Iraqi Kurdistan’s crude oil is prized by global oil giants because it is plentiful and easy to get at, rare among undeveloped energy resources. But the companies working there under contracts with the semi-autonomous Kurdistan Regional Government (KRG) are not getting much out, and they are not getting paid, all because of a dispute over control with the national government in Baghdad, a Reuters special report said.
Despite the row, rooted deep in the tinderbox politics of Iraq, ever bigger oil companies are moving into the northern region, angering Baghdad with their seal of corporate approval for a government that is seeking more autonomy in one of the most volatile parts of the world.
“The northward migration continues and this could well be the tipping point,” said a senior oil executive involved in Iraq told Reuters.
According to Ashti Hawrami, the KRG natural resources minister and a former British National Oil Company employee, output in this mountainous region bordering Turkey, Syria and Iran is an on-off trickle for now in global terms but, given the right investment and an export route, it could reach 1 million barrels per day by 2014, and 2 million five years later.
That would be more than Libya, the North African producer whose civil war outage led to a sharp jump in prices last year.
One Country, Two Governments
The sticking point for KRG development is that Baghdad has jurisdiction over all exports, and contests the validity of contracts signed with the Kurdish government in Arbil.
It tries to keep the region on a tight leash, limiting supplies of fuel and restricting its flow of cash under an entitlement based on 17% of the country’s oil export income.
There is much friction, claim and counter-claim over the arrangements, and in its most recent act of protest, the KRG halted oil exports in April, saying Baghdad owed $1.5 billion.
Now more than 40 foreign companies are drilling in oil territory so rich that in some places the crude seeps out of the hillside and collects in the valley below.
Proven reserves in Iraqi Kurdistan of 45 billion barrels amount to more than a third of the national total of 143 billion recorded in BP’s annual statistical review, where Iraq accounts for 8.7% of all the world’s known oil.
Because of the politics and the payback issue, ventures into KRG territory remained the preserve of smaller explorers with an appetite for political risk and nothing to lose in Baghdad.
In November last year, four years after Shell walked away, came the game changer.
Exxon Mobil, the world’s biggest private oil company, signed a deal for six exploration blocks.
Last month, the U.S. number-two player Chevron moved in too, buying 80% of two blocks, Sarta and Rovi, from India’s Reliance.
And last week, Total of France piled in, buying 35% of the Harir and Safen blocks from Marathon Oil, along with Gazprom of Russia, which farmed in to the Garmian block operated by Canadian company Western Zagros .
Suddenly, four of the world’s top 10 international oil companies by market value have set up shop in Arbil.
Baghdad is furious, and has made it clear that both Exxon and Total are risking their involvement in multi-billion dollar projects in the south of the country.
Is it worth it?
So what are the big international oil companies thinking?
There is still no obvious way to monetise these investments. Letters last week to the KRG from DNO, Genel and others with activities in Iraqi Kurdistan expressed their continued frustration at not getting paid.
Executives say the move north by the big companies sends a message to Baghdad that its commercial terms on southern oilfield projects are unattractive, and that institutional chaos and the slow pace of postwar redevelopment are problems.
“We understand the political risk of going into the north and the commercial terms are attractive enough to take that risk,” said an oil industry source. “The economics of Iraq’s service contract just can’t compete with the terms on offer in Kurdistan.”
KRG production sharing contracts (PSCs) promise as much as 25-35% versus the 15-18% in the south for fixed-fee output-boosting and start-up deals on untested fields, oil experts say.
Total’s CEO Christophe de Margerie has been openly critical of Baghdad’s service contract terms. The latest national tender for exploration blocks drew no interest from the oil majors.
Norway’s Statoil and Italy’s Eni are both looking at KRG acreage, say industry sources.
Statoil pulled out of its stake in the giant West Qurna-2 oilfield in southern Iraq earlier this year, while Eni is still leading a project to develop the huge Zubair oilfield in southern Iraq.
Other big companies that still have all their Iraq eggs in the southern basket include Britain’s BP, which recently produced its 1 billionth barrel in the southern Rumaila field, Russia’s Lukoil, as well as the Chinese and Malaysian state firms CNPC and Petronas.
Shell has stayed loyal to Baghdad too. According to industry sources it decided last year for a second time against a KRG tie-up, turning its back on a partnership with Exxon to focus on a $17 billion gas project and other commitments in the south.
BP said it had plenty to keep it occupied in the south and no plans to look north. Although Shell would not comment, company officials privately have a similar view to that of BP.
But those already on the ground in Kurdistan are likely to build up their positions. Exxon, risking operatorship of West-Qurna-1 with its dalliance in the north, is looking at unawarded blocks along the border with Turkey, and Chevron and Total are expected to snap up more acreage, industry sources said.
“It’s quite worrying for the Iraqi government to have the big companies walking away,” said a senior oil executive who believes Baghdad will take action to deter further defections.
“If the federal government does not act, other companies will think they can move north without further consequences. And they have to do what they say – so far, it’s just been a lot of noise.
“And we will, of course, use the situation as an argument to look for more reasonable terms (in southern Iraq).”
Baghdad has protested at the highest political level about Exxon’s floodgate-opening move, with Iraqi Prime Minister Nuri al-Maliki writing to U.S. President Barack Obama predicting dire consequences for the country’s stability.
It has also threatened to throw out Exxon and Total and blacklist Chevron from future involvement. All to no avail – so far.
“I don’t think Exxon can hang onto and work both pieces and they will be forced to choose very soon,” said a senior western executive, adding that he expected chief executive Rex Tillerson, if pushed, to opt for Kurdistan.
In the latest twist, Arbil has responded to Baghdad’s sabre rattling with an apparent softening of its position, agreeing to resume exports until Aug. 31 provided it gets the money it says it is owed.
The oil concessions dispute between Maliki and KRG president Masoud Barzani forms part of a deeper political rift in Iraq, whose wobbly coalition of Sunni, Shi’ite and Kurdish leaders are embroiled in their second serious squabble since the last U.S. troops left in December.
With their potential to produce immense wealth for whoever controls them, reserves in Kurdistan also play into the broader balance of power and ethnic tensions in the region.
When it comes to exports, a fully independent Iraqi Kurdistan could in theory avoid Iraq territory altogether by sending its crude through Turkey.
In May, the KRG announced plans to build a pipeline from the Taq Taq oilfield to hook up with an existing one that runs from Kirkuk in Iraq to Ceyhan on Turkey’s Mediterranean coast, targeting August 2013 as the completion date and initial capacity of 1 million barrels a day.
But there’s a snag here too for the KRG and its investors, and one that could strengthen Maliki’s hand.
Turkey’s prime minister Tayyip Erdogan performs one of the world’s trickiest political balancing acts.
Having turned his back last September on his one-time friend, President Bashar al-Assad of Syria, and embraced the rebels fighting him, Erdogan has made an enemy along his longest border.
Iran, which backs Assad, is another potentially unfriendly neighbour. Meanwhile Turkey, like Syria, has a restless Kurdish population of its own.
So Erdogan may be reluctant to upset Baghdad, and a Kurdish state flush with oil money on his frontier might not be the perfect outcome for him either.
“The one thing in Baghdad’s favour right now is that the Kurds don’t have an independent export line,” said Raad Alkadiri of Washington consultancy PFC Energy.
“So a lot of this will come down to the Baghdad-Arbil-Ankara triangle, and given developments in the region, including Syria, how this relationship plays out could surprise the Kurds and investors there.”
(Source – Reuters)