A long-term oil law, the making or breaking of Iraq

“This deal cannot solve all the problems currently but it is considered a good step,” Kurdish Prime Minister Nechirvan Barzani

One of the greatest items of contention in Iraq has been a formula to share its immense oil wealth amongst its distrusted and fragmented ethno-social mosaic. Since oil was discovered in Iraq almost a century ago, it has been akin to more of a curse than a blessing for the ordinary people.

It’s difficult not to imagine what Iraq would have been like today if its oil wealth was not in the hands of tyrants and those who have abused Iraq’s treasure.

Kurdistan oil is home to estimated 45 billion barrels of oil and trillions cubic feet of gas, yet ironically the Kurds have seen the oil in the past used to purchase arsenal in their repression them and destroy their villages and livelihoods. It is a little wonder that the Kurds were keen to muster a level of autonomy on their energy reserves as part of the Iraqi constitution negotiated in 2005.

Although, the Iraqi constitution has clear stipulations around oil exploration, revenue sharing, export and control of federal regions, oil has been a contentious thorn in relations between the Kurdistan Regional Government (KRG) and Baghdad.

Oil minnows have flocked to the region as the early pace-setters and for the like of Gulf Keystone Petroleum, Addax, Heritage Oil, Western Zagros, Genel Energy and many more, the early bird really does catch the worm. Such is the spectacular promise and potential of energy in Kurdistan that akin to a rags-to-riches story, juniors have become majors in their own right almost overnight.

Oil giants coming off the fence

Any oil company anywhere in the world would have been misguided not to see the unravelling of the newest and perhaps last global oil frontier before their very eyes. However, while some smaller companies jumped in with both feet at the rewards and the lucrative terms of the Production Sharing Agreements (PSA) on offer, oil majors, while licking their lips at what was on offer, sat on the fence to preserve their interests and contracts further south and to appease Baghdad.

In spite of Baghdad’s fierce rhetoric against the KRG deeming their contracts signed with foreign companies as “illegal” and sending stern warning to oil companies, oil majors could simply no longer remain idle.

A spate of oil majors such as Chevron, Total and Gazprom have recently joined the fray with ExxonMobil’s oil deal a little short of a year ago serving as the ice breaker. Whilst from 2003 onwards there was a rush of juniors, now there appears to be a rush of majors keen not to lose out on the limited spots remaining at the Kurdish oil counter. Royal Dutch Shell is the latest major rumoured to be in discussions with the KRG which will serve as another symbolic feather in the cap for Kurdistan.

The possibility of Shell signing an agreement with Kurdistan, after twice coming close in the past before pulling back, comes as Baghdad continued to threaten ExxonMobil this week. As part of the timelines of the PSA with the KRG, ExxonMobil is starting logistical preparations to dig its first exploration well.

In reality none of the oil majors need to be reminded about the threats on offer, they are all fully aware. Furthermore, they have first class law teams and their confidence in the legal dealing with Kurdistan is a major endorsement to KRG policies. The fact that Baghdad effectively asked these companies to take sides makes the feat all the greater.

ExxonMobil has a major interest in the southern lucrative West Qurna-1 oilfield and Shell has its supergiant Majnoon field in addition to a multibillion gas venture.

But just what can Baghdad do to actually implement their threats? What would be left for Baghdad if it blacklisted all these oil majors? Simply put, Baghdad will do some sabre-rattling but ultimately it can’t afford to shoot itself in the foot and lose out.

Resolution over oil payments

The Kurdistan oil export taps have been frequently used in recent years for political gains, threats and concessions. While the production rate has been modest, it has the potential to significantly ramp up output.

Last week an agreement was ratified between the KRG and Baghdad ensuring that oil exports could continue and a dispute over oil payments could end with the Kurdistan receiving 147,000 barrels of oil products per day.

Lack of payment to foreign oil companies in Kurdistan and the stop-start nature of oil exports and thus oil revenues for these companies has been the only major blemish in an otherwise spectacular rise of the Kurdistan energy sector.

Kurdistan will keep export at around 140,000 bpd per day this month before ramping up to 200,000 bpd for the remainder of the year. In turn, Baghdad would pay around $857 million owed to foreign companies working in Kurdistan.

“It was agreed to form a permanent committee to follow up on the terms agreed, and give the committee authority to resolve any obstacles blocking implementation,” a KRG statement confirmed.

This committee is perhaps the most important step of all. If any side has any reason to doubt any elements of the oil revenues or the activities of any party, including foreign oil companies, then it must address them legally, politically and with clear audits, accounts and evidence to eliminate any doubt, accusations or grey areas.

While this agreement serves as a major relief or in the words of KRG Oil Minister Ashti Hawrami “a big breakthrough” and a promising step towards a new oil law, it is hardly comprehensive and may serve as another false dawn.

The bones of contentions stretch much deeper than just payments to oil companies. The question of federal autonomy and more importantly territorial disputes are etched much deeper. The issues of oil, article 140 and disputes territories and KRG foreign policies are very much intertwined.

Baghdad’s last remaining grip on Kurdistan is in the oil sector. It was naturally alarmed with the signing of landmark oil exportation deals between the KRG and Turkey in recent months. With the proviso of an independent oil pipeline under implementation, Kurds have much more control over the energy sector.

The national hydrocarbon law has stalled since 2007 and without formal ratification of an oil sharing law the Iraqi energy sector will remain rocky at best.

Iraq’s oil infrastructure is in urgent need of revitalisation and Iraq is in urgent need of additional revenue for it’s much needed and delayed reconstruction.

Oil for all of Iraq

Ironically, whilst Baghdad has accused the Kurds of manipulating its oil reserves, the oil in Kurdistan belongs to all of Iraq. The KRG has made it clear from the outset that they will abide by the 17% ratio agreed with Baghdad.

It is outdated mentalities that prevent Baghdad from realising that should Kurdistan gain then so does the whole of Iraq. Arab nationalists are quick to remind Kurds that Kurdistan is actually on Iraqi soil but then by the same token, treat Kurds like they are trespassers on their own soil, even if the Kurdish rise to prominence is essentially a major gain for all of Iraq

Kurdish oil exports and payments of foreign companies was actually on the of key prerequisites of the Kurdish political parties supporting Iraqi Prime Minister Nouri al-Maliki and joining the coalition and thus there was already agreements in principle, but in Iraq agreements are not always worth the paper they are written on.

The successful passing of a national oil law in Iraq could be the making or breaking of Iraq such is the immense oil resources Iraq has at stake. If it was not for oil, Baghdad would have given disputed Kurdish territories back to the Kurds many months ago, would have implemented article 140 and would not have implemented its Arabisation policy in the first place.

First Published On: Kurdish Globe

Other Publication Sources: Various Misc.

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