Bloomberg News

Kurdish Oil Deal Would Be Deficit Game Changer: Turkey Credit

March 10, 2013

Turkey is seeking to gain a foothold in northern Iraq’s energy industry, which would help it obtain oil and gas supplies and cut the current-account deficit.

A deal, should the government in Baghdad permit it, may allow Turkey to buy cheaper energy and earn as much as $5 billion a year in transit fees, according to Ozgur Altug at Istanbul-based BGC Partners. That would be a boon for Turkey, which pays the fourth-highest borrowing costs in major emerging markets, even as the government cut its debt burden to less than any country in western Europe except Norway and Sweden.

The Kurdistan Regional Government in northern Iraq has signed its own production agreements with companies including Genel Enerji AS, an Istanbul-based company started by former BP Plc (BP/) chief Tony Hayward, and DNO International ASA (DNO) of Norway. That’s putting provincial authorities in the KRG at loggerheads with the government in Baghdad. Turkey’s strategy involves recognition of its neighbor’s concerns over the Kurdish region’s autonomy, while at the same time dealing with officials in the north to secure its interests there.

“If Turkey’s efforts to get a foothold in Iraq are successful, it would be a huge plus,” Isik Okte, a strategist at Halk Invest, the investment unit of Turkish state-run lender Turkiye Halk Bankasi AS (HALKB), said by e-mail from Istanbul March 8. “This would result in a better current-account balance, higher growth and overall better macro balances for the economy.”

Baghdad Tensions

Turkey’s efforts are complicated by tensions with Iraqi Prime Minister Nouri al-Maliki’s government in Baghdad, which denied landing permission to Turkish Energy Minister Taner Yildiz’s plane in northern Iraq on Dec. 4.

Ties with Maliki, a Shiite, were strained after Turkey backed his opponent, the Al-Iraqiya bloc led by former Prime Minister Ayad Allawi, in the 2010 elections. Turkey has also sheltered Sunni Vice President Tariq al-Hashimi, convicted by Iraq of operating death squads. Turkish Prime Minister Recep Tayyip Erdogan personally defended Hashimi last September, rejecting calls that he be extradited and saying Turkey would host him “as long as he wants to stay.”

Overcoming those obstacles to get access to northern Iraqi oil would be a “game changer” for Turkey’s $800 billion economy, which is bigger than any other in the Middle East, according to a report by Altug, BGC’s chief economist, on March 5. “Turkey’s current-account deficit might improve by $10 billion to $20 billion, probably starting from 2014,” he said.

’Key Weakness’

The deficit was $48.9 billion in 2012, when Turkey imported about $59 billion in energy, according to Deputy Prime Minister Ali Babacan on Jan. 3. Turkey has a current-account surplus of about $11 billion when energy imports are excluded, Finance Minister Mehmet Simsek said Feb. 14.

The deficit is Turkey’s “key weakness” and a balance of payments crisis could trigger ratings action against it, Fitch Ratings senior director Paul Rawkins said at a conference in London on March 7. Fitch upgraded Turkey to investment grade in November, the country’s first such rating in 18 years.

Turkish debt retains junk ratings at Standard & Poor’s and Moody’s Investors Service even after improvement in the government’s finances. Erdogan’s government has cut the ratio of debt to gross domestic product to 40 percent from 79 percent in 2003, according to data compiled by Bloomberg. That compares with ratios of 89 percent in France and the U.K., 81 percent in Germany and 74 percent in the U.S.

Yields Rise

Yields on Turkey’s benchmark lira debt rose five basis points to 5.78 percent on March 8, completing a second week of increases, according to data compiled by Bloomberg. That’s down from as high as 11.5 percent in January last year, before the central bank began cutting the deficit from about 10 percent of GDP in 2011.

Five-year credit-default swaps to protect against a Turkish debt default dropped one basis points, or 0.01 percentage point, to 130. That’s less than the protection cost for Russia at 139 basis points, or South Africa’s 168, both of which have better credit ratings than Turkey.

The lira weakened 0.4 percent to 1.8041 per dollar at 6:20 p.m. on March 8, extending losses this year to 1.1 percent. The lira was the worst-performing major currency in 2011, when the deficit was second largest in the world, behind the U.S., at $77.1 billion.

Finding Energy

“Finding energy is the only thing that will improve the current-account deficit,” Yildiz, the energy minister, said in an interview in Ankara on Jan. 9.

Speaking at a conference in Ankara on March 7, Yildiz said Turkey respects Iraq’s territorial integrity and agrees that all oil revenues must be shared within Iraq.

“If Iraq is a whole, then there should be no difference between the north and south,” he said. “Turkey will diversify resources and routes” and “these projects will help normalize Iraq,” he said.

With stability the rest of Iraq has lacked for almost a decade, the Kurdish area has lured some of the world’s biggest oil companies, including Exxon Mobil Corp. (XOM:US), Chevron Corp. (CVX:US) and Total SA. (FP) Turkey, which borders Greece and Bulgaria in Europe and also shares a 331-kilometer (200-mile) border with Iraq, would be the natural export route if it can navigate the political tensions, according to Robin Mills, head of consulting at Dubai-based Manaar Energy.

The Kurdish region “is seeking to use its oil and gas to secure its own economic future and political autonomy from Baghdad,” Mills wrote in Insight Turkey magazine. “Given the realities of politics and geography, this makes it dependent on Turkey for export routes.”

’Official Line’

Turkey told Iraq that it won’t allow construction of a pipeline network to export energy from the semi-autonomous Kurdish region without the approval of the federal government, Iraq’s As Sabah newspaper cited Iraqi Oil Minister Abdul Kareem al-Luaibi as saying in a story published Feb. 25.

The Kurdish region plans to raise crude output to 250,000 barrels a day in 2013 and 1 million barrels a day in 2015, KRG Prime Minister Nechirvan Idris Barzani said at an energy conference in Erbil in northern Iraq on Dec. 3. Northern Iraq has potential reserves of 45 billion barrels of oil and as much as 6 trillion cubic meters of gas, according to the KRG.

Iraqi oil production swelled by 24 percent last year, catapulting the country ahead of Iran as the second biggest oil producer, after Saudi Arabia, in the Organization of Petroleum Exporting Countries.

“The official line is to seek Baghdad’s approval for all energy deals, but eventually things will evolve and we may get gas and oil flowing from the KRG into Turkey,” Naz Masraff, a London-based analyst at Eurasia Group, said in an interview in Ankara on March 7. “Turkey definitely wants to penetrate into northern Iraq’s energy sector.”

To contact the reporter on this story: Selcan Hacaoglu in Ankara at shacaoglu@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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