The impact of oil contracts for the government of Iraqi Kurdistan

Oct 14, 2007 02:00 AM

by Walid Khadduri

In August, the Parliament of Iraqi Kurdistan approved an Oil and Gas Law for the province, whose government had approved eight production sharing contracts with foreign oil companies prior to the issuing of this legislation, or even before approval on a federal Oil Law, which remains under discussion by the Parliament in Baghdad.
In October, the Kurdistan regional government signed three production agreements with Canada's Heritage for the Miran block, whose petroleum reserve is estimated at 1 bn barrels of crude. This area is 30 km away from the Taq Taq field of 20,000 bpd, based on a 50:50 sharing agreement with the regional government, on the condition a refinery is completed within two years from the date of the signing.

The regional Kurdistan government granted France's Perenco the concession to develop the Sandi-Amidi Block, adjacent to Turkey; it also granted an agreement for production sharing to America's Hunt Oil (the first US company to obtain a contract of this type in the province). However, unlike the other agreements that have been announced so far, neither the regional government nor the concerned company published information about the given concession area.
The Kurdistan regional government's agreements have provoked wide opposition in Iraq; taking part in the campaign of criticism has been Iraq's oil minister, Hussein Shahristani, who stated after the signing of the last of three agreements that they were "illegitimate" and that he would support the export of any oil that is discovered and extracted by these companies. He indicated that the companies that are contracting in this method with the Kurdistan government will not be permitted to work in the rest of Iraq.

This opposition was confirmed by the spokesperson of the Iraqi Oil Ministry, Assem Jihad, who said that the federal Oil Law draft legislation stipulates awarding all development agreements through an open and transparent public bidding process, and not through bilateral agreements. The Kurdistan government has openly called for firing Shahristani due to these positions and accused him of interference in the regional government's affairs.
The international media has raised a big commotion about the last deal, with Hunt, not only because it's Kurdistan's first deal with a US company, but also because the company's owner is an old friend of US President George Bush and a member of the president's foreign affairs advisory council.

However, the real problem with this agreement is not just this; former Oil Minister Issam Chalabi discovered this and recorded it in two letters, one addressed to Hunt himself on 4 October, and the second to the speaker of the Iraqi Parliament, Mahmoud Mashadani, on 6 October.
The information obtained by Chalabi and recorded in the two letters maintains that the agreement with Hunt "covers blocks 6 and 7 and 8, by virtue of the numbering system adopted by the regional government; according to the official maps, these areas fall within the province of Nineveh, and outside the currently-recognized Kurdistan province." Chalabi goes on to say that "these three areas comprise four geological formations, Jabal Qand, Fajr, Narjus and Ain Safna, where the Jabal Qand formation is located 35 km toward the northwest, in the direction of Ain Zala. Regarding the Fajr and Narjas areas, they represent and extension of Jabal Maqlub, toward the northwest, and this can be confirmed by specialists at the Oil Ministry."

In his memorandum, Chalabi reminds the Iraqi speaker of Parliament of the following: "In a direct conversation with Hunt Oil, the company refused to acknowledge or deny (the information about the fields) and said that such matters would be reviewed by the regional government. The company said that it had dealt with the matter in sound, legal and transparent fashion."
In his letter, Chalabi says, "Perhaps, in order to obtain confirmation of the abovementioned information, the regional government is asked for an official and open clarification of the matter."

Unfortunately, these problems and difference in opinion were expected ever since the announcement of the Iraqi Constitution and its vague provisions regarding the prerogatives of the Iraqi Oil Ministry, the regions and the provinces in managing the country's petrochemical resources. The disputes we see today are a result of the manner and method in which the constitutional provisions on the oil sector and oil laws were drafted, resulting in disagreements in viewpoints between the oil minister and the Kurdistan regional government, or between prominent Iraqi oil experts and the Kurdistan government, and we are still at the beginning of the process.
There is considerable fear that the obstacles to a natural development of the oil and gas sector in Iraq may grow larger, due to these vague legal arrangements. There is fear that these disputes are a bad sign for Iraq's most important economic sector, as if the security problems weren't enough already to obstruct the rise of a modern oil sector. Complicated legal problems have been invented, and the examples we have today are a telling sign of this.

Who is responsible for negotiating with foreign companies? What prerogatives do local governments enjoy? Who determines the scope of a block to be granted? What happens if a regional authority grants concessions outside its jurisdiction?
What happens if, as in the present case, the areas granted to Hunt, if this is confirmed, are in Nineveh (Mosul) and not within Iraqi Kurdistan's current borders? What will be the regional repercussions of these types of domestic disputes within a single country for the oil sector in the rest of the Middle East, if this experience is taken to neighbouring countries?

Dr Walid Khadduri is an expert in energy affairs.

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