Tuesday, September 4, 2012

Hydrocarbons Tensions Between Erbil and Baghdad Don't Seem to Abase

 September 4, 2012
On Thursday July 19, 2012, the American oil giant Chevron declared that it was in the process of purchasing oil interests in Iraq's semi-autonomous Kurdistan region. In specific, the super-major stated that it would acquire from India's Reliance Industries Ltd. an 80 percent stake of two blocks (called Rovi and Sarta, with the related operational control) located north of the city of Erbil within Iraqi Kurdistan. The junior partner in the two blocks would be Austria's O.M.V. (O.M.V. Rovi GmbH and O.M.V. Sarta GmbH). Unconfirmed sources spoke of a $300 million deal.

A few days later on Tuesday, July 24, 2012, the Ministry of Oil of Iraq released a statement that explicitly stated that "Chevron is barred [banned] from any agreement or contract with the federal ministry of oil and its companies ... unless it retreats from the contract it signed in the Kurdistan region". The latter in turn stated that all and any deals it had signed well complied with the country's new constitution. In other words, Chevron was disqualified from doing business in the central and southern part of Iraq, where it previously had prequalified to bid. Chevron, when replying to the ministry's statement, explained that it had been working in Iraq since 2003 and that it would be interested into participating to new businesses if these met its investment criteria. Moreover, at the time of reply, Chevron had no stake to lose in southern Iraq as a consequence of this disqualification.

This banning was the direct consequence of the long dispute between Iraq's federal government in Baghdad and the Kurdish Regional Government (K.R.G.) in Erbil in relation to the control of Kurdish hydrocarbons production and the related consequent export from Iraqi Kurdistan. This current confrontation was and still is today well amplified by the lack of legislation for the energy sector in Iraq.

Because of the current argument between Baghdad and Erbil, several major foreign oil companies up to now have preferred to avoid buying or just being involved with assets located in Iraqi Kurdistan and/or in the territory right now disputed between Baghdad and Erbil. Certainly, signing directly with the K.R.G. a contract that could be nullified by the central government is not the best way to conduct oil operations in an already-difficult country like Iraq.

Until this spring, the only super-major operating in Iraqi Kurdistan had been ExxonMobil, which in October 2011 declared that it was the first oil super-major to purchase the rights for some oil fields within Kurdistan — in specific, the deal concerned six oil fields. Also in this case the central government's subsequent move was to ban Exxon from any future oil and gas deal with Iraq. It should be noted that ExxonMobil was already running a very giant oil project in southern Iraq.

What was immediately clear was that the central government's opposition to the K.R.G. contracts would lose weight if another super-major started operating in Kurdistan. In fact, already in the previous months of 2012, other foreign big-oil companies seemed interested into working in Iraqi Kurdistan, notwithstanding the fact of being consequently excluded from energy operations in central and southern Iraq. To support this thesis, last spring's energy auction (Iraq's fourth energy auction, which included both oil and gas blocks) held by the federal government for twelve blocks located in southern Iraq raised very limited interest from foreign companies. In practice, only two blocks were sold and not to the big companies.

Big-oil companies do consider the terms imposed by the Iraqi Oil Ministry for investing in Iraq as excessively onerous with reference both to payment terms and the revision of the original targets so as to increase capacity. In practice, Erbil permits production sharing agreements (P.S.A.s) in its oil fields, while Baghdad only signs simple fee-based service contracts. Before Chevron's arrival, in Kurdistan were already working several small- and mid-sized oil and gas companies (among them, Norway's D.N.O. and Austria's O.M.V., which is partially owned by Abu Dhabi's International Petroleum Investment Company (IPIC)). With no doubt, if big players could really add to the minor oil and gas companies it would be a good outcome for the local energy sector, which requires, especially in the initial phases, imposing investments. So, the scarce attractiveness of Baghdad's contracts pushed big-oil companies to be focused much more than in the past on Iraqi Kurdistan. And a few days after Chevron's move, at the end of July, France's Total followed suit in Iraqi Kurdistan buying a 35 percent stake in the Harir and Safen blocks (covering an area of 705 square miles) from U.S. Marathon Oil Corp. Until this summer, the K.R.G. had signed about 50 exploration contracts with minor oil and gas companies (some of them are really wildcatters). And indeed Baghdad considered all these deals to be illegal and already blacklisted some companies that had negotiated with Kurdistan (one of these is U.S. Hess Corp. which like ExxonMobil was excluded from Iraq's fourth energy auction). Three months ago Iraq explicitly asked President Barak Obama to convince Exxon not to explore in Kurdistan, signaling in this way the importance for Baghdad to completely control its hydrocarbons sector.

On April 1, the K.R.G. stopped its oil export consisting of around 120,000 barrels a day through a Baghdad-controlled pipeline from Kirkuk to the Turkish port of Ceyhan. The reason behind this move was that the central government was retarding the payment of approximately $1.5 billion to the contracting companies. Later, on August 7, the K.R.G. restarted the oil shipments, but it clearly stated that it would interrupt them one more time, if within one month there would be no agreement on the payment that Baghdad should give to the contracting companies. Lately, on Saturday September 1, according to Kurdish sources, the K.R.G. extended the deadline until September 15 as a goodwill gesture. This move should permit Baghdad to have more time in order to resolve the payment issue.

Currently, shipments from Kurdistan are around 120,000 barrels per day, although Baghdad affirms that the amount should be 175,000 barrels per day (something less than 5 percent of Iraq's total production, which reached in August 2012, 3 million barrels per day), which, in October 2011, were agreed upon for year 2012. Iraq between 2010 and 2012, as a consequence of the interruptions of the K.R.G. shipments lost some $8.5 billion and according to Deputy Prime Minister Hussein al-Shahristani of Iraq it would be correct if the government deducted this sum from the national budget allocated to the K.R.G.

In any case, it should be understood that presently Kurdistan does not have any available shipping alternative to the Iraqi pipeline  trucking oil to Turkey or Iran is absolutely not a 100 percent substitute and that Kurdistan is strongly dependent on the yearly budget allocation it receives from Baghdad. This allocation  reached in 2012 almost $11 billion (It's about 17 percent of the whole Iraqi national budget, although Erbil receives something less, probably just 13 percent, as a result of deductions utilized to cover federal expenditures for a range of items of which the Kurdish region benefits like the rest of Iraq). But  and here lies the problem for Baghdad according to Ashti Hawrami, the natural resources minister of the K.R.G., Erbil wants to reach 1 million barrels per day by 2015. In reality, if Erbil were able to produce just 400,000 barrels per day of oil and to export them with a new Kurdish pipeline to Turkey, it could make $14.6 billion (considering a $100 per barrel of oil ). This value is consistently superior to the budget allocation Erbil receives now from Baghdad. In other words, economic self-sufficiency could be a potent tool to lately declare independence from Iraq. And of course, when Kurdistan and Turkey announced last May that they were planning to build this direct pipeline (with one million barrels per day of capacity) from the K.R.G. to Turkey by 2013 in this way bypassing Iraq, the federal government instantly defined this plan as very hostile. Plus, toward the end of July, Iraq accused Turkey and Kurdistan of doing illegal oil trade on the basis that only Iraq's central government may export oil. And adding oil to the fire, the visit of Turkey's foreign minister, Ahmet Davuto─člu, to Erbil on August 2012 increased tension.

Chevron's move indeed follows a protracted stand-off between Iraq’s federal government and the K.R.G. over the control of oil production and exports from Kurdistan. It immediately seemed quite improbable that Baghdad could completely boycott Kurdistan while at the same time its own energy auctions had reaped so scarce an interest. According to Kurdish sources, Erbil would like to reach a production of 2 million barrels a day by 2019 (the intermediate step will be 1 million barrels a day by 2015 as pointed out by Mr. Hawrami ) from a current value of only 300,000 barrels a day.

Almost nine years have passed since that December 13, 2003 when President Saddam Hussein was captured by the U.S. forces near Tikrit. Iraq, an OPEC member which owns the third largest proven oil reserves in the world (143 billion barrels) does not possess yet a binding hydrocarbon law, the so-called Iraqi Federal Oil and Gas Law (FOGL). In fact, the 2007 draft law was immediately marred by political infighting among different factions. The current dispute between Erbil and Baghdad is the direct consequence of their century-old struggle, and now, dangerously, hydrocarbons could buttress Iraqi Kurdistan's economic autonomy if not in the future its independence.


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