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Iraq backs down over Kurdish PSAs

Prime minister Nuri al-Maliki has pledged to honour the PSAs Kurdistan struck with foreign players. The region could be on track for an oil boom

IRAQ has taken a long-term, pragmatic view by backing down in its dispute with the Kurdistan Regional Government (KRG) over production-sharing agreements (PSA). Ultimately, the country needs cash for redevelopment and the wrangle over the deals not only choked exports, but also sent the wrong signal to potential investors. It is possible, too, that the compromise could eventually allow the federal government to rejig its upstream framework to include PSAs alongside its preferred option, technical service contracts (TSCs).

The federal government's back-down is a double victory for the KRG. First, the decision, made in February, saw oil exports from the region resume, a move that will help boost output. Second, if al-Maliki's pledge holds, the majors could rush to join the Kurdish play. So far, only smaller companies, such as Norway's DNO, operate in Kurdistan. The majors have stayed away, knowing they would be blacklisted by Iraq's oil ministry if they agreed PSA terms with the KRG. Their interest in gaining a foothold in Iraq's established plays – even under TSCs – far outweighed their interest in more lucrative PSAs on offer in the north.

Al-Maliki's pledge to honour the KRG's contracts is pragmatic. Because oil extraction in Kurdistan is more difficult than in southern Iraq, where oil is "closer to the surface", the PSA model was preferable to the TSCs on offer elsewhere in the country. Upstream investors generally prefer PSAs, which provide ownership of a percentage of production, providing better compensation for capital costs, such as those likely to be incurred in Kurdistan. TSCs, on the other hand, offer companies a set per-barrel fee for any production over a stipulated level.

The BP-led consortium developing Rumaila, for example, initially lodged a $3.99 a barrel bid, but ultimately agreed to the federal government's original $2/b terms.

Al-Maliki's statement came as a surprise to many in Iraq – not least to deputy prime minister for energy Hussein al-Shahristani, the country's former oil minister. In December, as part of al-Maliki's manoeuvring to establish a workable coalition government, al-Shahristani, whose relationship with KRG officials is fractious at best, was named deputy prime minister for energy. The decision to move him upwards – away from day-to-day negotiations with the KRG – and to appoint Abdul Karim Luaibi as oil minister paved the way for the agreement with the KRG.

Al-Shahristani, who claimed al-Maliki had been misquoted when he endorsed the KRG's upstream terms, has yet to accept al-Maliki's pledge, maintaining that the KRG's contracts must be converted to TSCs before being approved by the central government. Indeed, when Kurdistan's PSAs were originally signed, starting in 2004, al-Shahristani refused to recognise them. First oil flowed from Kurdistan in June 2009, but output and exports were choked a few months later in a payments dispute. Exports resumed on 3 February.

The Tawke and Taq Taq fields, which are now back on stream, pump a total of around 80,000 barrels a day (b/d), which will ramp up to about 110,000 b/d by the end of March, says the KRG. DNO holds a 55% operating stake in Tawke, with Turkey's Genel Enerji and the KRG holding stakes of 25% and 20%, respectively. Genel has 44% of Taq Taq, with China's state-owned Sinopec holding 36% and the KRG the remaining 20%.

Oil from the two fields is being routed to the Turkish port of Ceyhan on the Mediterranean coast. Tawke is connected to Kirkuk, where the pipeline starts, but Taq Taq's 240 km pipeline to the Fishkabur intersection of the Kirkuk-Ceyhan pipeline is still to be built. It should be in place by the end of this year, but in the meantime exports are being shipped to the Khurmala spur pipe, which gives access to Kirkuk-Ceyhan.

The KRG expects Kurdish production to hit 150,000-200,000 b/d this year, but this may slip if payment to foreign producers for outstanding extraction costs is further delayed. So far, companies working under the KRG's oil laws have not been reimbursed by the Iraqi oil ministry's State Oil Marketing Organisation.

The lag in payment has been blamed on uncertainty over whether the federal government or the KRG should pay producers. Despite the apparent acceptance of the KRG's PSAs, this issue has not been fully resolved. Iraq's new Hydrocarbons Law is stalled in parliament, but a draft budget law is in place, linking Kurdistan's oil exports of 100,000 b/d to its rights to a 17% slice of the federal budget.

KRG oil minister Ashti Hawrami says that after three years in office he has 43 oil and gas companies working in Kurdistan. "They've spent billions of dollars," he says, "and they're still to get a dollar back." Hawrami sees their staying power as the ultimate endorsement of the KRG's oil laws. "They stay, and keep coming," he says, "because they know we have the right contractual environment."

If the federal government's acceptance of Kurdish PSAs sticks – without any eruptions of political ill-will on the side of die-hard Iraqi federalists – Iraq may see a surge in investment. The KRG's mandate to forge PSAs could leave the way open for the Iraqi oil ministry to approve its own PSAs for some of the country's less-tested greenfield prospects.

TSCs were put in place in the wake of a 2006-07 resource-nationalist backlash, after al-Shahristani pushed for the introduction of PSAs in the country's hydrocarbons play. But TSCs lack pulling power – as last year's gas-licensing round proved.

With its insistence on forging revenue-sharing deals, Kurdistan could be crafting the model that fuels Iraq's oil boom. As Hawrami says: "If people see our way as a model, it's because ours is the constitutional model and because it works. If Iraq follows it, there will be stability and we will all be rich."

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