Kurdistan Regional Government Still Seeking Oil Contracts

Stephen DeAngelis

November 29, 2007

In early October, I wrote a post about the frustration politicians in Kurdistan are feeling because of the sluggish progress being made elsewhere in Iraq [Tensions Mount with Uneven Iraqi Development]. The event that prompted that post was the signing of an oil deal between the Kurdish Regional Government signed and Hunt Oil of Dallas, TX. Despite objections from both the Iraqi central government and the Bush administration, Kurd politicians continue their pursuit of additional contracts [“Kurdish Ministers Woo U.S. Oil Firms,” by Stephen Mufson, Washington Post, 28 November 2007]. Mufson reports that Omer Fattah Hussain, deputy prime minister of the Iraqi Kurds’ autonomous region, and Ashti Abdullah Hawrami, the Kurdish regional oil minister, have been in the U.S. cozying up to oil companies.

“After more than a year of political deadlock in Iraq over a national petroleum law, the Kurdistan Regional Government unanimously adopted its own petroleum legislation in August. In the past month, it has signed a dozen oil exploration contracts and hopes that foreign firms will ultimately invest $10 billion in the oil sector and bring 1 million barrels a day of new oil production from the Kurdish region over the next five years. … Hawrami said the contracts posed no conflict with Iraq’s federal constitution. The Iraqi central government, however, is irate over the Kurdish contracts — and the State Department isn’t happy either. The Bush administration has been striving mightily over the past year to get a national petroleum law approved before international firms jump in. In addition, a group of 60 Iraqi oil professionals signed a letter saying that the recent Kurdish contracts were a ‘dangerous step that has no legal or political standing whatsoever.’ Iraqi oil union leaders have also opposed the contracts.”

With so much opposition, the fact that Kurdish leaders continue to sign contracts underscores their frustration with the Iraqi central government. For its part, the central Iraqi government is threatening retaliation against any oil companies that negotiate with the Kurds.

“Earlier this month, Iraqi oil minister Hussein Shahristani called the deals illegal. He warned that foreign oil companies that sign contracts with the Kurdish authorities without central government approval risk retaliation when seeking stakes in the bigger oil prospects in the southern part of the country.”

Although such threats don’t help the situation (and they reinforce Kurdish feelings that their Arab neighbors are still out to get them), oil companies have to take them seriously because there is much more money to in southern Iraq than in the Kurdish region.

“There are 51 known but undeveloped fields in Iraq. Several major international oil companies have been talking to Baghdad about resuming work in the same giant southern fields where they had worked when Saddam Hussein was in power. And the central government indicated to them that it might rely on Hussein-era oil laws or offer service contracts if the new petroleum legislation is delayed, according to Kamal Field Aldasri, an economic adviser to the Iraqi government. Aldasri said recently that the central government wants help in finding ways to boost output at the 27 operating oil fields throughout Iraq, which are producing well below their potential. The Kirkuk field, for example, used to produce almost 1 million barrels a day and now produces less than 200,000. The government’s aims to boost production from the current 2.2 million barrels a day to 3 million, though it is running far behind schedule.”

For the moment, most oil companies are watching from the sidelines and providing timely advice when requested.

“The major oil companies have been giving advice, reviewing data and training Iraqi oil workers — without compensation. Royal Dutch Shell Group, for example, is drawing up a master plan for tapping for domestic consumption the more than 600 million cubic feet a day of natural gas now being burned off. Exxon Mobil, Chevron, BP and Total are also doing technical studies, industry sources say. But given political uncertainty, legal disputes and security risks, the big international firms are not prepared to reenter the country with their own personnel.”

Mufson reports that large oil companies are likely to shun Kurdistan until a national oil policy is adopted because the size of potential Kurdish oil fields is too small for them.

“Smaller firms, however, have rushed to sign exploration and production contracts there. They include affiliates of Russia’s Alfa-Access-Renovo group, India’s Reliance Industries, the Korea National Oil Corp. and Austria’s major oil firm, OMV. Asked about the absence of major oil companies, Hawrami said TNK-BP had signed a contract. BP said that it was not involved but that its Russian partner had entered the agreement on its own.”

Large U.S. oil companies are also likely to shun Kurd advances because the Bush administration is pressuring them to work through the central Iraqi government.

“In a … meeting with the Washington representatives of major oil companies, two State Department officials insisted that the Bush administration’s policy was that U.S. companies should not sign separate deals with the Kurdistan Regional Government without approval from the central government in Baghdad. According to one person at the meeting, the officials warned that some of the blocs being offered by the Kurdish government lay outside its territory and might extend into Turkey or Iran. While conceding that the Hunt deal did not violate any U.S. law, they said it created an ‘unfortunate and untimely’ impression that the U.S. government was changing its position on the need for a national petroleum law.”

One of the challenges created by separate Kurdish oil deals is that the terms they are setting could differ from the terms required by a national petroleum law.

“Some Iraqis accuse the Kurdish regional authorities of giving overly generous terms to foreign oil companies in production-sharing agreements. In those agreements, a foreign firm takes on all the risk of exploration but gets a share of production if it finds oil. Hawrami said the foreign firms would get no more than 15 percent of production under recent contracts and less if the regional government chooses to take a one-quarter stake in the venture after oil is found. He said contracts in relatively peaceful areas would offer smaller percentages to foreign companies.”

Whatever Kurdish oil resources are developed, they will flow to market through a pipeline that runs through Turkey. As I’ve noted before, despite Turkish disagreements with PKK rebels operating from Kurdish territory, Turkey and Kurdistan enjoy a symbiotic relationship. The oil pipeline is just one manifestation of that relationship. While there may be a bit of “thumbing the eyes” of the central Iraqi government for past injustices in the KRG’s pursuit of oil contracts, it pales in comparison to the burning desire of KRG leaders to develop their resources and stimulate their economy. I see this desire every time I visit Iraq. My company, Enterra Solutions®, has recently concluded a number of strategic alliances that will help it implement our activities there. In addition, the company recently announced it will open an office in Erbil and today it announced today that a contract is now in place for Enterra Solutions to provide business-to-business and business-to-consumer trading exchange services to Iraqi companies. The road ahead remains long and the challenges many, but everything is headed in the right direction.