After verbally sparring for years over federal control over oil production on Iraq’s Kurdish region, the two sides now have come to an understanding. As Platts’ Tamsin Carlisle writes in Oilgram News‘ Petrodollars column, it may be a turning point in the country reaching its oil output goals.
A landmark agreement between Baghdad and semi-autonomous Iraqi Kurdistan for crude exports may have turned the tide in the region’s long struggle for the decentralized control of resources.
Major international oil companies are piling into Iraqi Kurdistan as the region attempts to mend fences with Baghdad and take on the challenge of developing the region’s multiple billions of barrels of recently discovered oil.
The pent-up demand for access to one of the world’s last major frontiers for conventional onshore oil and gas exploration became evident in July and August.
In July, Chevron became the second major international oil company to stake out Kurdish turf when it signed a farm-in agreement for two exploration blocks — a deal Baghdad deems illegal.That move was quickly followed by announcements of similar deals in July and August, by France’s Total and Russia’s Gazprom respectively.
Until July, ExxonMobil was the only super-major that had dared to defy the Iraqi central government’s oft-repeated edict that international oil companies would have to choose between doing business with Baghdad or the Kurdistan Regional Government (KRG).
The US oil company in October 2011 took the momentous step of signing deals directly with the KRG for six Kurdish exploration blocks, prompting Baghdad to threaten cancellation of ExxonMobil’s 20-year technical services contract to develop the huge West Qurna-1 oilfield in Iraq’s southern Basra province.
ExxonMobil’s response was months of obfuscation about its Kurdish deal. The company repeatedly declined to comment on the status of the agreement or, at first, even to acknowledge its existence, as rumors circulated that the deal had been frozen.
But nearly a year later, the influx of other oil majors adds credibility to the KRG’s insistence that ExxonMobil is moving ahead with preliminary work on its blocks. Moreover, Baghdad has not expelled the US company from West Qurna-1, which it operates. ExxonMobil continues with Royal Dutch Shell to develop the field, seeking to add a further 100,000 b/d of crude output to existing production exceeding 400,000 b/d.
So far, other major oil companies that have followed Baghdad’s lead have also escaped serious repercussions.
“We heard Baghdad officials are not happy, but they did not request us to leave Halfaya,” Total CFO Patrick de la Chevardiere said September 24 at a briefing in London, referring to an oil development in southern Iraq in which the company is a junior partner.
Baghdad has significantly boosted southern crude exports during 2012, mainly by refurbishing Persian Gulf export terminals. That helped lift total Iraqi oil production and exports in August to a post-war records of 3.166 million b/d and 2.565 million b/d respectively. But the ever-present threat of a new Persian Gulf war intensifies the need for alternative export routes for Iraqi crude. Moreover, significant new field development in Iraq is only occurring in Kurdistan.
This may be the driving force behind the recent apparent Baghdad-KRG reconciliation. Aside from the intergovernmental deal on Kurdish oil exports, signs of a rapprochement are evident from the restart of talks aimed at passing a new, much-needed, Iraqi federal oil and gas law that would clarify the status of the KRG contracts. Notably, Iraqi Deputy Prime Minister for energy, Hussein al-Shahristani, an implacable opponent of Kurdish production sharing contracts, has been absent from the discussions.
Under terms of the export deal, the KRG has promised to increase the region’s contributions to Iraq’s federally controlled northern export system, which were suspended from April 1 to June 7 in a dispute over payments, to 200,000 b/d in the last quarter of 2012 from about 140,000 b/d in late September. KRG Natural Resources Minister Ashti Hawrami said in Istanbul on September 24 that he expected the export volume to increase to 250,000 b/d in 2013 and to 1 million b/d through two pipelines in 2015.
Meanwhile, Gulf Keystone Resources said in September that it expects to pump 150,000 b/d from its giant Shaikan oil discovery in Kurdistan by 2015. Other producers in the region are ratcheting up output capacity, while announcements of new Kurdish oil discoveries have continued apace.
In return for the KRG’s pledge to continue delivering crude to Iraq’s existing northern export pipeline, which run from Kirkuk into Turkey, Baghdad has agreed to release to the KRG $850 million of overdue payments for previous Kurdish oil exports, which will allow foreign oil producers in Kurdistan to get paid.
Hawrami is confident that international oil majors are in the region to stay. “Mergers and acquisitions, consolidation. That’s the name of the game in Kurdistan right now,” he said.
–Tamsin Carlisle in Dubai