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Kurds Don't Hold all the Cards in Iraqi Oil Battle

By Jen Alic | Sun, 05 August 2012 00:00 | 0

The battle between the Iraqi central government in Baghdad and the Kurdistan Regional Government (KRG) in northern Iraq is picking up dangerous momentum as Baghdad attempts to fight back against brazen moves by major oil companies to deal directly with the Kurds for Iraqi oil deals.

Following on the heels of a controversial ExxonMobil deal with the KRG last October and then Chevron earlier this year, France’s Total and Russian Gazprom’s Neft have now struck similar deals, leaving Baghdad wrong-footed and threatening to Balkanize the country.

Last week, Total SA announced it had signed deals with the KRG for a 35% stake in two exploration blocks in northern Iraq, the Harir and Safen blocks. Baghdad responded through the Iraqi Oil Ministry that it would cancel its contract with Total for the Halfaya oil field in retaliation.

Earlier this week, a subsidiary of Russia’s Gazprom Neft announced it had signed two deals with the KRG, again bypassing Baghdad. One deal was for the 1,780-square-kilometer Garmian block, and the Gazprom Neft subsidiary acquired a 40% share in the block. A second deal saw the Gazprom Neft subsidiary acquire an 80% share in the smaller Shakal block. For both deals, the KRG holds a 20% share.

The Kurds have always enjoyed a certain amount of oil autonomy due to an ongoing dispute over oil rights in the semi-autonomous region, but the arrival of major international oil companies on the scene has taken this dispute to a new level.

Baghdad’s strategy remains unclear. As Oilprice.com reported earlier this year, the Iraqi central government responded harshly to ExxonMobil’s courtship of the KRG by banning oil companies bypassing Baghdad to deal with the KRG from participating in its latest auction of oil exploration blocks. That May auction was a flop and only attracted bids from smaller companies.

But the central government has not made any indications that it would cancel its own contract with ExxonMobil for the West Qurna field near Basra. Still, it is willing to lash out at Total and cancel its share in the contract to develop the Halfaya field in the south of the country.

So far, no threats have been leveled at Gazprom, either, which has a share in developing the central Iraqi Badra field. Chevron was easy to ban as it has no existing deals with the Iraqi central government, so Baghdad had little to lose.

So let's look at the numbers: The West Qurna field has an estimated 8.6 billion barrels of oil, while the Halfaya field has around 4.9 billion barrels and the Badra field 100 million barrels. This makes it clear why ExxonMobil was allowed to slide, while Total is being threatened more seriously.

Full-on support from Washington aside, major international oil companies find the KRG’s terms more attractive. Baghdad offers a flat fee for extracted oil, while the KRG offers a share of reserves and oil produced. Beyond that, Iraqi oil wells just haven’t been as profitable as oil majors thought they would be, so they are willing to risk losing their contracts. That said, the lure of the KRG is somewhat subdued by Baghdad’s threats and the possibility that Baghdad could block the use of its pipelines in the south to transport oil from the north.

The current conflict over oil has intensified since April, when the KRG halted exports after accusing the central government of failing to honor the tenets of a 2011 agreement in which the Kurds were to send oil to Baghdad and then take half of the revenues from the sale. The KRG says it never got paid, while Baghdad claims that the KRG was smuggling oil out and hoarding illicit revenues.

Irbil is gambling that it holds enough cards now to break the stalemate on its own terms. On Wednesday, the KRG announced that it would restart exports at 100,000 barrels a day beginning the first week of August in what it called a gesture of goodwill. However, that gesture will only last a month if the KRG feels that Baghdad is not living up to its end of the bargain. In order to do that, Baghdad would have to pay what the KRG claims it owes in unpaid revenues of around $560 million for earlier exports. And if it does that, it will demonstrate a certain weakness that will further embolden the KRG, which now believes it holds all the cards in the oil game.

The KRG may be gambling a bit above its pay grade, though. Baghdad still holds plenty of cards, if it could just figure out how to play them to the tune of the oil majors. The KRG does, after all, still rely on the central government in Baghdad for its budget from oil revenues and for the time being needs southern pipelines to transport product.

By. Jen Alic of Oilprice.com

Jen Alic is a geopolitical analyst, co-founder of ISA Intel in Sarajevo and Tel Aviv, and the former editor-in-chief of ISN Security Watch in Zurich.

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