Iraq, And Its Foreign Oil Deals

Remember how, when the US invaded Iraq in 2003, critics said it was all about oil? Next week, political events in Iraq – and the long simmering conflict between the central government in Baghdad and the local government in the region of Kurdistan – are due to come to a constitutional flashpoint and… it is all about the oil and gas reserves.

Next Monday or Tuesday, the al-Maliki government is due to announce which of 31 foreign and state-owned bidders have won the contracts to operate six major oil fields and two gas fields. The sticking point is that instead of framing these deals in terms of profit sharing – which is the way Kurdistan has gone about structuring its oil and gas deals – the al-Maliki government is pursuing fee-for-service pay deals with the energy companies in the bidding queue. That shortlist includes some very familiar names, such as Exxon Mobil, Royal Dutch Shell, Chevron and Sinopec, as well as a few large Iraqi state-owned companies.

As you may recall, Iraq has the world’s third largest proven reserves of oil after Saudi Arabia and Iran. The Iraq oil minister Hussein al-Shahristani already stands accused by other MPs of mismanagement resulting in 10 billion dollars in lost revenue from a federal budget that – crucially – is projected to go into deficit. The government needs oil revenues from wherever it can get them. As yet, it is still unclear whether the Iraqi Parliament has the power to veto the Oil Ministry’s plan to conclude the bidding process, which will be Iraq’s first auction of its oil resources to major energy companies since the fall of Saddam Hussein.

So where’s the constitutional conflict? It comes down to who owns the oil fields, and how the profits are to be shared. Article 108 of the Iraqi constitution seems pretty clear : “Oil and gas are owned by all the people of Iraq” and are to be managed by the federal government in conjunction with regional governorates. However, the regional government in Kurdistan has interpreted that to apply only to existing fields – which it agrees, fall under the control of central government – and not to any fields discovered in future.

Using that loophole, Kurdistan has merrily gone ahead and signed a variety of exploration agreements with companies from Norway, Turkey, Switzerland, Canada, Korea, the U.K., and Austria, as well as a huge natural gas deal with two companies based in the United Arab Emirates. On top of this, there is the long simmering matter of whether it is the Kurds or the central government who should get the lion’s share of hotly disputed fields at Kirkuk.

Under the constitution, Kurdistan – like all other oil revenue generating provinces is guaranteed 17% of the returns. Kurdistan’s leaders also argue that the semi-autonomous province has the right to pass its own oil laws, if central government proves incapable of passing an acceptable federal law. Until this month, the key player – Turkey – has been withholding from Kurdistan the ability to ship oil through the large Kirkuk to Ceyhan pipeline, without the agreement of the Baghdad government, which has hitherto refused its permission.

Suddenly – and in the face of those budget deficits – the al-Maliki government has agreed to let the Ceyhan pipeline be used to ship Kirkuk oil. The oil started flowing on the first of this month, to much joint celebration between the Kurds, the Turks, and major oil companies – but without any al-Maliki representative being present at the festivities.

Clearly, this uneasy, makeshift situation has not resolved the core tensions between the central government and Kurdistan, which – as its economic base becomes more and more secure – appears to be marching inexorably towards formal independence and the related breakup of Iraq. This prospect seems increasingly acceptable to Turkey, so long as Kurdistan agrees to crack down on the PKK Kurdish terrorists who have long used Kurdistan as a safe haven to launch attacks into Turkey.

Finally then, foreign oil companies are on the brink of getting their hands on Iraqi oil and gas. The matter of which Iraqi factions profit primarily from the revenues though, still has the capacity to slowly tear the country apart.


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