"In Kurdistan, we are setting the example: this is only the first post-Saddam framework for oil investment in Iraq that follows the democratic, federal, and free-market principles mandated by the Iraqi Constitution," regional Oil Minister Ashti Hawrami said regarding the contracts.
"It is the first and only constitutionally based legal framework to attract investments to Iraq, which is designed for Iraq-wide revenue sharing, an essential element of future stability in Iraq that the constitution also rightly mandates," Hawrami added, and that the KRG hopes a similar framework will be adopted throughout Iraq.
The KRG announced on November 6 that it has approved seven new production-sharing contracts (PSC) with foreign firms. It also awarded PSCs to the Kurdistan Exploration and Production Company, which is owned by the KRG, and awarded an integrated project to the Kurdistan National Oil Company, a government-owned development company, to build a refinery for the Khurmala oil field.
At the time, the KRG said another 24 blocks in the region were the "subject of intense interest from international companies."
Baghdad Says No
There was little reaction from Baghdad to the announcement. Iraqi Oil Minister Husayn al-Shahristani has repeatedly said that previous contracts concluded between the KRG and outside investors are illegal. Al-Shahristani contends that the KRG must wait for the central government to ratify a draft oil law.
Moreover, as Oil Ministry spokesman Assam Jihad has said, the federal draft oil law stipulates that all development agreements be awarded through an open and transparent public bidding process, and not through bilateral agreements, with final approval by Baghdad.
The draft federal law was approved by Prime Minister Nuri al-Maliki's cabinet and sent to parliament for ratification months ago, but the Council of Representatives has yet to hold a vote, and the draft appears to be tied up in the parliament's Oil Committee.
The Kurdistan regional parliament passed its own gas law in August, which the Kurds say is in line with the draft federal oil law. According to the KRG's November 6 announcement, the regional government's share of oil revenues will be 17 percent, while the remaining 83 percent will be redistributed throughout the country through the central government in Baghdad.
Following the KRG's decision to award three PSCs to foreign firms in October, al-Shahristani threatened to blacklist any foreign companies working with the KRG. Al-Shahristani said he would work to prevent those firms from doing business in Iraq in the future. "The federal government's position toward these new deals is that any contract signed without its approval isn't considered a contract," al-Shahristani told Dow Jones Newswires on October 5. "We warn these companies and hold them responsible for the consequences of signing such deals."
He added that under both the Hussein-era hydrocarbon law and the current draft law, the only Iraqi body authorized to export Iraqi crude oil and gas is the State Oil Marketing Organization. Any other exports would be considered "smuggled" by the central government.
Kirkuk As Bargaining Chip
According to media reports, one of the most controversial contracts awarded by the KRG is to U.S.-based Hunt Oil, because the territory under exploration falls outside the Kurdistan region, in the historically Kurdish-populated northern Ninawah Governorate -- an area the KRG hopes will eventually join the region, along with nearby, oil-rich Kirkuk Governorate. Baghdad will likely challenge the legality of the KRG-awarded contract for exploration outside its region.
Also at stake is the Kurdish claim to Kirkuk Governorate. The government was to hold a referendum on the status of Kirkuk next month, but it remains unclear whether the vote will go ahead. Under the constitution, revenues from existing fields such as those in Kirkuk, belong to the central government. Newly developed fields would fall under Kurdish control, but as the constitution stipulates, the revenues must be shared with Baghdad.
At the moment, it appears the central government can do little to prevent the contracts from being carried out, though Kirkuk could end up being the government's leverage issue. Some observers have also speculated that Baghdad could block export routes, a threat also voiced by Turkish leaders seeking to place an economic embargo on the Kurdistan region in retaliation for the KRG's failure to expel Kurdistan Workers Party (PKK) militants from Iraqi territory.
Should that happen, the KRG could theoretically sell the oil through smuggling routes to Iran and Syria, but such a move would be unlikely to sit well with their international investors.
Regardless, there is little chance the KRG will halt or even slow its development of the oil industry. Investors have flooded the region in recent months, and the KRG intends to benefit from the boom.