Conflict Rising in Iraq Over Oil Contracts and Revenues

In a development that surprises no-one except armchair analysts, trouble is brewing in Iraq over the sharing of oil revenues between Iraq's largely autonomous Kurdish region and the central authorities in Baghdad over the Kurdistan Regional Government's unilateral agreement just signed with U.S. oil giant, Texas-based Exxon Mobil, to develop the region's oil resources.

The agreement sets the stage for conflict between central authorities in Baghdad, who insist that the central government has overall oversight for the country's energy agreements and Kurdish authorities in Arbil, working to carve out increased autonomy for retaining an increased share of their region's oil revenues rather than sending it all to Baghdad to await repatriation of a fraction back to Arbil.

The issue is hardly minor, as Iraq contains the world's fourth-largest oil reserves. Other major international oil companies working in southern Iraq, including BP and Royal Dutch Shell, have resisted venturing into areas controlled by the Kurdistan Regional Government, fearing the wrath of the Iraqi government.

Given the Iraqi government's insistence that U.S. forces vacate the country by 31 December, central authorities are throwing away their major bargaining chip with the Kurdish authorities in Erbil, especially as the incipient signs for a post-American occupation deal are not good, leaving Baghdad bereft of an international 'peacekeeper."

Cut to the chase.

The Kurdistan Regional Government is urging Baghdad's central government for a quick resolution to the dispute over regional rights to develop natural resources, Iraq's biggest source of foreign currency, as Erbil insists on its right to implement earlier contracted deals.

The potential flashpoint is the Iraqi Kurdistan's regional administration Energy Minister Ashti Hawrami confirming during the Kurdistan-Iraq Oil and Gas conference in Erbil on 12 November that it had already signed a long-debated deal with U.S.-based oil major Exxon Mobil on 18 October 18 for six exploration blocks within its area of control, the regional administration's first official confirmation of the Exxon Mobil contract of its initial contract with an international energy major to venture into the region.

Baghdad has consistently maintained that it views such unilateral contracts between the Kurdish regional authorities and international oil firms to be illegal. Ramping up the pressure, Iraq stated that it may close the country's potentially lucrative southern oil fields to international energy firms which ignore their concerns on developing the country's potential northern region oil fields and as regards Exxon Mobil, earlier warned the U.S. oil company that any unilateral oil exploration contract with Iraqi Kurdistan might result in termination of its 2009 deal with the central government to develop the 8.7 billion barrel West Qurna Phase One oilfield.

It is not an idle threat - Abdul Mahdy al Ameedi, director of the Iraqi oil ministry's contracts and licensing directorate, stated "The Exxon Mobil company could face disqualification and the termination of its contract with the Iraqi Oil Ministry."

Hardly surprising, Exxon Mobil has so far declined to comment beyond asserting that its Kurdistan venture had the approval of Iraqi Deputy Prime Minister for Energy Hussain al-Shahristani.

And the Iraqi Oil Ministry?

It rejected Exxon Mobil's assertion that Iraqi authorities had approved the arrangement.

Adding to the uncertainty is the fact that Iraq's new oil investment law, which deals with the contentious issue of apportionment of oil revenues, will only be submitted to parliament by the end of this year. Recently the Kurdistan Regional Government increased the tension with the authorities in Baghdad after Erbil rejected the proposed Oil and Gas Law draft, believing that it would allow the federal government the power to manage the north's oil wealth at the expense of the region.

Kurdistan Blocs Coalition spokesman Muayyid Tayyeb said, "Shahristani's position towards the right of Kurdistan Region to conclude oil contracts is unconstitutional and (unresolved) political agreements between us and the federal government will lead to a new crisis and disputes between the region and the federal government."

So, how to read the contretemps?

While little is certain in the Middle East, it would seem that Exxon Mobil is looking beyond the American drawdown of its military presence in Iraq by 31 December, one can draw several possible conclusions.

First, that the central authority of Baghdad overall will decline as a result of losing its major foreign patron.

Secondly, that southern Iraq's oil reserves will become an increasingly contentious free for all between a multitude of international energy concerns and those oil companies underwritten by foreign governments, such as Chinese firms.

In such a fluid situation, jumping the gun is understandable. It makes sense to be the first international energy firm with 'boots on the ground" in northern Iraq's Kurdistan Regional Government's area of influence, as there is currently zero competition and, given the oil lobby's influence in Washington, the Obama administration may reluctantly conclude that it has little option but to advise Baghdad to accept the new 'reality."

Cynical?

Certainly. But it would give a major U.S. energy firm a unique advantage in an area that is an up and coming energy producer.

It would not be the first time that Iraq saw such power posturing in Washington over issues of its national sovereignty vacillate between wishful thinking and reality. Remember the nation's purported "weapons of mass destruction" that triggered the 2003 U.S.-led invasion.
 
Eight years later, we're still waiting for the evidence.

By. John C. K. Daly of Oilprice.com