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Kurdistan plays hardball with Iraqi government over oil

The semi-autonomous Kurdistan Regional Government is pressing home the advantage opened up by the Iraqi power-sharing agreement, reports James Gavin

Oil and gas map of Iraq

WITH a power-sharing deal all but secured, Iraq is alive with expectation that prime minister Nouri al-Maliki will focus efforts on ending the long-standing oil dispute between Baghdad and the Kurdistan Regional Government (KRG).

Already, the Kurds appear on the verge of having won a significant scalp in the haggling process over cabinet seats, with the likely removal of KRG bête noire Hussein al-Shahristani as oil minister – although he is tipped to retain a role in overseeing energy policies as deputy prime minister for energy affairs. Under the proposals, the new deputy prime minister will oversee the ministries of oil, electricity and transport, although the job's precise remit has yet to be worked out.

As the oil ministry is traditionally used as a bargaining chip by Iraqi power brokers, the sidelining of the controversial Shia oil minister – widely distrusted in the Kurdish north after years of bitter rows over the legitimacy of the Kurds' signing of oil contracts with international oil companies (IOCs) – could help to keep the KRG on board in a governing coalition.

The KRG's fingerprints are all over the new political agreement. Negotiations on the deal, forged on 10 November, which paved the way for the formation of a unity government under the incumbent Maliki, started out in Erbil under the auspices of KRG president Massoud Barzani.

There are other encouraging portents for the Kurds. The recent announcement that the 2011 Iraqi national budget includes exports of 150,000 barrels a day (b/d) of Kurdish crude suggests the KRG has managed to wring important concessions from Maliki in exchange for supporting the government. The Kurds say they are ready to begin exports of 100,000 b/d, from the Taq Taq and Tawke fields, the latter already plumbed into the Kirkuk-Ceyhan northern export pipeline. Output is scheduled to rise to 150,000 b/d by end-2011.

The big question is whether the Kurdish exports can restart without the signing of a new Petroleum Law. Kurdish exports were halted by Shahristani over objections to the KRG claiming exclusive rights to sign production-sharing deals with IOCs. Powerbrokers in Erbil and Baghdad were also at loggerheads over how to pay operators in Kurdistan.

To kick-start exports ahead of a definitive Petroleum Law that would clarify the provinces rights' to sign oil contracts, the two sides could agree an interim deal under which exports resume. But that might not prove so easy to accomplish. The KRG and the oil ministry would still have to hammer out a payment mechanism for oil companies operating in the north. The existing uneasy compromise has seen State Oil Market Organisation (Somo) collect revenues from Kurdish production, but IOCs claim they are still owed up to $0.5bn by Somo.

KRG natural resources minister Ashti Hawrami is not pulling any punches in pushing Kurdish demands. Addressing a London conference in early December, he insisted that new petroleum and revenue sharing laws would have to be signed by June 2011 as a condition of Kurdish participation in the new Iraqi government.

He also demanded that there should be no more blacklisting of oil companies by the oil ministry in Baghdad for signing deals. The 37 contracts signed by the KRG with IOCs would stand under Iraq's new oil law, Hawrami confidently asserted.

This is no mere bluster. In the past couple of months, some credible new players have signed production-sharing contracts (PSCs) in the KRG area. In October, the US' Marathon Oil signed contracts for operatorship and an 80% stake in the Harir and Safen blocks, north-east of Erbil and has also been assigned working interests in the Atrush and Sarsan blocks, northwest of the city (see p16).

Senior officials in Baghdad say the Petroleum Law is at the top of the in-tray. "Among the next government's priorities will be to push the long-awaited oil and gas law through parliament," government spokesman Ali al-Dabbagh told a press conference in London in early December.

That will also hinge on the KRG's willingness to compromise on its list of 19 demands circulated as conditions for their support for any Baghdad government. The Kurds' hard-line stance includes securing a veto over ministerial appointments and the power to dissolve government if it refuses "to abide by the terms of the programme agreed upon".

These demands will cause headaches in Baghdad, even if Shahristani is put out on gardening leave. Any deal would also have to pass through new power-sharing institutions. As part of the power-sharing pact, a National Council for Strategic Policies has been formed to oversee all big decisions, including in the oil and gas sector (see p5). This will require an 80% majority for any decision to be rubberstamped – a sure-fire recipe for stalemate if recent history is anything to go by.

It has yet to be seen whether the Kurds' arch-foe Shahristani so readily accedes to his ousting from the oil ministry position. He remains close to the prime minister and is generally well regarded in Baghdad as a long-standing opponent of Saddam Hussein. One theory is that the oil minister will not take on the new role of deputy prime minister with responsibility for energy affairs unless he has a direct say in oil-ministry decision making.

If the Kurds secure the political green lights they are seeking, there is scope for optimism about the north emerging as a short-term driver of Iraq's production growth. The entry of players such as Marathon is a clear morale booster for the KRG and those firms already operating in the north have successes to show for their efforts over the past year. Norway's DNO has tripled production volumes from Tawke from 5,817 b/d in third-quarter 2009, to an average 18,462 b/d in 2010.

The Kurds have claimed eight new oil discoveries over the past three years, while the 37 PSCs promise up to $10bn of investment – largely for exploration and production. Downstream, three new Kurdish refineries have been commissioned with a combined capacity of 200,000 b/d.

Gas: a potential game changer

Natural gas has also emerged as a potential game changer for the KRG, which estimates gas resources in northern Iraq at up to 200 trillion cubic feet (cf). Hawrami told a conference in Istanbul in October that the KRG could pump 1bn cf/d, exporting around two-thirds of this to neighbouring Turkey. These supplies would be based on production from the Khor Mor and Chemchemal gasfields, as well as fields in the Dohuk area (PE 10/10 p40).

Given their important role in the new political dispensation in Iraq, the Kurds' hardball negotiating techniques could yet yield fruit. The June 2011 deadline set by Hawrami at least provides a timetable for action. But it would be unwise to invest too much hope in Iraq's political process. The stakes are still very high for all sides and the new institutional arrangements in Baghdad are yet to be properly tested.

"The game will continue," predicts Manouchehr Takin, an analyst at the Centre of Global Energy Studies. "But they will eventually resolve the problem." Companies are coming in, spending hundreds of millions and finding oil in the north, he says, and they "simply can't" have a situation where they are not allowed to export that oil.

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