ANKARA Turkey has quietly built up a large presence in Kurdistan's oil and gas industry, teaming up with U.S. major Exxon Mobil, as Ankara bets on Iraq's semi-autonomous republic to help wean it off costly Russian and Iranian energy imports.
A state-backed Turkish firm was also set up in the second quarter of 2013 to explore for oil and gas in Kurdistan, according to three sources familiar with the company.
The strategy will anger Baghdad, which claims sole authority to manage Iraqi oil, and runs counter to calls from Washington for Ankara to avoid backing projects that will help the Kurds gain further autonomy.
With a ballooning energy deficit that leaves the Turkish economy vulnerable to external shocks and a booming demand for power that is set to keep growing over the next decade, Turkey has been working to cut the costs of its oil and gas imports.
Kurdistan's huge energy potential has been hard to ignore, and Turkey's courtship of Iraq's Kurds, a strategy driven by Prime Minister Tayyip Erdogan, is beginning to pay off.
"When you have such an energy deficit and you have such a big potential on your border, you can't let Baghdad or anything else get in the way," said one of the sources familiar with the new state-backed company, a Turkish industry figure close to the deals in Kurdistan. "You have to find a formula and make sure this oil flows through your country."
The Arab-led central government in Baghdad, at odds with the Kurdish-run enclave over control of oilfields and revenue sharing, has repeatedly expressed its discontent.
It has warned that independent Kurdish efforts to export its oil could ultimately lead to the break-up of Iraq.
But neither calls from Baghdad nor Washington have been enough to deter the Turks, the Kurds or the oil companies. Exxon, Chevron and Total have already signed exploration deals with Kurdistan.
Semi state oil firm TPIC and state pipeline operator Botas have stakes in the new state-backed company, which has entered a dozen exploration blocks in Kurdistan, including several fields where Exxon is already present.
It is also negotiating a gas purchasing deal with Kurdistan, said the sources familiar with the company. Exxon Mobil declined to comment for this story.
Turkey's ambition to play a bigger role in Iraqi Kurdistan's energy prospects comes at a time when it is also negotiating a fragile peace process with Kurdish militants on its own soil to end a three-decade long bloody dispute.
Divided mostly between Iran, Turkey, Iraq and Syria, the Kurdish people are often described as the largest ethnic group without a state of their own.
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Turkey's involvement also stretches to a new KRG pipeline that is almost complete and will allow the Kurds to export their crude from the Taq Taq oilfields straight over the border to Turkey without having to wrangle with Baghdad over payments.
The pipeline will link with the existing Kirkuk-Ceyhan pipeline on Turkish soil, rather than in Iraq, thus bypassing Baghdad, according to the latest plans.
Last year, Kurdistan stopped exporting 200,000 barrels per day (bpd) of crude through Iraq's federal pipelines due to a revenue-sharing dispute and instead started trucking smaller amounts of oil to Turkey.
The semi-autonomous region has ambitious plans to raise exports to more than 1 million bpd by the end of 2015 or over 1 percent of global supplies.
The sources say the pipeline is almost complete and will start pumping around 200,000 bpd at the end of the year. Turkey consumes around 700,000 barrels of oil daily.
OPEC member Iraq's oil may have long been the focus of attention, but for Turkey, gas could have an even greater appeal.
Turkey is set to overtake Britain as Europe's third biggest power consumer in a decade. It buys natural gas from Russia, Iran and Azerbaijan and liquefied gas from Nigeria and Algeria for use mainly in power generation.
"For Turkey, securing natural gas from fields in northern Iraq, where Turkey will also be a partner, is of utmost importance. There has been big progress on this issue," said one of the three sources, a Turkish official close to the talks.
Two of them said the state-backed Turkish company was looking to finalize gas purchasing deals with KRG in the coming months.
KRG Energy Minister Ashti Hawrami said this year Kurdistan was planning to export the first gas to Turkey by 2016.
About a dozen Turkish private companies have applied to Turkey's energy watchdog EPDK to obtain a license to import gas from Iraq. Turkey's daily gas demand stood at 125 million cubic meters in late 2012 and is likely to rise to nearly 220 million during the harsh winter months, energy ministry officials say.
"It is actually a gas game. The main reason why Turkey is taking this political risk in Iraq is because of the appealing gas resources," said the industry source.
(Additional reporting by Orhan Coskun; Editing by Nick Tattersall and Will Waterman)