Introduction
After having been tabled on the agenda of the Iraqi parliament (Chamber of Deputies) a little over two years ago, the Iraqi oil draft law remains deadlocked, stalled by the bitter row between Baghdad and the Kurdish Regional Government (KRG). Stakes are indeed high, with politics continuing to cloud the situation. The principal issue of contention is who ultimately controls the oil fields and how revenues are shared.
Kurdish Oil Law
Not willing to be hamstrung by the federal government's failure to pass an oil law, the KRG parliament approved its own regional oil law in August 2007, signaling that the Kurds were moving forward with their own hydrocarbon policy while the federal law languished in Baghdad. The regional law gives the KRG the right to exploit its oil and gas in its territory as well as in what is described as "disputed territories," a reference to Kirkuk, which sits on huge oil reserves. Commenting on the passage of the law, the Kurdish minister for natural resources Ashti Hawrami said pointedly, "We haven't passed this law to do nothing." [1] The oil law anchors Kurdish political aspirations into a strategic source of revenue and constitutes another step in the Kurds' move away from the federal government.
All along, the KRG has asserted that its regional oil law is in conformity with the Iraqi constitution. Article 108 of the Iraqi constitution says, "Oil and gas are owned by all the people of Iraq" and are to be managed by the federal government in conjunction with regional governorates. KRG has argued that Article 108 refers only to "current" oil fields, which are controlled by the central government, not any fields that will be discovered in the future. The wording provides a huge constitutional loophole that the Kurds have taken advantage of as they seek to control "future oil fields."
KRG Signs Oil and Gas Deals
Insisting it has the constitutional right to do so, an opinion not shared by the federal ministry of oil in Baghdad, KRG has signed a variety of exploration and development agreements with foreign companies - including companies from Norway, Turkey, Switzerland, Canada, Korea, the U.K., and Austria. But perhaps the most significant agreement has been the one signed in April 2007 with the two companies Dana Gas and Hilal (Crescent) Petroleum, both of the UAE, an Arab country. The two companies are 50:50 partners in a major natural gas project and are said to be investing $650 million, making it the largest private sector investment and one of the largest oil and gas projects in Iraq in several decades. The project calls for the establishment of integrated petrochemical and heavy industries which are run on natural gas. [2]
Lack of Outlets for Oil from Kurdish Fields
KRG has faced considerable difficulties with its daring oil policy. A landlocked region, surrounded by hostile neighbors, KRG had no outlet for its oil and natural gas until recently. Turkey had announced in the past that it would not allow KRG to ship oil through Kirkuk-Ceyhan (the Turkish port on the Mediterranean) pipeline without prior approval of the Iraqi government. And such approval was not forthcoming. On June 1, 2009, the situation changed suddenly, if not dramatically.
Export of Oil from Kurdish Oil Fields
After years of denying KRG the right to export newly found oil in oil fields explored by foreign companies under contract with KRG, the Iraqi government suddenly agreed to allow the export of 100,000 barrels a day of oil from the KRG territory. The government offered no public explanation for this shift in policy, but observers have argued that with budget deficits growing, the central government was anxious to put its hands on as much additional revenues as it could. [3] A senior official in the Iraqi ministry of oil, Abdul Karim Lu'aibi, would assert that the key disagreement between his ministry and KRG has nothing to do with the export of oil or the retention of revenues by the central government (KRG receives 17% of such revenues constitutionally guaranteed to oil-producing provinces/regions) but it has to do with the agreements signed by KRG with oil companies operating in its territory. [4]
June 1 - Initiating Oil Export
On June 1, 2009, the Kurds proudly inaugurated the beginning of the export of oil from Kurdish fields to Turkey. The event was celebrated by Jalal Talabani, Iraq's president (who is a Kurd) and Mas'oud Barazani, the president of KRG. The oil will flow through the pipelines connecting Kirkuk with the Turkish Port of Ceyan. In his comments on this occasion, President Talabani sought to remind the audience that KRG had the constitutional right to sign exploration and export contracts in the event that the federal government failed to pass an oil law. He added that the revenues (minus whatever would be deducted for the KRG) would benefit the national treasury and the Iraq people. [5]
The initial export was 10,000 barrel a day, expected to increase to 60,000 b/d within a few days and 100,000 b/d shortly thereafter. However, the KRG minister of natural resources, Ashti Hourami has asserted that the two fields from which the oil is being exported would be able to produce 250,000 b/d within a year. Representatives from 30 countries are said to have attended the ceremony but representatives from the Iraqi government were noticeably absent. [6] The two fields, Tawqe, developed by the Norwegian company DNO International jointly with the Turkish company Genel Enerji, and Taq Taq, developed by a joint venture of the Swiss oil company Addax (listed on the Toronto stock exchange) and Genel Enerji, will initially produce 50,000 b/d and 40,000 b/d, respectively. [7] The two oil fields are the first new fields to be developed in Iraq in more than three decades, and highlight the failure of the federal government to increase oil production appreciably since the invasion of 2003.
A Strategy for Slow Independence
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The Iraqi electronic moderate daily Al-Rafidayn interpreted the export of oil from Kurdish fields to Turkey to signal the existence of a secret agenda between Erbil (the capital of KRG) and Ankara designed to facilitate the slow separation of Kurdistan from Iraq toward independence. It said that in pursuing its interests, Turkey had sold itself to the devil, allying itself with its traditional adversaries [the Kurds] in return for KRG banishing the PKK, the Kurdish terrorist organization, from its territory. The paper maintains that the Turkish government would seek to convince the Iraqi leaders to take "a pragmatic view" with regards to its decision to prevent the export of oil from Kurdish fields. According to experts, Turkey has become "the Kurdish lung." [8] Even the London Economist was to comment that "Relations between Turkey's government and the Iraqi Kurdish regional one are plainly improving." [9] Turkey is also the major investor in KRG's territory. According to Mustapha Ahmed, a professor of economics at Suleimaniya University, KRG had received $8 billion in foreign direct investments through 2008, most of it generated by Turkish investors. [10] While Turkey has so far delayed opening a consulate in Erbil to join the 16 other diplomatic missions in KRG, [11] the top military officers of Turkey and Iraq signed a memorandum of understanding on June 10 to strengthen their joint efforts against the PKK. [12]
Central Government Reasserts Objections to KRG Oil Deals
The celebration for the export of oil from Kurdish fields did not last long. Two days after the event, the Iraqi oil minister Ali Al-Shahristani, a bitter opponent of the Kurdish oil program, reasserted that the federal government considers all contracts between KRG and oil companies illegal and unconstitutional. What is perhaps even more disturbing to the Kurds was the statement by Al-Shahristani that the federal government refuses to compensate the foreign companies that produced the oil, estimated at 10-20% of sales revenues, and asserted that it was the responsibility of KRG to do so from its 17% of revenues, guaranteed under the constitution. In a press conference, Al-Shahristani asserted further that the government would not discuss compensation to DNO and Addax "under any circumstances." [13]
However, the Iraqi government, including the prime minister, has remained silent on the subject. [14]
It was suggested that if Iraq were to agree to reimburse the oil companies for the cost of exploration and drilling stipulated in their contracts with KRG, such reimbursement would be tantamount to accepting the admissibility of the contracts. [15]
Adding Insult to Injury
Not only has Iraq refused to reimburse the oil companies for the cost of exploring, drilling and extracting the crude, but the spokesman for the Iraqi government, 'Ali Al-Dabbagh, announced that his government has decided to submit to parliament a draft law that would compensate a producing province $.050 for the cost of each barrel of crude produced. The amount, he said, will cover "the negative consequences of oil production, particularly environmental pollution." [16] Of course, this is far from the sum the KRG would expect from the government.
Conclusion
Unless the central government of Iraq and KRG reach an agreement over the legality of the contracts signed by KRG and on the distribution of revenues and the coverage of cost of production, the two sides are bound to proceed on a collision course. But this collision would be insignificant if measured against the far greater collision regarding the future of the oil-rich Province of Kirkuk which the Kurds claim to be part of their historic territory.
Turkey will play a major role both with regard to the future of Kirkuk because of its substantial Turkmen population and with regard to the export of oil and natural gas from KRG through its territory. For the moment, Turkey seems to be keeping its options open.
*Dr. Nimrod Raphaeli is Senior Analyst (emeritus) at MEMRI.
Endnotes:
[1] www.iraqdirectory.comDisplay/News.aspx/id=4272.
[2] Al-Sharq, Qatar, July 29, 2008
[3] Al-Manarah, Iraq, May 25, 2009
[4] Al-Sharq Al-Awsat, May 10, 2009
[5] Al-Mada, Iraq, June 2, 2009
[6] Al-Quds al-Arabi, June 2, 2009
[7] Al-Rafidayn, May 13, 2009
[8] Al-Rafidayn, June 4, 2009
[9] The Economist, London, May 30-June 5, 2009
[10] Al-Rafidayn, Iraq, June 11, 2009
[11] Sotiliraq, June 4, 2009 (quoting Falah Mustapha, in charge of foreign relations in KRG government)
[12] Al-Rafidayn, Iraq, June 11, 2009
[13] Al-Rafidayn, Iraq, June 11, 2009
[14] Al-Sabah al-Jadid, Iraq, June 6, 2009
[15] Al-Manarah, Iraq, May 25, 2009
[16] Al-Rafidayn, Iraq, June 12, 2009
