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Who Controls Northern Iraq's Oil Wealth?

There are no indications that Baghdad and the Kurdish autonomous north have come any closer to bridging their divide over oil revenues.
There are no indications that Baghdad and the Kurdish autonomous north have come any closer to bridging their divide over oil revenues.
Iraq's northern oil fields are again in the news as Baghdad and the Kurdistan regional government (KRG) argue over how foreign companies that export oil from the region should be paid.

The flare-up comes after what initially looked like a breakthrough in the two sides' long-running argument over which has the right to contract foreign energy companies to work in the Kurdish self-rule area.

Last week, both the KRG and Baghdad said that they had agreed that oil from two fledgling fields in the Kurdish-controlled north could be channeled into Iraq's national pipeline that exports oil to the global market via Turkey's port of Ceyhan.

"The Oil Ministry would express its welcome if it receives any oil produced from Kurdistan's fields to be exported by the ministry through the national pipeline network," Iraqi Oil Ministry spokesman Asim Jihad told RFE/RL's Radio Free Iraq on May 12.

"There is communication between us on completing projects to build pipelines feeding the network from these fields. When they are completed we will commence oil exports, God willing."

The exports, which Iraqi officials said could start in June at the level of 60,000 barrels per day, would reverse the government's policy of blocking such shipments for the past two years.

That was good news for the small foreign companies that have so far invested hundreds of millions of dollars into finding and producing oil in the autonomous Kurdish region but whose only other -- and much more limited -- option is to export it via tanker trucks.

But there was a proviso.

Oil Minister Husayn al-Shahristani warned that any oil going into the national pipeline would become part of Iraq's overall exports. And that meant the money earned would go into the central government's coffers.

"When the Oil Ministry actually receives oil from Kurdistan's fields, it will export the supply as it does with oil produced in the south, with revenues going to state coffers," ministry spokesman Jihad said. "This does not imply approval of oil deals signed by the Kurdish regional government. This is a different matter."

'Let Him Call Me'

The British daily "Financial Times" on May 14 quoted Shahristani as challenging the KRG to try to collect any share for itself or to reimburse its foreign oil companies for their expenses. He told the paper, "If [the Kurdish oil minister] can get a dollar out of the [Iraqi Finance] Ministry, let him call me."

The basic issue is that the petroleum law has not gone through the parliament and there are two interpretations of the [Iraqi] Constitution.
Shahristani repeated that the some 25 contracts signed to date by the KRG with foreign oil companies are not recognized by his ministry or by the Iraqi government. He said the KRG, which receives 17 percent of Iraq's oil budget, should compensate the companies with these funds or turn over the contracts to Baghdad.

The showdown subsided with the KRG assuring the European companies that it will pay them for their work. But that lack of any final resolution only served to underline again the uncertain status of Iraq's northern fields even as they rapidly develop.

The few signs of compromise in the dispute over who controls the northern fields have come in the form of occasional informal expressions of goodwill from Baghdad or Irbil, the seat of the KRG.

"The latest was, a month or two ago, that his excellency Dr. Shahristani, the oil minister, said that those deals up to 2007 made by the Kurdish regional government with foreign companies would be valid but beyond that would not be valid," says Manuchir Takin, a regional specialist with the London-based Center for Global Energy Studies, who follows the Iraqi oil industry closely.

"So that situation, whether it was a definitive statement or not, still holds. And verbally, of course, the Kurdish authorities say that revenue from their oil exports would go to the central government and the Kurdish regional would get part of it," Takin adds.

No Closer To Bridging Divide

But Takin says there are no indications so far that the two sides have come any closer to bridging their divide.

"The basic issue is that the petroleum law has not gone through the parliament and there are two interpretations of the [Iraqi] Constitution," Takin says. "The Kurdish region claims that international lawyers interpret the constitution as saying what the Kurdish region is doing is valid to make deals with foreign companies, whereas in Baghdad, in the Oil Ministry, they say it is not valid."

"If [the Kurdish oil minister] can get a dollar out of the [Iraqi Finance] Ministry, let him call me," says Iraqi Oil Minister Hussein al-Shahrestani.
One way to resolve the disagreements would be to amend the constitution to more clearly detail the Kurdish region's rights as part of federal Iraq. But, while parliament occasionally discusses such options, any amendment would require a referendum, making it a complicated option.

But the supposedly less difficult course -- passing a national hydrocarbons law that would regulate foreign participation in Iraq's energy sector and detail how oil and gas revenues are to be shared between Iraq's various regions -- has not proved any easier.

Efforts to pass such a law have stagnated amid tensions over the richest oil area in the north, Kirkuk. The multiethnic city is the focus of a tug-of-war between Baghdad and the KRG, both of which want to control its future.

The KRG wants to annex Kirkuk to the Kurdish autonomous region, saying the city has a majority Kurdish population. However, the Iraqi federal government says the city's mixed ethnic composition requires it be part of Iraq proper instead. The situation is volatile enough that the Kirkuk area was excluded from Iraq's provincial polls in January for fear of violence.

Continue To Invest

In the meantime, foreign oil companies continue to invest in the northern fields, hoping that the two sides will ultimately agree on a solution that regularizes their presence.

Takin puts the oil industry's view of the Baghdad-Kurdish dispute this way:

"Maybe they will find the ways and means to reconcile the two sides and that is what everyone hopes -- that the Kurdish area and the central government will somehow reach an agreement," Takin says. "I think that is what is behind the oil companies doing these deals [with the KRG]. In the back of their minds they hope that one day there will be an agreement."

The energy companies view Iraq as their biggest opportunity since the fall of communism, which lifted barriers to the Caspian and Russia.
One factor that has made the northern fields attractive to oil companies despite the risk of irking Baghdad is the terms the KRG offers.

Takin notes that Irbil offers the foreign firms production-sharing agreements that allow the foreign companies to share directly in the profits from the oil sales. At the same time, the good security situation in the Kurdish-controlled region is an added incentive.

By contrast, the Iraqi Oil Ministry offers oil companies only service contracts -- the less attractive but more common oil-industry arrangement of working for fixed fees. And, until recently, the security situation in the Baghdad-controlled area was anything but welcoming.

But this balance could change soon.

In recent months, Baghdad has signaled it too may begin offering oil companies a share of profits if they undertake exploration and development of new fields across the country. And Iraq's improved security has created much industry interest in talking with Baghdad.

The Oil Ministry says it wants to dramatically increase Iraq's oil production from the current level of some 2.4 million barrels a day -- roughly equivalent to the Saddam Hussein era -- to 6 million barrels per day in four or five years. It has scheduled a major round of bidding for June in which many of the world's largest oil companies are expected to compete.

The energy companies view Iraq as their biggest opportunity since the fall of communism, which lifted barriers to the Caspian and Russia. Only Saudi Arabia and Iran hold more oil and both are off limits to international companies.

Lose Comparative Advantage

Oil industry analysts say that how quickly Baghdad is able to increase oil production in Iraq proper could have an impact on the Baghdad-Kurdish dispute.

As opportunities in the rest of Iraq grow, the Kurdish region risks losing the comparative advantage it has enjoyed so far. That advantage has been enough to bring in small and aggressive oil companies, but until now these companies did not have to weigh their investments against missed opportunities with Baghdad.

Still more importantly, the KRG hopes its fields -- whose extent is still being explored -- will turn into major revenue sources in the future. And for that, the fields would need to be exploited by large companies with abundant capital and the oil needs to go by pipeline to international markets.

All of these conditions may mean that any major finds in the northern fields would inevitably push Baghdad and Irbil to regularize their oil relations -- even if they seem unable to do so today.

RFE/RL's Radio Free Iraq contributed to this report

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