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new government must negotiate with krg on oil

Mayada Daood
Just four months after the first barrel of oil left Kurdistan, in June 2009, conflicts between the Erbil government and Baghdad began mounting and exports ceased.
13.08.2010  |  Baghdad

The two governments repeatedly announced the impending resolution of the conflict but Kurdish oil is yet to fill the Turkish Ceyhan pipeline. The crisis over oil contracts concluded by the region with 30 international companies also remains unsettled.

Ashy Horami, the Minister of Natural Resources in the Kurdistan region said that the central government refuses to pay the foreign oil companies operating in the region.

"All revenue from oil exports, be it from the South or the North, must go to the Treasury in Baghdad," he says.

According to the Kurdistan Region Government, the resumption of oil exports from the region's fields cannot continue if foreign companies operating in these fields are not given some of the profits according to the contracts they have signed.

The Iraqi Oil Ministry says that it does not recognise the contracts concluded by the Region's Government with foreign companies and will not divert a percentage of any profits to them.

The roots of the crisis date back to the year 2007 when the Iraqi government refused to recognise contracts concluded independently by the independently with foreign oil companies, declaring them illegal.

Hamza al-Jawahiri, an oil expert, said that the KRG and the central government in Baghdad interpret the constitution differently.

"While KRG believes that it is its right to develop its oil industry, conclude oil contracts and control oil production, the Oil Ministry in Baghdad considers that crude oil belongs to all Iraqis, not to citizens of any area be it in the center, the south or the north," he reveals.

Maliki's government finally agreed, in May 2009, on oil exports from the Taq Taq and Tawke oil fields in Kurdistan under the condition that export revenues go to the Iraqi state treasury and their distribution controlled by the Iraqi government.

The government, upon statements made then by its spokesman Ali al-Dabbagh, pledged to pay the foreign companies and the cost of investment without acknowledging the legitimacy of the oil contracts signed by the KRG. This decision allowed the KRG to officially begin exporting oil through the national pipeline in Kirkuk to the Turkish port of Ceyhan.

When the KRG’s first barrel of oil joined the export line on 1 June 2009, Iraq’s president, Jalal Talabani and the KRG’s Prime Minister, Masoud Barazani celebrated the event.

But developments on the ground stopped oil exports, depriving Iraq’s budget of much-needed revenue. The government reneged on its decision to pay the companies’ share of export revenues, reverting to its stance that the contracts were illegal.

DNO is a company tasked with the development of the Tawke oil field, which produces 40-50 thousand oil barrels/day. It owns 55 percent of the field. The Swiss Addax Petroleum Company, recently sold to the Chinese Sinopec Corp and the Turkish Genel Energy, is developing the Taq Taq oil field and owns 25 percent of the field with the KRG's share reaching 75 percent.

According to figures announced by the Iraqi Oil Ministry based on price rates over the past eight months, the losses incurred by the Iraqi economy, for not exporting its oil, reach about US$1.7 billion.

Oil expert, Hamza al-Jawahiri, thinks the real figure is much higher.

"Oil production in Kurdistan was expected to reach 1 million bpd over the next four years. The first year has already passed without any progress in developing production capacity," he explains.

For his part, Asem Jihad, the official spokesman for the Iraqi Oil Ministry, played down losses incurred. He told Niqash that stopping oil production in Kurdistan “has no big impact on the Iraqi budget."

Jihad added that there are some losses incurred and all additional revenue is useful contribution to the reconstruction process in Iraq.

"Revenues will positively impact on the Kurdistan region because it benefits from the petro-dollar allocated to the region: a one dollar revenue for every exported barrel," he said.

Sami al-Atroushi, a former federal parliament member, believes the subject of oil exports will remain a controversial topic.

“The two parties, the KRG and the central government have reached agreements but then abandoned them. No final settlement has been reached," he complains.

Al-Atroushi added that the KRG has recently made several proposals to resolve the dispute and develop production to reach 200,000 bpd by the end of 2010.

“The KRG has no objection against handing over Iraqi oil distribution to a marketing company.”

Such a company would be responsible for marketing oil across Iraq and paying revenue to the Finance Ministry, which would in turn distribute revenues among the different provinces.

The marketing company should either deposit a percentage of the revenues in the Region's budget to pay the companies' share or it should pay these revenues directly to the companies itself.”

According to Atroushi, there have been on-going negotiations between the two parties.

"Specialised committees were formed to study the amounts to be paid and the mechanisms to be adopted for payments. Until now there are still some outstanding problems and the current government is unable to resolve them. These problems will remain unresolved pending the formation of a new government.”

Jawahiri emphasises the importance of that.

“The conflict will not be resolved unless a new government is formed," he explained.

"There should be serious negotiations between Erbil and Baghdad governments to reach results. Both parties can resort to the Federal Court to help interpret the constitutional provisions which are the basis of conflicts between the two."