Rich in culture, history and resources, the Kurdistan region of Iraq, long brutalized by the Baath government, enjoyed peace, stability and economic development in the aftermath of the 2003 invasion of Iraq. Known as the state within a state, or the “other” Iraq, the region holds an estimated 45 billion barrels of oil and equally colossal levels of gas.
Currently, however, there is no oil law that determines control and management over the country’s resources because of differences between the Kurdistan Regional Government (KRG) and the Baghdad government. The KRG opposes the yet-to-be passed draft oil law because it would require it to cede too much control to Baghdad. As a result, Iraq lacks the necessary regulatory and legal framework to instill confidence in foreign investors. The country desperately needs to upgrade its energy infrastructure and to ensure the country’s oil wealth is tapped to its full potential (Iraq currently exports little more than 2 million barrels of oil per day — less than what it was prior to 2003).
In accordance with what it considers its constitutional rights (under the Iraqi constitution, oil and gas ownership are not within the exclusive powers of Baghdad), the KRG has enacted its own oil law as disputes with Baghdad persist; it has signed — independently — more than 30 exploration and development deals. The federal government deems these illegal and void since they are enshrined in production-sharing agreements that give companies a stake in the crude they produce. Baghdad has, as a result, blacklisted those companies that independently enter agreements with the KRG. The oil ministry instead prefers to give a fee to companies; this, however, has discouraged investment since it gives oil companies no incentive to maximize output or compensation for the risks taken, and the Iraqi parliament itself has voiced its dissatisfaction with what it considers an unproductive model. Iraq’s Oil Minister, Hussain al-Shahristani, it should be noted, has been called to account for this by the Iraqi parliament and faces an interpolation in the coming weeks.
Back in June, however, Baghdad did allow the KRG to export oil from two fields in the Kurdish north (Tawke and Taq Taq), with all revenues being deposited and distributed on a per capita basis by the Baghdad government.
Although this might have seemed like a breakthrough at the time, it is now clear that the two governments are still at a standstill. Neither the KRG nor Baghdad have paid the foreign oil companies that operate those two fields.
To make matters worse, the KRG was recently embroiled in a dispute with the Oslo Stock Exchange and the Norwegian oil company DNO International (which operates the Tawke field).
DNO is one of many foreign oil companies that have signed contracts with the KRG to develop oil fields. However, DNO operations were suspended last month by the KRG as a result of a Norwegian regulatory investigation into the sale of $30 million-worth of DNO shares. Material published by the Oslo stock exchange suggested at the time that the KRG acted as a middleman for the transaction of those shares to Turkish oil firm Genel Enerji (which operates the Taq Taq field), through the use of a clearing account registered to KRG Natural Resources Minister Ashti Hawrami.
At the time, it was suggested that a personal account was used, and this led to intense media speculation that illicit personal gain may have been involved in the transaction. The KRG abruptly suspended DNO operations. Indeed, Baghdad was quick to jump on the opportunity and an Iraqi MP called for a committee to investigate the possibility of unlawful involvement by the resources minister.
It was, however, all too quick and opportunistic. The KRG and, specifically, Hawrami, were vindicated entirely after the Oslo Stock Exchange and HSBC released statements that made clear neither the KRG nor Hawrami were being investigated and that there was no wrongdoing on their part.
Although DNO operations were eventually restored, the damage was done. The tit-for-tat rhetoric and heated exchanges between the KRG and a corrupt and underperforming oil ministry in Baghdad, resulted in the suspension of all operations in the Kurdish north.
The Tawke and Taq Taq oilfields produced around 60,000 and 40,000 barrels per day, respectively. Even at $50 per barrel, these fields could jointly generate $5 million per day, and this is revenue Iraq desperately needs. Iraq has already had to slash its budget on countless occasions because of falling oil prices.
A recent oil auction saw only one bid being awarded to a foreign oil company, while the second bidding round has just been postponed; like everything else, the energy sector is currently in a state of stagnation. Perhaps once the national elections in January 2010 are out of the way, focus will turn on the outstanding disputes — oil being one of many — including Kirkuk and the centralisation and decentralisation of power. But based on past performance, the only certainty in Iraq is uncertainty.
Ranj Alaaldin is a Ph.D. candidate at the London School of Economics focusing on post-invasion Iraq
