo sold was 30,000 tonnes – or in cash terms – some $22M worth of oil.

Turkey and the KRG initiated direct crude swaps in return for refined oil products when Baghdad decided to withhold payment for oil from the federal Iraqi budget, due to Irbil’s perceived political intransigence. On 7 Mar 13, the Kurds only received $646M of the $3.5B billion they requested under the terms of the 17% payment agreement.

The KRG believes that they are in full compliance with the Iraqi Constitution, which mandates that the Kurds are to receive 17% of all Iraqi oil export revenues. That would be a huge sum of money – and far more than the KRG would make by exporting crude to Turkey by truck.

The oil and gas pipelines are therefore not only a conduit for crude oil, but they are also an economic escape route for an increasingly restive KRG as it would become economically self-sufficient with enough cash in the bank to be independent — if it indeed decides to go down that political road.

This is not without both major political and security risks – pipelines in Kurdistan are regularly attacked by extremists, which stop oil transfer between the countries, and impacts on the revenue generated by sale of crude.

Politically, the Kurds and Turks will therefore be watching for the reaction from Baghdad very carefully – as will Washington.

ISARR’s View

Quantifying risk and mapping that risk to critical assets and regions will be vital to maximising the potential of any new venture.  It is crucial to avoid static risk assessment models to adequately manage this sort of risk. ISARR links changes in the external and internal environment, to provide a dynamic and continuous way to quantify and assess risk; this enables real-time risk management strategies to be deployed to manage the risk

Threat Actors, Risk and Critical Assets

By mapping the pipeline within ISARR, we can begin to assess the areas of critical concern. The system enables you to see the pipeline as a whole, segmented by section for additional clarity. Each section of the pipeline can be allocated a profile page and a criticality rating within the business framework. Each section essentially becomes a stand-alone asset, yet linked to the other sections as dependencies. This enables us to assess any change in threat types or severity, as the pipeline moves through complex environments. A fully configurable threat register can be assigned to each section of the pipeline, with the corresponding Risks available on the asset profile page shown by impact and probability. Any notable risks are pulled from the threat register and automatically shown as a top line summary on the asset front page. The assessment of threat often includes the use of historic data, to provide background information to the likelihood of an event occurring. ISARR has the ability to introduce your incident reporting categories as threats within the threat register, by doing so, linking two of the most vital pieces of information into one usable visual interface; we can map any increase in the number of incidents, to increased likelihood, providing evidence based assessments.

There’s no need for multiple reports to gain an overview of the Risk and the changing levels of risk on a daily basis. Any change or emergence of new threats can be quickly communicated throughout the business, with immediate results in the risk profile.

This real-time information can be used to target spending by quickly identifying the assets most critical to the business and more importantly the levels of risk associated with each asset, from a single interface; A single graphical representation of the areas of business operations, backed by data segmented and tailored to your operational framework can give you an up to the minute overview as well as pinpoint detail by asset, incident category or geography to target your risk mitigation activities.

To find out more about how ISARR can help you manage risk more effectively, email your questions to solutions@isarr.com  and have a look at our system capabilities