IRAQ - Focusing On The Non-Oil Sector - Part 18 - Kurdish Oil Law.

Officials of Iraq's autonomous Kurdish Regional Government (KRG) say their petroleum law, paving the way for foreign investment in their northern oil and gas fields, is irreversible. While a federal legislation remains stalled, they say their law is in effect. It gives the KRG the right to administer its petroleum wealth in the three northern governorates - Irbil, Sulaimaniyah and Dahuk - as well as "disputed territories" including Kirkuk, one of Iraq's largest crude oil production hubs.

The law, approved on Aug. 7, authorises the KRG to sign production sharing agreements (PSAs) in accordance with a model in application since 2004. In Baghdad, however, Oil Ministry officials say the KRG's law will have to be amended to fall in line with a federal petroleum legislation awaiting debate when the federal parliament resumes its work in September. They dismiss KRG assertions that its law is irreversible. But the federal government has been weakened by Sunni, Shi'ite and secular groups opposed to its policy and parliament is deeply split on the shape of the petroleum legislation. The US is frustrated with a deadlock over this and several other "benchmarks" in the run up to a Sept. 15 assessment in Congress of progress in the American project.

What many call "the oil curse" - or "the Saddam curse" - is the name of the set of problems the US has faced in Iraq since its invasion of this country in March 2003. Spending almost $1 trillion in efforts on all fronts - including cash, with the war bill exceeding $2 bn/week - and having lost so many US lives (over 3,750 by Aug. 25), the Iraq project seems to be the costliest thing Washington has undertaken since World War II. Yet the complications in Iraq keep multiplying as if this curse is embracing all concerned, not even sparing Iraq's neighbours - with special focus on the Iran-led axis of anti-US forces including Syria, on Turkey, and on a US-led anti-Tehran alliance including Egypt, Jordan, Saudi Arabia and most of the latter's Gulf Co-operation Council (GCC) partners (see Part 17 in ood1-IraqComplicationsJul30-07).

So far the KRG has signed five PSAs and two MoUs for E&P within its region. They involve the following companies:

DNO, whose two PSAs were signed in June 2004 for two areas including the Tawke oilfield it found and is developing - with crude oil production having begun.

Genel Enerji/Addax Petroleum, whose PSA was signed in 2004 for an area including the Taq Taq oilfield, confirmed with a second oil find in February 2007.

A&T Petroleum/Hawler Energy, whose PSA was signed in 2004 for an area where it has found a prospect through its Bina Bawi-1 well.

Petoil/Prime Natural Gas, whose PSA was signed in 2004 for an area where it has found the Chia Surkh prospect.

Western Oil Sands of Canada, whose PSA for its WesternZagros unit was signed in May 2006 covering an area it is exploring, said to potentially contain 1 bn barrels of oil.

Heritage Oil, whose MoU for exploration was signed in 2005.

Sterling Energy, whose MoU for exploration was signed in 2006.

The small Norwegian firm DNO, which began its work in November 2005 to extract oil from Tawke near Zakho in Dahuk governorate, recently announced production had risen to 6,000-7,000 b/d. This should reach a 30,000 b/d capacity before end-2007. DNO has just received, and rejected, an offer of $700m for its assets in northern Iraq which it values at more than $1 bn. This signalled that international oil companies (IOCs) were willing to put significant amounts of money into Iraq despite the security problems. DNO refused to name the company, but industry executives speculated that Shell was a possible bidder. DNO's areas are said to have over 200m barrels of recoverable oil.

The FT on Aug. 22 quoted Helge Eide, DNO's chief executive, as saying his firm would focus instead on maximising the value of its Iraqi assets. Eide said: "There is more and more interest in Iraq, and we have a unique position there". The offer was said to value DNO's proven and probable Iraqi oil reserves at about $11.9/b. DNO, which is quoted on the Oslo stock exchange, found the Tawke oilfield in late 2005. In June 2007, it became the first IOC to produce oil in Iraq since the nationalisation of the industry in 1972, albeit on a very small scale. DNO is delivering its production to the domestic market. Eide said DNO hoped to begin exports in November, once it had secured approval from the KRG to connect to a pipeline to Turkey.

Shell is seen as one of the main IOCs most positive about doing business in Iraq. In 2005, Shell signed an agreement with Baghdad to study the Kirkuk oilfield. The area is the subject of a dispute between the KRG and the central government. Shell has worked for the Iraqi Oil Ministry analysing the data on the oilfield. A number of other IOCs have signed similar co-operation agreements, or are training Iraqi petroleum engineers.

Iraqi Kurdistan, including the disputed Kirkuk, is home to 25 bn barrels of proven oil reserves and a further 20 bn barrels of probable reserves. The Denmark-sized Kurdish region makes up about 22.5% of Iraq's total oil reserves as estimated by Baghdad - excluding huge reserves yet to be found (see survey of Iraq in APS Review, from omt18IraqProspctApr30-07 through omt21IraqWhoMay21-07).

A scramble for Kurdish oil licences has begun since Natural Resources Minister Ashti Hawrami on March 22 said the KRG had a production goal of 1m b/d by 2012. In London on March 22, Dr Hawrami said the Kurdish region aimed to be the "hub" for Iraq's future oil industry and would look to sign up to ten E&P contracts by end-2007, adding: "I have six or seven [such] contracts on my desk (excluding PSAs). We will listen to any company as long as they have the technical and financial capabilities to do the job. We are not interested in names simply because they sound good".

BG Group and Statoil are among several IOCs in talks with the KRG. Others include smaller rivals such as UK-listed Sterling Energy. Paul Mullarkey, BG's chief business developer, on March 22 said: "We are considering our position, as we do with any region around the world. But it's far too early to say how the situation will progress".

Historically, little exploration has been done in Kurdistan. The first licence in Iraq, a huge concession east of the Tigris, was awarded more than 80 years ago to the BP-led Iraq Petroleum Co. (IPC). It expired in 1960/01 with no hard data coming out of it.

In KRG areas of the Zagros Basin there are six oilfields and two non-associated gas fields. The estimate of the reserves potential there is up to 45 bn barrels of oil and 100 TCF of gas, making the region comparable with the Caspian or North Sea. While Kurdish appraisals are rough estimates, to the west of the KRG areas lie some of Iraq's largest fields. At its peak in 1979, the Kirkuk field produced more than 1.6m b/d (see down19IraqFieldsMay7-07).

KRG Premier Nechirvan Barzani signed the law on Aug. 7, calling it a "historic moment". At a news conference in Irbil, capital of Kurdistan 350 km north of Baghdad, he said: "This is the first time in Iraq's history we have a say regarding our natural resources within the frame of the Iraqi constitution".

Sunni Arabs, in parts of Iraq without much oil proven as yet, are pressing for legislation to maintain central control of the petroleum wealth, fearing Kurds and Shi'ites in the oil-rich north and south will monopolise control of E&P contracts and hoard the profits. Kurds and Shi'ites are eager for control of the resources they were largely deprived of under Saddam's Sunni/Ba'thist dictatorship.

Armed with their law, the Kurds insist on running development of future oil and gas finds in their region. Underscoring the divisions, the hardline Sunni Association of Muslim Scholars (AMS) has issued a statement rejecting the KRG law and called on IOCs not to invest in the area. It said KRG leaders were part of the US-led occupation in Iraq and therefore had "no right to handle the petroleum resources of Iraqis", warning that IOCs could face compensation demands in the future.

A federal petroleum bill is one of the benchmarks being urged by the US amid a debate over calls to begin withdrawing American forces if Iraqi political leaders cannot make progress towards national unity. In the latest draft, Shi'ite, Sunni and Kurdish officials agreed on the distribution of revenues, with the KRG getting 17% of net revenues each month, after deducting federal government expenditures.

PM Barzani, a nephew of Kurdistan President Mas'oud Barzani, on Aug. 7 insisted the Kurds were "committed to a democratic, united Iraq". He said: "The oil revenues, whether from Kurdistan or Basra, will be put in one Iraqi account. Until a census is done, our share is 17% of Iraq's oil revenues. This is the deal we have right now. Such revenues will be used to make life better in Kurdistan where we have many problems and needs".

The KRG is to offer 40 new oil E&P blocks to IOCs. Minister Hawrami says they will be opened to competitive bidding, adding: "The Kurdish petroleum law addresses the needs of all Iraqis. We want to set an example for all of Iraq". The KRG is offering PSAs, whereas in Baghdad politicians are strongly against the PSA approach.

The Kurdish parliament on Aug. 6 approved the law. KRG Premier Barzani on Aug. 7 said the law "will be the foundation of our economic development. The...[KRG] will choose the best, most experienced, the most committed investors...who can bring us prosperity...".

The larger IOCs like ExxonMobil, Shell, BP, Chevron, ConocoPhillips, Total and ENI have their eyes set on Iraq's big oil reserves in the Shi'ite south. They do not want to upset their chances of doing business in greater Iraq by entering into deals with the KRG before the federal petroleum law is in place.

The Kurds' law already has elevated investor interest in the region among smaller IOCs. Hawrami says he remains hopeful that Baghdad would move forward with its federal law. But he says the Kurds would carve out their own path in developing the region's petroleum resources, adding: "We haven't passed this law to do nothing... Our petroleum law is done within the federal framework of the constitution". He notes that the 111-member Kurdish Parliament approved the law unanimously.

Former Iraqi oil minister Issam Al-Chalabi, now an independent consultant based in Amman, says: "Oil is politics in Iraq and I think this [KRG law] will [add] fuel to the fire and upset more people in Baghdad. I think the Kurds should have waited to get a federal deal first before passing their own oil law".

Kirkuk has been a disputed territory between the Kurds and successive central Iraqi governments for many decades. The Kurds want to annex Kirkuk as soon as possible, while many politicians in Baghdad oppose this.

The KRG has planned crude oil production from the Kurdish region of 200,000 b/d in 2008, which is to reach 1m b/d by 2012. But hitting this target will require a lot of investment. Iraq currently produces around 2m b/d.

However, Iraqi Oil Minister Hussein al-Shahristani on Aug. 21 said: "Several parliamentary blocs [in Baghdad] want to add a clause banning PSAs, although these deals are common even in highly nationalistic Syria. We at the Ministry are not that enthusiastic about PSAs, especially that we have the finances and ability to raise production from existing fields". The federal law, he said, will stipulate a review of all oil and gas deals signed by Saddam's regime and by the KRG to "guarantee total national control and the highest return for Iraq", adding: "Any contract that contradicts this has to be redrawn. The oil law is not as contentious as those who oppose Iraqi democracy imagine".