Saturday, 10 April 2010, 07:55 GMT
KRG Oil Policies and Dependent Aspirations

DNO worker at the Tawke oil field in Duhok. PRESS PHOTO

By Thomas Strouse
The Kurdish Globe

The Kurdistan Region of Iraq is years ahead of the rest of the country in terms of economic and institutional development.

However, Iraq's central government continues to inhibit the development of Kurdistan's oil sector. While the Kurdistan Regional Government began developing its oil and gas sector following the U.S.-led invasion of Iraq in 2003, it continues to struggle with Baghdad over oil policies. Underlying the major differences between Baghdad and Erbil are deep political and identity issues that have made compromise difficult.

Despite its desire for an independent and decentralized oil policy, the KRG is forced to rely on Iraq's central government because it controls the national pipeline that transports oil from northern Iraq to markets through Turkey. For its part, Turkey insists on dealing with Baghdad on oil exports as well as other official state matters. The KRG's relationship with Ankara is also influenced by Turkey's own Kurdish minority. Consequently, the KRG must maintain difficult relationships with both Baghdad and Ankara as it exploits the energy resources that sustain its autonomy and promote its development.

Relations between Baghdad and Erbil have occasionally been tense since 2003, with issues relating to oil at the center of many of their disputes. The Kurdish Region was much quicker than the central government to exploit its oil assets, signing deals with foreign oil companies even in the absence of an oil law and without permission from Baghdad. The KRG signed its first contract with DNO, a Norwegian oil company, in June 2004. It has since signed more than 20 additional contracts with foreign companies. When Iraq was unable to come to an agreement on a national oil law, the KRG drafted and approved its own regional oil and gas law in August 2007. The Kurds decided that it could no longer be held back by the fickleness of the leadership in Baghdad and that it must carve out its own path if it hopes to successfully develop its own oil and gas sector.

The Kurds exported oil for the first time in 2009. However, this only lasted from June through September. Operating companies halted exports after they did not receive payment for their work. While exports were flowing, the KRG appeared to be under the impression that Baghdad would eventually give in and pay the companies. This never happened.

The KRG wants Baghdad to at least pay the companies the capital costs that they have incurred, but Baghdad believes that the KRG should pay the companies from the revenues that it receives from the federal government. The Kurdistan Region is entitled to 17% of Iraq's federal revenues, after deductions from "sovereign expenses." Not only is this amount not enough to pay the companies, but also the revenue payments to the KRG are not paid in a timely fashion and are generally used by Baghdad as a way to pressure the Kurds.

It makes little economic sense for Baghdad to continue to resist the KRG's desire to increase oil exports. Without a compromise, Iraq is depriving itself of much needed revenues largely because of political posturing. As it stands now, with no Kurdish exports flowing, Iraq's central government is receiving 83% of zero from KRG export potential. The Kurds are not demanding 100% of their oil export revenue. Instead, they hope to increase Iraq's total exports, which would in turn increase revenues for the Kurdistan Region.

The foreign oil companies operating in Kurdistan say they are committed to a long-term presence and that their interests align fully with the KRG. However, it is unlikely that they will be able to stick around forever if politics continue to inhibit production and exports. The companies took a significant amount of risk and have invested heavily in their respective projects. They are not preparing to leave at the moment, but if political gridlock remains, it may leave some of them with few other options in the future. Since the companies signed contracts with the KRG, and not with Baghdad, ultimately it is the responsibility of the KRG to uphold the contracts.

The defiant posture of the KRG's Minister of Natural Resources Ashti Hawrami has put him at odds with the central government, but it has also enabled the Kurdish Region to attract a number of small and medium-sized Western oil companies to help the Kurds exploit their sizeable reserves. The KRG's independent strategy made an attempt to use Baghdad's initial failures in securing foreign investment in Iraq's oil sector as a way to justify its own successful efforts. In the latter part of 2009, however, Iraq's central government signed a number of contracts with large foreign oil companies which could dramatically increase production over the next several years. It appears that signing these contracts provided Baghdad with a renewed sense of confidence in its own ability to increase oil exports and not have to rely on the Kurds for their export potential. Maliki's government and many others in Baghdad believe that the KRG's oil sector must come under the authority of the central government.

Since Baghdad signed these latest deals, the KRG has struggled to find leverage on oil matters. The post-election horse-trading following Iraq's recent parliamentary election provides the Kurds with a window of opportunity to exact concessions from the next government in Baghdad. The fate of KRG exports could be part of a bargain preceding the formation of the next government. While not a total game stopper on oil issues, personal rivalries between political leaders in Baghdad and Erbil have been a major obstacle in overcoming the persistent deadlock between the two sides. Prime Minister Nouri al-Maliki and Oil Minister Hussein Shahristani each made conciliatory remarks regarding KRG exports in January and February, but this likely came from the realization that they may need the Kurds if they hope to remain in power.

The Kurdistan Alliance and the smaller Kurdish political factions are open to join any coalition in the next government. However, this time around the Kurds want more concrete assurances from Baghdad, regardless of who the next Prime Minister is. Maliki broke a number of promises he previously made and the Kurdish leadership does not want to have another four years of political gridlock between Baghdad and Erbil.

The Kurds have high aspirations for the Kurdish Region in general and for their oil and gas sector in particular. Despite having the determination and the resources, their go-it-alone approach to oil policies must eventually acknowledge a few stark realities. The Kurdistan Region is dependent upon Iraq's central government to export its oil and it is landlocked and surrounded by three countries that remain concerned by the future aspirations of the Kurds. Only through a compromise with Baghdad will the KRG be able to reach its true potential as an important and reliable oil and gas producer in its own right. If neither side is willing to soften its position and accept compromise, politics will continue to hold back not only the Kurdistan Region, but also the entire country.

Thomas Strouse is a graduate student at George Washington University. He recently traveled to Kurdistan to complete research for his master's thesis.