Iraq's fractious politics weigh on oil sector
Fears that country is teetering on the brink of civil war and the increasingly poisonous relations between Baghdad and Erbil may stymie Iraq's ambitions to boost crude production
The deterioration in Iraq's politics is a growing threat to its stability and may hamper bullish forecasts for its oil production, including hopes that the country will add another 600,000 barrels a day (b/d) to supply this year, believe industry executives and analysts.
Opec pegged Iraq's output at just over 3 million b/d in December, a dip from more than 3.2m b/d a month earlier. Since then, growing civil protests against prime minister Nuri al-Maliki, which on 25 January led to the Iraqi army killing five protestors in Fallujah, and further disintegration in relations between the Kurdistan Regional Government (KRG) and Baghdad have prompted fears that Iraq may be on the edge of a civil war. The government has said it wants production to rise to 9m b/d in the next decade, 3m b/d less than targets set in 2009. It is in the process of renegotiating production targets with operators at the mega-projects in the south. The International Energy Agency said its own forecasts, which see output reaching more than 6m b/d by 2020, depend on "consensus" and political stability in the country. Such stability is sorely lacking as a political crisis in Iraq looms ahead of provincial elections later this year. Civil war is growing likelier by the day, said senior figures at a conference at Chatham House, a UK think tank. Opposition politicians say Maliki's government is growing increasingly authoritarian and are now openly calling for "regime change" in Iraq, while likening protests against the prime minister to those that have unseated leaders elsewhere in the Middle East and North Africa. "This is Iraq's Arab Spring," said one senior politician in an off-the-record briefing in London in late January. At the same time, friction between the KRG and Baghdad continues to worsen, hitting the region's - and Iraq's - oil production. The central government has withheld payments to Kurdistan's oil producers, prompting them to shut in almost all exports. Ashti Hawrami, the KRG's oil minister, told reporters in London on 29 January that the region's output would not rise significantly until the payment issue was resolved. "Every single company [operating in Kurdistan] would rather leave oil in the ground than produce it under Baghdad's management," he said. Senior KRG officials are now also calling for the break up of the State Oil Marketing Organisation (Somo), the centrally controlled firm that has a monopoly on Iraq's exports. The KRG had 250,000-270,000 b/d available for export, out of 400,000 b/d production capacity, "but that is simply not going anywhere because the Iraqi government negated on its promises to pay", said Hawrami.
BP on the frontline
Hawrami also warned BP that it should stay clear of Kirkuk, which lies in disputed areas between Kurdistan and the rest of Iraq.
The Baghdad government says BP has agreed to help Kirkuk output more than double to 600,000 b/d, although the deal is only a preliminary one. "BP can come and advise anyone they want," said Hawrami. "But physically to do an agreement and come and work in Kirkuk is unacceptable." He said the governor of Kirkuk agreed and added that a "smart company" like
BP "would not wish to be an "instrument to be used by Baghdad" or put itself in the "frontline of a dispute". The KRG and the Iraqi central government have in recent months amassed military forces in disputed areas between Kurdistan and the rest of Iraq. Efforts to calm the situation have foundered. Growing discontent between the KRG and Iraq is underlining the KRG's need to begin its own direct oil exports to Turkey, the regional government believes. "Either we have an independent way to the market and we can sell [our oil]," said Hawrami, "or Baghdad comes to its senses and pays its part of the agreement". Meanwhile, Hawrami said he was negotiating with more oil majors seeking entry to the region's upstream - another move that will enrage Baghdad, which says the KRG's unilateral oil deals are illegal. Hawrami would not comment on his talks with Turkish investors, believed to include state pipeline firm Botas, covering a wider-ranging deal involving upstream investment and export infrastructure. Construction of Kurdistan's own pipelines - probably involving investment from Genel Energy, a Turkish firm with a large position in the region's upstream - would "soon" support exports of 1m b/d through Turkey. Pipeline export capacity would double later to handle heavy oil exports. Kurdistan recently began trucking small volumes of crude oil and condensates across the border to Turkey. Crude-oil shipments have been temporarily suspended while Kurdistan adds metering and monitoring facilities at the border, said Hawrami. They would resume in February at a rate of around 20,000 b/d of crude oil and 15,000 b/d of condensates. The KRG says all income from the sales is handled under constitutional terms that grant it 17% of oil revenue. Nonetheless, the exports, and Kurdistan’s wider independent sales plan, enrage Maliki’s central government, which says Kurdish exports are illegal unless handled by by Somo.
ExxonMobil on another
Insiders believe the central government is also trying to hamper Kurdistan’s upstream by re-opening negotiations with ExxonMobil over its contract at the West Qurna-1 mega-project in the south.
The US supermajor angered Baghdad in 2011 by signing a deal with the KRG for six upstream blocks, including three in the disputed areas. Hussein al-Shahristani, the deputy prime minister with oversight of Iraq’s energy policy, said in November that ExxonMobil must sell its stake in West Qurna-1 by the end of 2012.
"Every single company [operating in Kurdistan] would rather leave oil in the ground than produce it under Baghdad's management"
However, a recent meeting between Maliki and ExxonMobil chief executive Rex Tillerson has led to speculation that the company may abandon or freeze its KRG ventures if sweeter terms are offered in the south. Shahristani insists ExxonMobil must choose between Iraq and the KRG. “Let’s put it this way, Tillerson and Maliki aren’t meeting to sign the divorce papers,” said one insider.
Hawrami said the KRG’s relations with
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