Kurdish oil agreements have Baghdad in a bind

BAGHDAD - Reuters

Tanker trucks wait to be loaded at Taq Taq oil field in Arbil. Oil majors have struck deals with the regional government in Arbil. REUTERS photo

With Exxon Mobil and other major foreign oil companies upsetting Baghdad by signing exploration deals, Iraq’s Kurdistan Regional Government has angered the central Iraqi government. But barking threats at Exxon may be all Baghdad can do.

Baghdad insists it alone has the right to export Iraqi crude. Nine months after U.S. troops left, the oil contracts dispute is part of a broader political feud between the Baghdad government and the Arbil government over oil rights, territory and regional autonomy that is straining Iraq’s uneasy federal union.

Chevron, Total and Gazprom have joined Exxon with their own deals in northern Iraq, provoking warnings from Baghdad their southern Iraqi oil deals with the federal government might be at risk. But the might of Exxon has caught the Oil Ministry in a bind and officials say privately any action against the firm is unlikely in the near future. 

Analysts say it was a deliberate calculation that executives from Exxon Mobil had angered the Baghdad government as they played rival interests in Iraq off against each other.

Exxon was the first company to flex its muscle and challenge Baghdad’s authority by independently signing for six blocs to explore for oil with the Kurdistan Regional Government (KRG) in October last year.

Deputy Prime Minister Hussain al-Shahristani was tough with Exxon’s officials and warned them angrily they could lose the West Qurna contract if they started work in Kurdistan at a meeting in Baghdad two months ago, an industry source told Reuters. “The atmosphere heated up when Exxon said they would consider legal action.” Yet the complex politics of Iraq may also shield Exxon.

Analysts and officials say Exxon has been clever, playing Baghdad and Arbil off each other with aplomb. The tactic: securing lucrative deals in Kurdistan while sending signals to Baghdad that it may freeze its huge operations in the south.

Iraq has no binding hydrocarbon law more than nine years after the toppling of Saddam Hussein. Final passage of a 2007 draft has been delayed by political infighting, which has also played into the hands of Exxon and the other firms.

“The lack of an oil law has helped to open a narrow path for oil companies into Kurdistan. They had the foresight to realize that any eventual agreement will make them a winner at the end of the day,” said Ali Shallal, an Iraqi legal expert who specializes in drafting oil contracts.

Kurdistan has enjoyed more stability and security than the rest of Iraq, and its potential resources have already drawn smaller oil players such as Norway’s DNO and Gulf Keystone. But its bickering with Baghdad had kept major companies away until now.

Foreign firms already consider the production-sharing deals in Kurdistan a far better arrangement than Baghdad’s fee-for-service contracts. Some are already seeking to renegotiate.

For now, though, there are no signs of foreign companies backing away from their new relationships with the Kurds. “Exxon and the other firms have realized the only way to offset the modest profits generated from Baghdad deals is to invest in Kurdistan for extra profits and less risks,” Ali Shallal said. 

Exports rise

Meanwhile, Joe Stein – head of operations at Iraqi Kurdistan’s Taq Taq oilfield – was told to start exports immediately at 40,000 barrels per day (bpd). On Sept. 15 he may get the call to stop exports.
That is the deadline set by Iraq’s autonomous Kurdistan Regional Government, in the latest passage in its long-running feud with Baghdad’s central government over oil payments.

This 12-kilometer field now pumps 105,000 bpd of “champagne”-quality crude – with 55,000 bpd delivered by tanker truck to Khurmala for export into the central government’s Iraq-Turkey pipeline. Around 35,000 bpd is trucked to the nearby Bazian refinery and the remainder stored.

Kurdistan halted exports in April over payments from Baghdad to companies working in the region. It restarted them, but warned it would cut shipments by mid-September if there was no progress on payments.