Leap of faith—Kurdistan foreign oil deals could ignite power shift in Iraq
Eager to grow, smaller foreign oil firms sign deals with Kurdistan despite the semi-autonomous region’s prolonged deadlock with Iraq, which refuses to recognise any Kurdish deals.
August 9, 2011 11:39 by Reuters
A batch of oil deals signed last month in Iraq’s semi-autonomous Kurdish region could herald further investment, even though a prolonged political and legal deadlock between Baghdad and the Kurdistan Regional Government is far from over.
Oil company confidence in the region has grown since May when producers began to receive payments for exports after months of haggling between the central and regional governments.
Small and medium-sized oil companies Britain’s Afren, US firm Hess Corp, Irish oil explorer Petroceltic and Spain’s Repsol all entered agreements with the Kurdistan Regional Government (KRG) last month.
“Despite the absence of solid legal background for Kurdish deals, small companies are still taking their chances,” said Hamza al-Jawahiri, a Baghdad-based oil analyst. “This is clearly a gamble.”
Underscoring the continued tensions, Iraq has excluded energy companies with contracts with the Kurdish region from participating in the country’s fourth energy bidding round, which is expected to take place in January.
“Nothing has changed. We still consider contracts signed with the Kurdish region illegal and every energy company involved will be blacklisted,” Abdul-Mahdy al-Ameedi, the director of the Iraqi oil ministry contracts and licensing directorate, told Reuters.
“There is no chance left for these companies to work with the oil ministry.”
Semi-autonomous since 1991, Kurdistan has enjoyed more security than the rest of Iraq, where the central government is fighting insurgents and militia more than eight years after the US invasion that toppled Saddam Hussein.
The Kurds and Iraqi Arabs have a long territorial dispute over areas of northern Iraq, and Baghdad and the KRG still disagree over the legality of contracts signed with foreign firms and over revenue-sharing.
A lot is at stake.
The KRG puts its territory’s reserves at 45 billion barrels. The figure has not been independently verified, but if accurate, it would mean Kurdistan has more oil than the North Sea has produced over the past 40 years.
Samuel Ciszuk, senior energy analyst at IHS Global Insight, said the beginning of payments in May — even though they only cover costs — was “an important breakthrough”.
“I think people are feeling emboldened, especially small or medium-sized companies that are seeking to grow,” he said, while acknowledging there were still “huge stumbling blocks”.
Many analysts said any bets on normalisation were for the long term. The immediate motivation was the desire for a possible springboard into Iraq and to book reserves in a world where opportunities are scarce and powerful national oil companies increasingly dominant.
Oilfields in Kurdistan differ from Iraqi assets as the contracts allow oil firms to book reserves, helping to satisfy shareholders hungry for signs of reserves growth.
Afren’s Chief Executive Osman Shahenshah said the acquisition in Iraqi Kurdistan would materially boost reserves.
“We’re becoming a billion barrel company from 137 million barrels at an acquisition cost of well under $1 a barrel,” he said. “I’m pretty bullish that it’s moving in the right direction.”
Iraqi Kurdistan’s oilfields saw little development during the Saddam era.
Since the dictator was ousted in 2003, companies from countries ranging from Turkey to China to the US have moved in the region, even though the risks loom large.
With US troops scheduled to withdraw from Iraq at the end of the year, disputed areas over the border from Kurdistan remain a potential flashpoint and oil is key. By some estimates, the disputed city, Kirkuk sits on top of 4 percent of the world’s oil reserves.
Chief among the issues to resolve is agreement on the country’s long-delayed hydrocarbons law.
Work on the law has been stymied by…
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