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In Iraq, oil majors play Kurdish north
versus Arab south; Analysis
5.4.2012
By Patrick Markey and Peg Mackey - Reuters |
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Photo: Iraq's Deputy Prime Minister for Energy
Affairs Hussain al-Shahristani (R) speaks during a
joint news conference with Iraqi Oil Minister
Abdul-Kareem Luaibi in Baghdad, April 2, 2012.
Photo: Reuters/Saad Shalash.
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April 5, 2012
BAGHDAD, — In the weeks before Iraqi
Kurdistan revealed that Exxon Mobil had signed up to
explore for oil there, executives at rival Shell
faced a dilemma over whether or not to join the U.S.
oil major in its foray north and risk angering
Baghdad.
The fields in the autonomous region offered rich
potential, an easier working environment, better
security and attractive contracts. That seemed a
winning combination for smaller oil companies
already working there, such as Norway's DNO, even
though they struggled to collect profits.
But at the 11th hour, industry sources say, Royal
Dutch Shell backed out and decided to focus on a $17
billion gas deal in the south rather than sign
exploration contracts with the Kurdish Regional
Government, which the central government could
dismiss as illegal and could prompt reprisals.
Shell's caution, Exxon's silence on its deals and
this week's renewed dispute between Baghdad and
Kurdistan over export payments reveal how delicate
is the balance companies must manage between a
central government and a Kurdish authority locked in
a struggle over who controls Iraq's vast oil wealth.
The dispute over oil is at the heart of a wider
disagreement between Iraq's central government in
Baghdad and the Kurdish region, which are also
increasingly at odds over regional autonomy, land
and political influence.
Iraq has ambitious plans to develop its huge
southern oilfields - potentially the world's biggest
source of new oil over the next few years - and few
oil firms dare risk being barred from such a bonanza
by angering Baghdad.
But increasingly, some executives say, Kurdistan's
potential is also coming up in boardroom
discussions, as sluggish output, red tape and
infrastructure bottlenecks in the south take some of
the shine off the central government's oil program.
Oil majors are now waiting on the sidelines,
watching the outcome of Exxon's balancing act
between Baghdad and Erbil, the northern capital.
France's Total is the latest company to provoke
Baghdad's ire by acknowledging interest in
Kurdistan.
"What companies are trying to do is get to the point
where they are investing in the north and the
south," said one industry source working in Iraq.
"But at the moment they cannot do that. And that is
what you have to build in when you decide whether to
move in or not. You balance the risks."
After decades of war and sanctions, Iraq has signed
multi-billion dollar agreements with Exxon, Shell
and BP to develop fields in the south where most of
its crude is pumped,www.ekurd.net
hoping to become a major global oil exporter with
output targets of around 8-8.5 million bpd.
But two years on, only modest gains have so far been
notched up in production by companies frustrated by
infrastructure constraints, payment disputes and
logistical hurdles. Output last year averaged 2.7
million barrels per day versus about 2.4 million bpd
in 2009, the year of Iraq's oil tenders.
The government in Baghdad has driven a tough bargain
with foreign companies, offering fee-for-service
contracts with tightly controlled profit margins and
little chance to benefit from high energy prices.
Firms have experienced problems getting visas for
contractors and security staff, delays in bringing
in armored vehicles and holdups securing operating
licenses. Such hassles make Kurdistan's offerings
look more tempting by comparison.
"Every delay we face cuts off a significant part of
the internal rate of return," said one oil company
source. "Sometimes I wonder if we picked the wrong
region."
This year Norway's Statoil became the first major
company to abandon one of Iraq's lucrative new oil
deals, selling its stake in West Qurna Phase-2 field
to Lukoil.
POLITICAL CRISIS
The renewed stand-off between Baghdad and Erbil over
oil is playing out against the background of a
political crisis in Baghdad that jeopardized the
shaky power-sharing agreement intended to prevent a
return to ethnic and sectarian warfare.
Prime Minister Nuri al-Maliki, a Shi'ite, heads a
coalition that also includes Kurds and Sunnis. Just
as the last U.S. troops left the country in
December, Maliki's government issued an arrest
warrant for the country's most senior Sunni Arab
politician, Vice President Tareq al-Hashemi.
Hashemi fled to the Kurdish region, and Kurdish
regional President Massoud Barzani refused to turn
him over for trial, infuriating Baghdad.
Barzani has since given speeches increasingly
antagonistic to a central government he says is
trying to undermine Kurdish autonomy. He has accused
Maliki of concentrating power in his own hands, and
has warned in vague terms that Kurdistan may
reconsider its relations with Baghdad.
Iraq's central government is also being challenged
by other regions like oil hub Basra in the south and
Sunni-dominated Anbar who see Kurdistan's autonomous
status as a model for their own drives for more
freedom from Baghdad's control.
Autonomous since 1991, Iraqi Kurdistan runs its own
internal government and armed forces, and escaped
the sectarian warfare that saw the rest of Iraq hit
by suicide attacks and car bombs since the 2003
U.S.-led invasion.
Kurdistan's stability proved an attractive draw to
oil explorers, and its government has offered
production-sharing deals, which allow firms to
profit directly from oil sales rather than just
taking a negotiated fee for their work.
Small and medium-sized companies like DNO, British
oil company Afren, Gulf Keystone Petroleum and
Canada's Talisman Energy, are pushing ahead with
exploration in Kurdish oilfields.
Peter Wells of geological consultancy Neftex
Petroleum said Baghdad's service contracts make
sense for developing existing, discovered oilfields
with only small technical risk attached. Arbil's
production-sharing contracts encourage exploration,
by offering greater potential gains for greater
risk.
Big Oil prefers the production sharing deals, which
let firms count reserves on their books, make more
money per barrel and gain if the oil price rises.
They get operational control and an easily tradeable
asset.
"Put it this way: they want us in Kurdistan," says
one oil executive. "But it doesn't feel that way in
the south."
CATALYST FOR ACCORD
But however attractive Kurdistan may seem, companies
operating there face one fundamental challenge:
getting paid.
The Kurds receive 17 percent of Iraq's total oil
export revenue - a huge sum that has fuelled an
economic boom in the region - but in return, Kurdish
oil can be legally exported only by the central
government.
As long as the legal status of Kurdish oil deals is
disputed in Baghdad, companies operating in
Kurdistan have had no way to bring oil to market and
collect a profit.
Under the Iraqi constitution, the central and
regional governments should work together on ways to
manage oil and gas reserves and distribute revenues.
But Kurdish and Arab lawmakers in Baghdad have been
at loggerheads for years over an oil and gas law to
sort those issues out.
Exports from the north to a pipeline through Turkey
began flowing last year under an interim agreement.
Baghdad promised to collect revenue and pay
companies their costs, leaving the question of
firms' profits to be decided later.
But Baghdad and Erbil argued from the outset over
how much oil was being pumped and how much money was
owed.
This week, Kurdistan said it had halted those
exports because Baghdad had failed to pay the
companies for their oil. Iraqi government officials
said Kurdistan was failing to meet its export
obligations and illegally smuggling oil abroad.
Oil firms may have hoped that Exxon's push into
Kurdistan would act as a catalyst to force the two
sides to work together and enact an oil law. But for
now, the increasingly shrill rhetoric on both sides
hardly inspires confidence that a solution is
growing closer.
When Kurdistan's government announced last year that
Exxon had agreed to exploration deals for six
Kurdish fields, Baghdad responded with outrage.
Deputy Prime Minister Hussain al-Shahristani -
architect of Baghdad's oil program - said the U.S.
firm could forfeit the contract on its huge West
Qurna-1 oilfield in the south if it did not halt
work with the Kurds.
Baghdad has since barred Exxon from bidding in the
next round of oil deals, although it says the
decision is not final. Exxon was also removed from
its lead role in a water injection project in the
south, although Iraqi officials denied the move was
linked to the Kurdish deal.
The central government now says that Exxon has
written to it twice since early March to say that
its deals with the Kurds have been suspended. The
Kurds say Exxon has not halted work in Kurdistan and
have challenged Baghdad to publish Exxon's letters.
Total has become the second supermajor to say it is
considering investing in Kurdistan, although it has
not yet announced deals there. Chief executive
Christophe de Margerie, long a critic of Iraq's
service contracts, said Total will not seek deals in
the central government's next bidding round.
The conditions on offer from Baghdad, he says, are
not attractive enough.
Copyright ©, respective author or news agency,
Reuters
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