One of the main topics of contention between the KRG and Baghdad has been agreement on a national hydrocarbon law, format of oil sharing and specifically the ownership and jurisdiction of huge oil discoveries in the Kurdistan Region.
As the number of oil companies flocking to the region has steadily grown in recent years so has the general anger and animosity from Baghdad. However, with hopes of reaching a breakthrough on the elusive national hydrocarbon law dashed earlier this year were a draft oil and gas law was rejected in parliament, the Kurds have continued the development of their region and in particular their oil sector at speed.
Whilst major oil giants have stayed out of the Kurdistan scene for fear of upsetting Baghdad and potentially losing a greater slice of the cake further south, things took an unexpected and historic turn this week with the announcement that oil giant Exxon Mobil had signed a milestone oil contract with the Kurdistan Region to explore six fields in the region.
Dubbed as the “last major oil frontier”, the broad global interest and world class oil discoveries has put Kurdistan firmly on the map, however, the region as well as the smaller players have been eagerly awaiting the entry of the big actors that will undoubtedly change the tide.
The oil giants may have stepped aside and let the minors run the show in Kurdistan to date but it has become increasingly evident that as time passes by and with little sign of a breakthrough in the ratification of a commonly accepted oil law, those who linger in the background will lose out greatly in the long run. As the widely acknowledged last frontier, oil companies must arrive first or arrive too late.
The deal with Exxon Mobil may have been drawn on an economic basis but certainly the political ramifications echo a lot louder. In the short-term it makes reconciliation with Baghdad that much more difficult but ultimately as oil giants wane into the equation, finding resolutions with Kurdistan have to be taken a lot more seriously and Baghdad will have no choice but seek concord.
Almost inevitably the deal sparked immediate condemnation from Baghdad, with Deputy Prime Minister for Energy Affairs Hussein al-Shahristani, a long-time nemesis of the Kurdish position on oil, giving Exxon Mobil the choice to either work on the West Qurna fields in the south or on the fields in Kurdistan whilst deeming such contracts with the Kurdistan Regional Government (KRG) as illegal. “Exxon has violated the ministry directions and instructions concerning the companies working in Kurdistan,” said Abdul-Mahdy al-Ameedi, director of the oil ministry”s contracts and licensing directorate.
However, the greater significance is Exxon Mobil”s choice in essentially siding with Kurdistan. They knew very well what Baghdad”s response was likely to be having been warned a number of times during the negotiations with the KRG and the fact they risked their involvement in the development of the 8.7-billion-barrel West Qurna Phase One oil field in the south speaks volumes. They knew the consequence in drawing the wrath of Baghdad but still saw a stronger attraction to Kurdistan.
According to sources, Washington had warned Exxon Mobil”s about the risks of striking any deal with the KRG amidst a backdrop of hostility from Baghdad. In reality, such a deal would not have been possible without the consent of the US government. As oil giants are made to take difficult positions in ongoing friction between Baghdad and Erbil, increasingly global powers such as America would also need to take a position on the matter one way or another. Either way, standing on the side-lines politically or economically as the years ensue and progress is protracted at best in Iraq will serve no side.
As the feuds continue between Baghdad and Erbil, unless Baghdad can finally find a long-term resolution, more and more firms will have to choose between Kurdistan and Iraq. In this manner, the issue is not over Kurds of Iraq or over a federal region of Iraq but almost between two states – Kurdistan and Iraq.
With the discovery of huge oil reserves in recent years, the region is beginning to realise its much anticipated potential. With reserves of up to 45billion barrels of oil and a booming infrastructure, Kurdistan is becoming a force within its own right, with or without Baghdad.
Ironically, Shahristani is no longer the Iraqi Oil Minister but has continued to maintain a hard-line on Kurdistan oil projects on what has become more of a personal battle than a federal power management dispute. A key condition for the Kurdish support for the current Iraqi Prime Minister Nouri al-Maliki”s coalition was a ratification of oil contracts signed by the KRG with dozens of oil firms. Although, exports have resumed, it is by no means at the capacity that Kurdistan can produce and frosty relations have continued with disputes over payments to foreign firms under PSC agreements blighting any short-term gains.
At the same time as the announcement of the Exxon Mobil deal, KRG Oil Minister Ashti Hawrami confirmed that they were in talks with another two major oil companies which would bolster the region further.
However, on the back of the major fallout surrounding the Exxon Mobil deal, it was reported that Royal Dutch Shell Plc, who were rumoured to have strong interest in the Kurdistan Region, had decided to pull out of oil exploration and development talks with the KRG. This was clearly a ploy to protect its lucrative investments in southern Iraq much to the disappointment of the Kurds.
Either way, even if no other oil giants join the Kurdistan arena in the foreseeable future, a major taboo has been broken. Baghdad”s continued stance towards deals brokered by the KRG and its seemingly lack of enthusiasm to see KRG prosper ahead of the rest if Iraq, places the already fragile coalition in Baghdad into further doubt.
As Kurds become increasingly disillusioned with Baghdad over oil disputes and territorial disputes that shows no signs of progress, they are more likely than ever to take matters into their hands. As witnessed with Exxon Mobil and encouraging diplomatic support from abroad in the stand-off with Baghdad, other entities will increasingly support Kurdistan in its strategic goals and the fulfilment of its immense potential.
Tony Hayward, the former chief executive of BP and now the head of Genel Energy, voiced his support for the deal while the UK government simultaneously waned into the dispute. Michael Aron, the UK ambassador to Iraq, urged both parties to resolve longtime differences and end the heightened uncertainty for those signing contracts in Kurdistan.
Many expect a continuation of mergers and consolidation of the oil sector in Kurdistan. As oil minors make increasingly lucrative discoveries, the chances of them combining to become majors will become an increasing reality. Just this week Norway”s DNO announced it was open to partnerships, with Turkey”s Genel Enerji touted as a potential partner.
The Kurdistan Blocs Coalition (KBC) in the Iraqi parliament strongly criticised Shahristani”s stance on the oil deal with Exxon Mobil, while the KRG were quick to point out that the deal was good for all of Iraq.
After all, if Baghdad truly sees the Kurds as partners and the Kurdistan Region as an integral component of Iraq, then why should the prosperity and advancement of Kurdistan be such an issue for Baghdad?