IRAQ - Kurdistan Is Racing With PSA offers.

However, the KRG in early August published a draft petroleum law and model PSA and has since urged IOCs to begin negotiating E&P deals with its own Ministry Natural Resources. KRG's Natural Resources Minister Ashti Hawrami this week said he was eager to get on with the development of Kurdistan's petroleum sector so as to provide much needed revenues for reconstruction. He said the region's own draft petroleum law was to be passed by Kurdish lawmakers in October, adding: "There's a vacuum [in the rest of Iraq], and we need to engage these [oil and gas] resources through rapid development".

Among the thorny issues surrounding Kurdish oil production within Iraq is who gets the revenue from the fields which were not in production when the constitution was agreed last August - the KRG or the government in Baghdad. Hawrami said the KRG had no intention of withholding revenues from Baghdad from the new oilfields which would be developed in the undisputed territories in Kurdistan. But he added that it would not be without conditions, saying: "It makes sense to share [with the federal government] and we will share it, but with conditions. The industry must be structured in the way that we want it".

Oil output from the undisputed areas of Kurdistan under the KRG have the potential to reach up to 1m b/d in a few years on top of around 1m b/d from the disputed regions, such as Kirkuk. Hawrami said this would necessitate construction of a new 1m b/d crude oil export pipeline as well as an export pipeline for natural gas. Hawrami said he would prefer a new pipeline to run alongside the current line to Turkey's port of Ceyhan, but did not rule out the possibility of shipping the crude south if Turkish terms were not attractive.

Although northern Iraq's oil reserves are not as big as the giant southern fields around Basra, geologists say the north still has good potential, especially as the area is largely unexplored and modern techniques such as seismic imaging have never been used in Iraq. The KRG estimates northern Iraq's reserves at around 45 bn barrels of oil and 100 TCF of natural gas.

On the sidelines of a London briefing on KRG's petroleum sector, Hawrami on Sept. 20 told reporters: "We have been talking to oil majors about specific areas" - though he declined to say which companies were involved. Officials from Royal Dutch Shell, ENI, BHP Billiton and Statoil were among those at the briefing. Hawrami said the region's long-planned draft petroleum law "is ready to go to the parliament of the KRG this month or next". He said he expected it to be passed by Kurdish lawmakers in October.

DNO expects its drilling success in Kurdistan north to stoke wider interest by foreign oil firms in the country's most secure region. The first foreign firm to drill in Iraq after the US-led invasion in 2003, DNO aims to start producing crude oil from the first quarter of 2007. DNO President and Managing Director Helge Eide was on Sept. 21 quoted as saying initial test wells at DNO's Tawke field achieved an output of 5,000 b/d and more wells were planned to boost production.

Hawrami previously headed the UK-based consultancy ECL and was the boss of Iraq's former oil minister Ibrahim Bahr ul-Uloum. Hawrami, a liberal, has long advocated the PSA approach. In August he said the PSA was "the only viable model for Iraq, as it will attract investment and the companies will be willing to take risks on [E&P] projects". By contrast, federal Oil Ministry bureaucrats in Baghdad favour risk service contracts which are less attractive to IOCs.

Hawrami insists the proposed KRG petroleum law is in accordance with Iraq's permanent constitution, saying "so we do not expect any problem with the federal authorities". But Petroleum Argus on Aug. 14 quoted a Baghdad Oil Ministry official as saying: "A lot of things need to be changed. The Kurdish interpretation of the constitution is beyond anything I could have imagined". Argus said Oil Ministry officials in Baghdad wanted to "dilute clauses in the constitution which they [KRG] say give control of undeveloped upstream assets to the regions". Argus noted: "Not only do the Kurds reject such a move, but their interpretation of a key constitutional clause governing oil also differs from the central government's".

The constitution states that "the federal government will administer oil and gas extracted from current fields", which most understand to mean that existing fields will be operated by state-owned NOCs. But Hawrami says the term "administer" restricts the federal authorities to "only an administrative role, confined to the handling, i.e., exporting and marketing, of the extracted oil and gas from existing producing fields".

The KRG has already prepared a set of state operators in the petroleum sector: For E&P the Kurdish Exploration & Production Co. (KEPCO) is being formed to operate existing fields "in a manner consistent with Article 112 of the Constitution". For sales, the KRG is forming the Kurdistan Oil Marketing Organisation (KOMO) - as distinct from the federal government's State Oil Marketing Organisation (SOMO), an agency operating for many years before the invasion. The Kurdistan Organisation for Downstream Operations (DODO) will run oil refining and gas processing plants, storage, distribution, etc.

However, the KRG is coming up with new and unwelcome PSA terms with foreign companies may reject. Under contracts already signed, the KRG was to calculate profit oil on the basis of cumulative production, whereas under the new PSA the basis should be the average daily production. There is also a proposal in the draft law which links royalty rates with the gravity of the crude oil produced.