Global Insight Perspective
An agreement between the Iraqi central government and the Kurdistan Regional Government (KRG) to allow those companies who entered the autonomous region before the oil law dispute began seems to be within reach, with only technicalities—and possibly KRG politicking—standing in the way.
The export deal would allow early birds investing in Iraqi Kurdistan before February 2007 to export their oil, allowing them to develop their acreage fully and add perhaps more than 100,000 b/d to Iraqi exports within a year, rising to 300,000 b/d within two years.
Iraqi Kurdistan sees its output reaching 1 million b/d in a few years' time, but that would entail a broader deal involving all acreage holders in the region. The beginning of initial exports would nevertheless inject new dynamism into KRG investors, although the KRG might yet hold back on the finalisation, to pressure the Iraqi government to allow all its investors export rights at the same time.
So Near, and Yet…
Officials from both the Iraqi Oil Ministry and Kurdistan Regional Government (KRG)'s Energy Ministry are saying that an agreement is virtually reached, with only technicalities precluding the final hook-up of the oil pipeline from DNO's Tawke field to the relatively near export metering station on the Kirkuk-Ceyhan crude pipeline running between the northern Iraqi oil-producing hub and the Turkish Mediterranean port.
"We have told the KRG that we are willing to receive all the oil that's being produced by DNO and others", Iraqi Oil Minister Hussein al-Shahristani told UPI, adding "that has always been our position. We not only encouraged that but insist that there is no other way to export oil but through our export pipelines and State Oil Marketing Organisation (SOMO) contracts." His indications that a deal could be imminent are reinforced by the KRG's Natural Resources Minister Ashti Hawrami telling UPI that "when we are ready, we will call our colleagues, and I don't envisage any problem in that. The metering station is in the KRG territory. We can just link up the pipeline, open the metering and tell SOMO that so many barrels are going through, please account for it. All we are doing is expanding Iraq's production capacity, so what's wrong with that?"
The KRG has been locked in a battle with the central Iraqi Oil Ministry and government since early 2007, when negotiations over a national oil law draft dissolved following the parties' disagreement on how much autonomy over the oil and gas sector the KRG should have vis-à-vis the central government. In the aftermath the KRG launched its own oil law, which was adapted by its regional parliament. The regional oil law formed a successful basis for luring IOCs into the region, as Iraqi Kurdistan offered production-sharing agreement (PSA) based contracts, on which the Iraqi parliament has been unable to agree.
A small number of companies did, however, sign up for acreage in the Iraqi Kurdistan region before the February 2007 escalation of the dispute, de facto entering the autonomous region with the blessing of the central government, which at that time was still encouraging what little investment interest there was to go ahead. Among the early birds were Norwegian junior DNO; a Swiss-Turkish joint venture (JV) between Addax and Genel Enerji; and the Canada-based Western Zagros venture, spun off from Marathon-acquired Western Oil Sands. DNO and Addax have already developed a significant production capacity from their respective Tawke and Taq-Taq fields, with DNO being able to ramp up production to 50,000 b/d in no time, should it gain access to the region's only export pipeline. Currently the Tawke field's production lingers at levels between 6,000-7,000 b/d, supplying regional demand by tank car. DNO has said that a second-phase development of the Tawke field would lift production to 100,000 b/d with possible later phases to be added, while the Addax/Genel Enerji JV has said that a full development of its Taq-Taq field relatively quickly would yield a 200,000 b/d production plateau.
So What Is the Hold-Up?
Talks have been under way for more than a month between the sides about reviving the draft oil law from February 2007 and scrapping the annexes that were added by the Iraqi Oil Ministry and parliamentary committees in the aftermath of the original negotiations, but in effect, an all-encompassing oil law deal requires movement on some other political issues holding up talks for the moment in the Iraqi capital, Baghdad. Solving a part of the problem, by taking this step forward, would allow investment—and soon increased exports—to go ahead, perhaps bringing the overall deal closer, although there could also be negative implications for the KRG.
While the KRG is keen to get access to the export routes for the companies that have signed up for acreage in the region, tempting the Iraqi central government with the near-to-imminent Tawke and Taq-Taq production is convenient. If those two producers are hooked up to the export line—together with provisions for the WesternZagros development to follow suit—KRG would lose some leverage with the central government, given that the more recent entrants, more or less all of whom signed up to acreage in the latter half of 2007, are quite some time from bringing production onstream. The KRG would also be reluctant to allow an interpretation of the export link-up as being made entirely on the Iraqi government's conditions, and would rather see it portrayed as a first step to a comprehensive solution. It is no doubt seeking assurances from different political factions in the Iraqi parliament to this extent, so as not to weaken its future position on influencing the national oil law outcome.
KRG's Hawrami was also earlier this week reported by UPI as saying that it has collected the signatory bonuses paid by the IOCs to the KRG under its oil law, and is keeping the money untouched until there is a national oil law in place and the revenues can be shared with the rest of the country. Except for the obvious building of goodwill, the measure shows the KRG strategy of "creating facts on the ground" by in the end forcing a sense of fait accompli on the central Iraqi government which, for a host of reasons stemming from political deadlock to security, has been unable to get its own projects under way.
Outlook and Implications
With both sides admittedly being close to an agreement, there might be a breakthrough during the talks scheduled for the coming week. Exports from the KRG would greatly enhance its standing and act as a model for the remaining parts of Iraq, although at the same time this could take away much of the leverage the central government has held against the KRG in being able to deny its producers export rights.
Allowing the early investors in the region what was guaranteed to them initially by the central government is in itself not a great surprise, but given the strong KRG position vis-à-vis the weak central government coalition in the past year, it is likely to be very difficult for the central government not to placate the KRG in the end and give the region the far-reaching natural resources autonomy it craves, including the rights to export its production as long as it shares the revenue with the rest of Iraq. Indeed, the Iraqi government's recent turning on its own Shi'a allies, with the support from the Kurdish factions, signals just that.
Iraq: 4 June 2008: KRG to Approach Iraqi Government with New Oil Law Proposal Within Weeks
Iraq: 16 May 2008: WesternZagros Spuds Sarqala-1 Well in Iraqi Kurdistan
Iraq: 17 April 2008: Government Says Deal Has Been Reached with Kurds over Iraqi Oil Law
Iraq: 7 March 2008: Latest Flow Test Results from Addax, Genel's Iraqi Kurdistan Taq Taq Field Come In as Licence is Updated
Iraq: 22 January 2008: Addax/Genel Enerji Release Flow Results for Fifth Appraisal Well in Iraqi Kurdistan
Iraq: 16 November 2007: DNO's Tawke Reaches Test Production Ceiling, Highlighting Iraqi Showdown over Export Rights
Iraq: 7 September 2007: Addax, Genel Enerji See 50,000-b/d Taq Taq Production "in Short Time"
Iraq: 3 September 2007: BP Ready to Move into Iraq Following Oil Law; Addax, Genel Enerji to Submit US$1-bil. Taq Taq Development PlanIraq: 16 August 2007: Western Oil Sands Spin-Off WesternZagros to Drill First Iraqi Well in 2008; Raises Expectations