Iraq and Kurdistan: How to divide oil?

By Azer Ahmedbeyli, Trend analytical centre expert

Kurdistan president Massoud Barzani (Right front) with Iraqi president Jalal Talabani. Photo: Reuters

March 19, 2012

,— There may appear a new independent state and major oil player rolled into one on the map of the Middle East in the near future. The promise of the head of Iraqi Kurdistan Massoud Barzani to declare independence day on Newroz [Kurdish New Year] holiday (March 21), though not literally seen by many, but, coupled with the events in Syria, gives a signal that the process of the possible establishment of a Kurdish state is entering a decisive stage. A series of exciting events surrounding the Iraqi oil happens on this background.

According to BP, the proven oil reserves of Iraq amounted to 115 billion barrels at the beginning of 2011, and it means that the country ranks third in the Middle East after Saudi Arabia and Iran. Nearly 40 percent of Iraqi oil, or about 45 billion barrels, accounts for Iraqi Kurdistan.

"Kurdistan should achieve reunification through peaceful means," Barzani said on March 15 in Erbil, speaking at a youth conference.

Iraqi Kurdistan needs two things - political stability and large investments to achieve this goal. First was achieved, the second is prevented by the legislative uncertainty, namely, the absence of the Law on Oil and Gas, which would regulate the division of powers between Baghdad and the autonomous, income distribution and other conditions associated with the development and production of oil and its exports. It would bring clarity to the investment policy of the foreign oil companies that want to guarantee the security of their investments.

The law, discussed for the past seven years, has two versions, and each side maintains its bill. Baghdad insists on concluding service contracts, and the regional government is ready to enter into contracts on production-sharing, Baghdad wants to pre-approve them, and the Kurdish leadership does not want to depend on the signing of the federal government. There are also other differences.

Things began to change after oil super giant ExxonMobil and the Kurdish government signed an agreement to develop six oil blocks last October. It greatly increased the attractiveness of further transactions with the regional government for smaller companies. Another oil giant - Total has also announced intentions to begin operations in the territory of Iraqi Kurdistan a few days ago. Many experts noted that more favorable contract terms is the trump card of the regional government of Iraqi Kurdistan in attracting major oil companies to develop oil fields in the region of Iraq.

The Iraqi government considers the conclusion of transactions between foreign companies and autonomy government illegal. It has make the refusal of ExxonMobil from last year's contract with the Kurdish government as a condition of its participation at the tender in May for the sale of licenses to develop oil fields in southern Iraq, and operation of oil fields in West Qurna. The Americans have not yet given a clear answer to Iraqi government, but it seems that it will be impossible to stop the conclusion of further deals with the Kurds - Western companies are more profitable to work on the Kurdish conditions than Baghdad.

Recently, the situation became even worse. A spokesperson for the Iraqi Oil Ministry Asyma Jihad noted that the Kurdish administration in northern Iraq has cut oil exports from 175,000 barrels to 65,000 barrels of oil per day. The regional government explains the reduction in the supply by the lack of measure for the oil production, Jihad said in an interview with Trend. However, this reason is not objective, since the production of oil fields in the Kurdish administration is fully paid by the Ministry of Finance of Iraq, he added.

The Autonomy Government stated in response that Kurdistan Region exports from 90 -100 thousand barrels of crude oil per day since the beginning of this year. "If the statement of the Ministry of Oil will be valid, it means that from 25 to 35 thousand barrels per day, disappear in the process of placing on the market. Kurdistan believes that this difference in the number should be investigated immediately - just in case if someone is enriched through it," the Kurdish administration said in a statement. In addition, the Kurdish leadership accuses the federal government of stopping payments to companies involved in the export in May 2011, and that its debt to Kurdistan amounted to over $1 billion from last year's turnover.