Iraq's Ongoing Oil Resources Power Struggle

Incident: The tit-for-tat conflict over Iraq's oil resources continues with Iraqi Kurds suggesting they are in talks with "two to three major international companies" to develop oil resources claimed by the Iraqi central government. The Iraqi Kurds say they will announce the results of these talks in about a month.

Bottom Line: This is a direct response to Baghdad's ongoing talks with BP Plc. over a deal to develop oil in the disputed territory of Kirkuk, claimed by both sides, and its warning to Exxon Mobil that if it continues to work with the Iraqi Kurds it will lose its contracts in southern Iraq.

Analysis: As we have noted in several reports on this urgent issue, the Iraqi Kurds are producing and exporting oil directly to Turkey in contravention of the Iraqi government in Baghdad. Baghdad considers these activities smuggling, but major oil companies have increasingly chosen to work unilaterally with the Kurds, who offer a more attractive investment environment. Last week, Baghdad revealed it was in talks with major BP for a deal to develop a block in Kirkuk, the main flashpoint in the disputed territories, where Iraqi military troops and Kurdish security forces are in a standoff, poised for armed conflict. Also last week, Baghdad once again threatened Exxon Mobil over its operations with the Kurds, but also hinted to the Kurds that a deal with Exxon might be underway that would convince the oil major to quit Northern Iraq in return for more favorable contracts in southern Iraq. Exxon has not commented on this, and the Kurds insist that Exxon has no intention of caving in to pressure or concessions from Baghdad. Both sides are very nervous and oil companies are straddling a volatile investment zone here. Anything now could tip the balance in Kirkuk and trigger an armed conflict. Also last week, the Kurds announced they had awarded Chevron a stake in the Qara Dagh oil block.