Iraq and Gulf Analysis

The Iraqi Oil Ministry Clarifies Its Position on Oil Exports from Kurdistan and the DNO Deal

Posted by Reidar Visser on Monday, 18 May 2009 23:59

The two last weeks have seen considerable confusion about the Iraqi oil ministry’s position concerning oil exports from Kurdistan, where the regional authorities have signed a number of exploration and drilling deals with foreign oil companies without consulting Baghdad. News that Baghdad had given the go-ahead for exports from the fields concerned by these deals prompted wild news reports about some kind of “grand compromise” between the Kurds and Baghdad on an oil law, which has stalled since the first drafts were written back in 2006. However it soon became clear that there was no compromise at all, as the Iraqi oil ministry stated that it still does not recognise the deals that the Kurds have cut with foreign companies. Accordingly, the only interpretation that could reconcile the seemingly contradictive position by the Iraqi oil ministry would be that Baghdad would allow exports to go ahead, but would at the same time keep the oil income for itself in the centrally managed account before redistributing back to the Kurds the 17% agreed as Kurdistan’s share during the annual budget negotiations earlier this year. This, of course, would involve no payment to the foreign companies concerned: DNO (a small private Norwegian company) at Tawke, and the Turkish-Canadian joint venture that is involved at Taq Taq.

In interviews with the Arab press, Iraq’s oil minister Husayn al-Shahristani has now confirmed that this is indeed the way he intends to handle matters. In principle the Kurds are free to export oil from these fields. However, Baghdad will do the marketing, and all the revenue from these and Iraq’s other oil exports (the vast majority of which come from Basra) will be pooled into a central account controlled by Baghdad, from which the Kurdistan Regional Government (KRG) in turn will receive its allocated 17%. The problem of how and whether to compensate the foreign companies involved will therefore most likely be left to the KRG, since it would be exceedingly difficult for Baghdad to pay any money for contracts it does not recognise. (Shahristani has offered to consider any contract that is submitted to Baghdad for review, but so far this has not been done by the Kurds because a key stumbling block in the oil-law and constitutional-review negotiations is that Kurdish politicians believe this kind of decision should be a regional prerogative. Also, Shahristani’s stance on this makes it perfectly clear that for the moment he does not see any difference between deals agreed before the drafting of the oil law in 2006/2007 and later contracts, a distinction which some of the foreign companies with agreements dating back to 2005 like to make.)

If Shahristani stands by his current position, this situation will involve dilemmas for the KRG. Like other administrative entities in Iraq (elsewhere known as non-federal muhafazas or provinces), the KRG will receive its share of Iraq’s total oil income. But even if the agreed share of 17% for Kurdistan is generally seen as inflated in proportion to the relevant demographic numbers, the KRG will have a problem in that it will probably have to use these funds to pay DNO (which apparently will not get any money from Baghdad) for operating the field. This could leave a net economic result that is worse for Kurdistan than other administrative entities in Iraq, which can use the oil money they receive in its entirety to finance local services for their inhabitants, without having to worry about payments to foreign companies.

This leaves Kurdish authorities with the quandary of whether they should pay the foreign companies in order to honour their own contracts or not. It is probably painfully clear to them that if the contracts had been submitted to Baghdad, Kurdistan would have received exactly the same sum of money without having had to pay anything to the foreign companies (who would instead be paid by Baghdad – that is, if the contracts were found to be “in Iraq’s interests”, as Shahristani has described it). True, Shahristani, too, is under considerable pressure to boost oil exports, but if he should choose to suddenly turn around and accept both production sharing agreements (PSAs) with two foreign companies and regional negotiation rights – traditionally red lines for Baghdad politicians – angry reactions inside and outside the Iraqi parliament would likely follow. There the mood is that Iraq can still afford to keep the constitutional process and the question of foreign oil investment separate from each other, without having to surrender entirely to foreign investors and the forces of international capitalism.

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