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the battle for iraqi oil
can there ever be a winner?

Shwan Zulal
The battle for Iraq’s oil goes on. Iraqi Kurdistan is intent on controlling its own oil, Baghdad is intent on wresting that control from them. Will the impasse ever be solved? Only if both sides see reason,…
3.05.2012  |  London

Ever since oil was found in Iraq nearly a century ago, there has been a battle to control the most important commodity the country has known. In the beginning, the struggle over oil played out between foreign or colonial powers. Then when the Iraqi oil industry was finally nationalised in the early 1970s, the struggle for control of the oil industry became internal. Today it dominates domestic politics.

Ever since the government of the semi-autonomous region of Iraqi Kurdistan, in the north of the country, decided to come up with its own version of oil and gas laws in 2006 and 2007, the Kurdish and the Iraqi federal government in Baghdad have been on a collision course.

The Kurdish formulated their own laws because they were largely frustrated by the federal government’s inability to come up with such a law and to start to develop the oil industry. Iraqi Kurdistan then began to negotiate contracts with international oil companies and to move on without Baghdad’s explicit approval.

Since then the powers-that-be have been deadlocked, with neither side willing to compromise. Baghdad is refusing to recognise contracts made by the Kurdish region and threatens to blacklist international companies operating there. In return the Kurdish halted oil exports from out of their region.

In fact, it is only relatively recently that the Kurds have been able to control the oil under their own feet – and it is hard to imagine they would ever give up those rights, especially now that huge companies like Exxon Mobil and other major oil companies are lining up to do business in the region.

Meanwhile the policy that Iraq’s central government in Baghdad is pursuing, with regard to the Kurdish region, is not particularly realistic. It’s outdated and it is hard to understand why Baghdad hasn’t yet worked out that the Kurds will not let them dictate Kurdish oil policy or control Kurdish oil revenue.

Comments made by Abdul Mahdi al-Ameedi, head of the federal Ministry of Oil’s contracts and licensing department, in the online industry portal, the Iraqi Oil Forum, indicate Baghdad’s current opinions on the matter.

*Production sharing contract* An agreement between a government and an oil company that says they both share in production costs. The contractor typically pays for exploration, development and production costs of an oil field. They will eventually get their money back because of an agreement made about how much of the oil revenue they will be paid. While an oil company takes on more risk and financial burden here (say, if the oil is not found), they may also benefit from higher revenues once the oil starts flowing.

Asked if production sharing contracts, or PSCs as they are also known, were problematic, he replied that: “the state considers that production-sharing contracts are illegal and unconstitutional since the Iraqi constitution stipulates that oil and gas in Iraq is the property of the Iraqi people. Since a PSC gives foreign companies the right to a portion of the production under the form of profit oil, they are considered in contravention [of] the current constitution.”

Judging by al-Ameedi’s comments, Baghdad seems to be doing what it can to make PSCs that Iraqi Kurdistan signed, look illegitimate. Not because they think PSCs are a bad idea or because they are less value for money for Iraq. Rather, they are bringing the Iraqi Constitution into it as a way of putting political pressure on Iraqi Kurdistan, to try and prevent the Kurds from moving any closer to making disputed territories like Kirkuk part of their own semi-autonomous region and to try and reduce the percentage of the Iraqi federal budget that the Kurdish region currently receives.

Baghdad has realised that trying to take charge of the oil in some of the disputed territories - those areas that the Kurdish say belong to Iraqi Kurdistan but which Baghdad consider part of Iraq proper - is also beyond its reach.

So instead, they’re going for damage control and trying to prevent the Kurds from entering into international deals in those disputed territories. And they have good reason. Because while Baghdad tries to wring concessions out of the Kurdish with arguments about PSCs being illegal, the Kurdish themselves are teasing Baghdad by granting licenses for oil work on the very borders of the disputed territories, including in some blocks where borders are not as clear or overlapping.

Although the Kurdish regional government has explicitly said that it won’t grant any licenses in disputed territories, there are still question marks over several exploration blocks – including two that major international Exxon Mobil is contracted for.

Last November Exxon Mobil dropped a bombshell on Baghdad, announcing they had signed contracts with the Kurdish for six exploration blocks. Exxon Mobil already operates in southern Iraq and despite numerous warnings from Baghdad, the multinational went ahead and signed anyway. After complaints from the Iraqi government Exxon Mobil then apparently sent two letters to Baghdad promising to freeze its Kurdish activities. However evidence on the ground suggests otherwise.

Basically Baghdad has been mostly powerless – the most they have been able to do has been to exclude Exxon Mobil from bidding for oil contracts this May, a fourth bidding round that it appears Exxon Mobil was not much interested in anyway.

And while the Kurdish won’t budge on the topic, they will happily continue to take their 17 percent share of the federal budget. Most of Iraq’s national income is generated by oil revenues and currently, most of Iraq’s oil is produced in southern Iraq, in places like Basra. Many Iraqi politicians have already argued that the Kurdish are getting an unfairly large share of the country’s income even while they’re not contributing, having stopped their own oil exports in early April

Still, the Kurdish themselves might argue that they’re still exporting oil because of what is coming out of Kirkuk, a disputed territory that they believe is part of Iraqi Kurdistan. In April, Kirkuk’s oil exports came to almost 400,000 barrels per day; Basra is exporting over 2 million barrels per day.

The northern Iraqi city of Kirkuk has actually been one of the flash points of this struggle, over the last four decades.

During former Iraqi leader Saddam Hussein’s regime, the Kurdish population was driven out of Kirkuk so that Arab Iraqis could control the oil rich area. After Hussein was removed in 2003, Article 140 of the Iraqi Constitution was formulated to remedy this so-called “Arabisation". This includes a census to determine the demographic makeup of the area’s population and then finally, a referendum to determine the status of disputed territories. Obviously if a census and referendum are used, then whether a disputed territory is home to mainly Kurds or mainly Arabs will have an effect on who can lay claim to it.

And in Kirkuk a census should have been taken already, with the city’s fate decided by its inhabitants. But an unwilling Iraqi central government and lacklustre Kurdish authorities have failed to make this happen.

Today Kirkuk remains largely Kurdish and the government of Iraqi Kurdistan claims it belongs to them. Although legally it belongs to Baghdad, currently the city is, in fact, under the de-facto control of the Kurdish government.

Which makes any oil deals here difficult. For example, oil giant BP was reported to have been in talks with Iraq’s federal government regarding a short term contract to boost oil production in Kirkuk. But the plan was a non-starter from the outset because nobody had asked the Kurdish authorities, who are really in charge in the city. A politically sensitive deal like this would require broad consensus.

Even though Kirkuk, with one of the largest and most prolific oil fields in the world, has been producing oil from early on, the city’s residents are yet to reap the benefit of these riches. With rundown buildings and littered streets, Kirkuk epitomises the sorry state of the power struggle over the nation’s oil.

Iraqi oil exports are on the rise and could promise a new prosperity for a nation badly in need of it. If Kurdish oil were added to the flow, then that increase could be even higher. But the policies being pursued by Baghdad, which fail to acknowledge the entrenched reality in Kurdistan, only serve to deepen distrust in this divided land. And the longer the deadlock continues, the more expensive it is for oil companies to operate in Iraqi Kurdistan and the more difficult it is, to secure funding for new oil industry projects there.

It is hard to take the politics out of oil or vice versa. But decisions relating to the oil industry and attempts to maximise its potential must be based on the commercial interests of the country. Currently oil issues are highly politicised in Iraq – so there can only be further confrontation.

If the current impasse continues, Iraqi Kurdistan will continue to try and look elsewhere to sell its oil and the rest of Iraq will remain resentful that the Kurdish still benefit from funds, from oil produced outside of the Kurdish region.

And while PM al-Maliki keeps centralising power, leaving most of Iraq’s other political groups feeling marginalised, the Kurdish are only becoming more stubborn: they see oil as the only tool they have left with which to exert any influence.

Yes, it is easy to understand the points that both sides in this tussle have to make. But Baghdad’s failure to accept reality and the Kurdish inability to compromise is only set to make both sides drift further apart.