Fragile politics remain a threat to Iraq and its energy sector
Rising production and a deal between Baghdad and the KRG are positive. But fragile politics remain a threat to Iraq
Baghdad and the Kurdistan Regional Government (KRG) are talking again. A deal struck in mid-September ends – for now – a dispute over oil exports from Kurdistan. The Iraqi central government will send money to the KRG that it will use to pay three oil companies. In exchange, the KRG will instruct the companies to increase exports from the region to 200,000 barrels a day (b/d). The dispute had shut in much of that oil.
The agreement brings a degree of stability to Kurdistan, will encourage the oil firms that have invested there against Baghdad’s wishes and, believe some analysts, suggests a new willingness, on both sides, to negotiate. Some optimistic observers even think an oil law – which has spent years being debated, with few hopes of enactment – may now be in the offing. Kurdistan, feeling vindicated, is now pressing ahead with ambitious plans to reach output of 1 million b/d in the next year: enough to support its own pipeline through Turkey, believe the region’s boosters.
The extra oil will be welcome in the international market. It’s no surprise that the deal followed a visit to the region by senior US officials, said Shwan Zulal, a political-risk analyst covering Kurdistan. The US has been seeking a way out of the impasse, and more oil supplies from producers, for months. In Iraq’s south, meanwhile, the supply picture is even more encouraging. Production is soaring. In August, incremental output from the Exxon Mobil-led West Qurna-1 development, China National Petroleum Corporation’s Halfaya project and Eni’s Zubair field helped push exports in the south through new loading infrastructure near Basra to around 2.57m b/d, said the International Energy Agency (IEA). Total production has reached 3.07m b/d, the highest in three decades.
More on the way
There should be plenty more to come – and quickly. Peter Hitchens, an analyst at HSCB, a bank, reckons output will hit 3.5m b/d by the end of the year. That figure may double by the end of the decade. Growth may not be following the original ambitious government target of 12m b/d by 2017, but the rise is still impressive. Iraq has added 400,000 b/d since the beginning of the year and its oil is now a major force in the global economy, reckons the IEA’s chief economist, Fatih Birol.
Counting on Iraq to deliver extra oil to meet growing global demand, however, is risky. Production growth is happening despite of the country’s dire political problems. Graft remains rife. Transparency International, an advocacy group, said Iraq was the eighth most corrupt country in the world in 2011. Iraq Body Count, a website keeping track of grisly statistics, says the number of Iraqis killed by violence had reached 218 by 19 September. August’s total was 393. Earlier in September, Tariq al-Hashimi, the country’s Sunni vice-president, was convicted of murder and sentenced to death in absentia. He is now in Turkey, his home since fleeing Baghdad earlier this year after Nuri al-Maliki’s Shia government accused him of running death squads.
The weakness of Iraq’s central government has created more prosaic problems for the international oil companies (IOCs) charged with bringing on stream the south’s mega-projects. Oil executives talk of bureaucratic wrangles that delay import of essential kit and keep executives twiddling their thumbs in Dubai awaiting Iraqi entry visas. Even Shell, considered the golden child of Iraq’s south, where it has signed contracts to develop the 12.6 billion-barrel Majnoon field and capture flared gas across the region, is not immune. It now admits it may miss a year-end production target of 175,000 b/d from Majnoon. “It would be fair to say the progress has been slower than we originally hoped,” Mark Carne, the company’s Middle East and North Africa boss, said in Dubai on 18 September.
The oil law problem still hangs over the sector, bedevilling the federal government’s relations with Kurdistan. Baghdad still views the production-sharing contracts (PSCs) offered by the KRG to be illegitimate. Some analysts doubt that the latest agreement, described by one advisor to the parliament as a “fudge”, will hold. Faith in the deal will only come when Baghdad actually begins to make its payments to the KRG, notes Hitchens. Sceptics doubt it will happen.
Intriguingly, the recent negotiations between the two sides took place without the involvement of Hussein al-Shahristani, overseer of Iraq’s oil policy and the most powerful opponent of Kurdistan’s efforts to chart an independent energy sector with its own PSCs. He has yet to offer his view of the deal. When he does, his view may decide whether the new air of friendliness between Erbil and Baghdad lasts.
Shahristani’s strategy is in danger of coming apart. Despite the south’s rising output, Kurdistan’s success is a contrast to Iraq’s recent struggles. An auction of blocks earlier in the year, Iraq’s fourth such sale, drew little interest from international oil companies, whose eyes are increasingly set on the KRG’s more lucrative contracts.
Baghdad will have to sweeten the terms of its fifth auction to compete – a galling prospect for federalists in Baghdad who believe Kurdistan has undercut the state. Some companies are said already to be trying to renegotiate their existing agreements with Baghdad.
Actions on the ground are beginning to win the argument for the Kurds, too. ExxonMobil, which angered the Baghdad government by signing a deal last year to explore six blocks in Kurdistan, has begun to spend money in the autonomous region. Other majors, including Total, Chevron and Gazprom Neft, have also signed deals with the KRG. Statoil and Conoco are thought to be interested, too. Kurdistan’s infrastructure has streaked ahead of the south’s, where electricity provision remains sparse and the kind of violence not seen in Kurdistan in years remains a daily threat.
Things could still fall apart, especially if the deal between the KRG and Baghdad frays. “There is still huge mistrust between both sides,” said the advisor. Wider geopolitics also remains a problem. Turkey’s encouragement of Kurdistan is a direct response to Baghdad’s cosy relationship with Iran, said Zulal. Iranian influence in Iraq, meanwhile, has not abated. The bigger threat could come from well beyond Iraq’s borders. Its fiscal budget depends on oil prices well above $100 a barrel. If the market melts amid the wider global economic malaise, Iraq will suffer.