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Kurdistan confronts enemies within and without

Kurdistan faces many obstacles as it seeks to realise its untapped oil and gas potential

IRAQ’S autonomous Kurdish provinces are held up as a symbol of what the country as a whole should look like: largely free of violence, politically stable, pro-Western and increasingly prosperous. The only danger facing Western visitors walking down the main street of Sulaymaniya, eastern Kurdistan’s largest city, is being run over by the supersized SUVs that are now de rigueur for Kurds of any standing.

But the Kurds’ attempts to build an oil industry from scratch are proving harder to realise. And with the fate of the jewel in the crown of northern Iraq’s hydrocarbons firmament – the region around Kirkuk – still uncertain, the Kurdistan Regional Government’s (KRG's) designs on becoming an independent Middle Eastern oil and gas superpower remains hamstrung by its need to build bridges with an array of neighbours that, historically, have antagonistic relationships with the Kurds.

On top of the enemy without, the KRG must also deal with a new enemy within. A series of street protests, largely focused on Sulaymaniya – the traditional fief of Iraqi President Jalal Talabani – have gathered strength in recent months and suggest the Kurds of Iraq may have more in common with their Arab neighbours than they might care to admit.

A lack of transparency – a familiar litany from Tunis to Tehran – is stoking resentment for the political elite in the Kurdish capital Erbil. As one protestor in Sulaymaniya’s Liberation Square told Petroleum Economist: “The government is getting billions from oil companies, but we don’t see any of it.”

Missing billions

The “missing billions” are the fruit of ambitious KRG natural resources minister Ashti Hawrami’s bold attempt to open up the country’s estimated 45bn barrels of oil to international oil companies (IOCs). The KRG’s production-sharing contracts (PSCs) offer the most favourable terms in the Middle East.

Taking a leaf out of Libya’s book, the Kurds have insisted on oil companies providing handsome signature and “capacity-building” bonuses, racking up an impressive $5bn return from the 37 firms signed up to explore and develop reserves in the three KRG provinces: Dohuk, Erbil and Sulaymaniya.

The largest single commitment, from South Korea’s KNOC – which has interests in PSCs at Bazian, Hawler, Sangaw North and South, and Qush Tapa – saw a pledge to hand over $2.1bn, of which $1.9bn will be spent on infrastructure projects determined by the KRG.

Turkey’s Genel Enerji is committing $1.1bn to fund infrastructure projects from a percentage of its share of profit oil from its Ber Bahr, Chia Surkh, Miran, Duhuk and Tawke PSCs, as well as the Taq Taq field – one of the first to produce oil in the KRG territories.

In the Garmian area, where Canada’s Talisman Energy is developing a block with fellow Canadian firm Western Zagros, $200m of the $480m bonus has been advanced to a segregated KRG account.

But this successful rattling of the begging bowl has been turned against the KRG leadership. Anti-government media have attacked Hawrami for failing to spend some of the $4bn-5bn alleged to have been placed in an HSBC bank account, although experienced Kurdish oil sources dispute such interpretations. They point out that the terms of the PSCs are transparent and that it is unlikely all of the promised signature and capacity-building bonuses have been handed over to Hawrami to keep.

“I doubt there’s more than $2bn in there,” said one Sulaymaniya-based consultant to IOCs operating in Kurdistan. “Most of the allegations about the missing billions are just rumour and speculation – perhaps reflecting the lack of transparency here.”

That issues of transparency are aggravating domestic opinion confirms a wider discontent with the fruits of eight years of peace since the removal of Saddam Hussein – and an attendant frustration that the Kurdish upstream opening has attracted only smaller international players, some of which carry unfortunate reputational issues.

Alleged irregularities

Both producing companies in Kurdistan, Norway’s DNO and Turkey’s Genel – producing a combined 115,000 barrels a day (b/d) from their respective Tawke and Taq Taq concessions – have been targeted by financial regulators in Europe because of alleged irregularities in share transactions.

In March, Norway’s white-collar economic crimes unit, Okokrim, charged DNO managing director Helge Eide and chairman Berge Gerdt Larsen with market manipulation over a controversial deal involving the sale of DNO shares to the KRG in October 2008, which saw those shares sold on at higher prices in 2009.

Meanwhile, Genel chief executive Mehmet Sepil was fined nearly £1m ($1.6m) in February last year for buying shares in London-listed Heritage Oil knowing that it had made a large oil discovery in Kurdistan, but before the market had been informed.

The allegations against DNO are pending further investigation, but neither story reflects well on the KRG in its efforts to transform Kurdistan into a competitive, transparent oil economy.

The roots of the KRG’s predicament lie in the constrained circumstances of its outreach to IOCs in 2005. “We had to offer attractive terms because we were desperate – we needed to bring in companies, but because the larger firms were nervous of offending [the central government in] Baghdad, we could only hook the smaller fish,” the oil consultant said.

Hawrami is unlikely to be rattled by the street protests that have yet to reach the capital and, in any case, has other, bigger fish to fry. His success in turning Iraqi Kurdistan into a net oil exporter in invidious circumstances deserves praise and he has single-mindedly faced down the collective might and bureaucracy of the Iraqi oil ministry, headed by his arch nemesis: former oil minister and now deputy prime minister for energy affairs, Hussein al-Shahristani.

The central government has stirred trouble in the north. The senior auditor, Abdulbasit Turki Sayid, claimed in February he was refused access to the KRG's oil and fuel receipts, in possible violation of UN resolutions on Iraq, and said he received no help from the KRG in resolving queries relating to the Kurd’s continuing argument with the oil ministry over its PSCs – although the fiercely independent KRG would be unlikely to view Sayid’s intervention as a purely innocent enquiry.

But relations between the KRG and the government are better now than they have been for some time. In February, the two sides appeared to have broken a deadlock in the management of oil revenues and exports from the Kurdish north, with an agreement that the KRG delivers produced oil to State Oil Marketing Organisation (Somo), with revenues going to the federal government in Baghdad, then distributed through the annual budget that grants Kurdistan 17% of all income.

The thornier issue of the KRG’s unilateral contracts with IOCs remains unresolved, however. And a potentially bloodier dispute looms over the question of ownership of fields in disputed territories around Kirkuk – the oil-rich area lies outside KRG-governed territory, but is subject to a historical claim by the Kurds. Last month, the normally emollient President Talabani stoked controversy in his adopted capital Baghdad, with a claim that Kirkuk “was the Kurds’ Jerusalem”.

The KRG is already producing oil from the Khurmala dome, an extension of the Kirkuk field, which the government in Baghdad appears happy with – as long as the barrels continue to flow to Somo and the revenues end up with the oil ministry.

Kirkuk’s fate as either a Kurdish or Arab province will be subject to a referendum – on a date yet to be determined – that will also clarify the position of oilfields in disputed territories. The potential for this issue to become toxic and provoke a wider conflict means there is little rush to seek closure. But the Kurds may press for a compromise under which the oil ministry, through state-owned North Oil, would retain control of existing producing fields, with new acreage under KRG control.

Kurdistan’s troubled early gestation as an oil statelet may soon be forgotten if the dozens of IOCs exploring blocks in the north manage to produce even a portion of their potential. With over 100,000 b/d being pumped from just a couple of fields, Hawrami is justly confident that the Kurds will soon be a significant Middle East oil player – although the 1m b/d target he claims is within easy reach may not stand up to closer inspection.

The Kurds’ old saying, “no friends but the mountains”, still rings true and suggests more trouble ahead as the landlocked entity looks to wriggle free from Baghdad’s embrace and make it on its own.

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