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Publication of Kurdish PSCs and Baghdad
use of delaying tactics
11.10.2011
By Shwan Zulal - ekurd.net |
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October 11, 2011
It has been three weeks since the KRG (Kurdistan
Regional Government) published the Kurdish PSCs
(Production Sharing Contracts) and surprisingly
there has been very little reaction from Baghdad and
the media in general.
Before the publication of the oil deals,
commentators were speculating about the content of
the contracts and allegation of corruption was rife.
Nevertheless, so far little evidence of corruption
charges pointed at the KRG or companies involved has
emerged.
Due to the volume of the documents published it
maybe some time before the Kurdish opposition or
Baghdad make any comments on the content of the
contracts. This may also be due to the ongoing talks
between the political blocs to find a way forward on
the range of issues crippling Iraqi government.
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The publication of the
contracts is a step forward for KRG in its
transparency initiative. There have been debates
within the KRG for some time now weather to publish
the PSCs or not, but it appears that PM, Barham
Salih's efforts to open up the KRG has taken a step
forward by successfully publishing all the
contracts. The initiative is also highly political
and annuls Iraqi government's arguments over the
transparency of the contracts and corruption
allegations.
The Kurdish PSCs have adopted a regressive fiscal
regime by having bonus payments at the commencement
of the contract. While oil prices go higher and
production starts, the incremental cash flow
increases with it the contractors' profitability.
There have been allegation of wrongdoing and
misappropriate use of the bonuses by the government,
but so far no evidence of this has merged.
It is not a secret that the Kurdish PSCs are on more
favourable terms compared to TSCs on offer by
Baghdad. Companies that entered PSCs with the KRG
enjoy a higher rate of return and their windfall
profit is significantly higher if the oil prices
stay above $70.
While Iraqi oil export is about to hit 3 million
bopd- pre war production level- soon, Kurdistan
region has not been able to increase oil production
as fast, largely due to infrastructure limitation
and partly because of the political impasse with
Baghdad and geopolitics. The political deadlock with
Baghdad has been eroding confidence and holding back
many investors and companies which otherwise will be
willing to invest in the region.
Kurdistan Region has deliberately given favourable
terms to the oil companies to attract as many
operators as possible and managed to do that
successfully. Policy makers appear to believe that
it is a price worth paying to gain a control over
the vast untapped oil and gas reserves in the
region. Kurdish control over its natural resources
give the KRG the influence it needs to be listen to
in Iraq and the region.
Kurdish PSCs typically gives the oil operators five
years period for exploration and in some cases it
can be extended by another 2 years. Some contracts
have been awarded since 2007 and the companies
involved have undertaken their obligation under the
contracts by surveying the blocks and undertaking a
drilling campaign at a considerable expense. Many
have been successful and few suffered setbacks. A
number of operators are ready or will be in a
position to start production soon. However, due to
lack of infrastructure and political disagreement
with Baghdad, more delays expected.
The debate over a suitable oil and gas law is still
raging and different versions of the law put forward
by different blocs yet to be agreed upon. It is
unlikely that the law will make it to the statute
book any time soon. The Iraqi deputy PM for Energy
matter, Hussain Shahristani,www.ekurd.net
continues to challenge the Kurdish PSCs and only on
Monday he was
quoted by
Reuters repeating the his stance on the Kurdish
deals and declaring them illegal. He has also
reiterated the exclusion of companies operating in
Kurdistan from Iraq.
While the political wrangling continues, oil
companies are becoming nervous. Baghdad appears to
be using a delaying tactics. Time is of the essence
for the Kurdish oil contracts and the companies
involved in the region will inevitable face
challenges. The longer the stalemate drags on,
operation and financing cost will mount. Although
the exploration period can be extended for a limited
period, smaller operators will find it difficult to
raise funds in the future and may be forced to sell
or relinquish part of their obligation under the
contract at a cost. It is needless to say that under
the terms of the contracts, large part of the cost
is recoverable and the longer the disagreements
carries on the KRG and Iraqi government will
ultimately incur increased cost, as and when oil
production starts.
Consolidation is already taking place as
Vallares-Genel and DNO-RAK merger is concluding.
Moreover, Gulf keystone petroleum has raised $ 200m
and is looking for a buyer to sell its 20 per cent
interest in Akri-Bijeel block, possibly fund new
pipelines exporting oil from its mega oil find.
Larger oil companies like Hess has entered the
region and Others are weighing their options and
some are negotiating their contracts.
Kurdistan region's bold oil and gas strategy has so
far proved effective by attracting investors and
upstream operators however; exporting the
hydrocarbon and building up the much-needed
infrastructure will require a fresh approach.
Shwan Zulal is a
political risk analyst, specialising in Kurdish PSCs
and Hydrocarbon Law and advising investors in the
Kurdistan Region and Iraq with legal background.
Zulal is a regular contributing writer for ekurd.net.
He also runs a blog on to the same subject
http://kurdishviews.blogspot.com
Copyright © 2011 ekurd.net
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