Risky Business: Trading with a non-state actor in Iraq

By Alix Hines

WASHINGTON – In mid-July, the Kurdistan regional government sent its Peshmerga troops into Kirkuk, securing a fourth province in Iraq for the Kurdistan region. With another oil-rich province in hand, the Kurdistan Regional Government is now in a unique position for expanding oil exports from the war-torn country.

Source: U.S. Energy Information Administration
Source: U.S. Energy Information Administration

The KRG already has rerouted the pipeline from the Kirkuk oil field to Turkey, according to an article by Voice of America’s Jeffrey Young.

However, Charles Ebinger, director of the Energy Security Initiative at the Brookings Institution think tank in Washington, explained that there are grave legal issues involved with producing oil in the Kurdistan region and exporting it.

The U.S. government does not recognize Kurdistan as an independent nation. So any exports sent without the approval of the Iraqi central government in Baghdad are essentially undermining the central government’s authority, according to Ebinger.

“It immediately raises questions if an American company or anybody else produces oil and moves it out of Kurdistan,” said Ebinger, who has advised more than 50 governments on their energy policies. U.S. Agency for International Development to the World Bank. “If the Iraqi government went into international courts and challenged the ownership of the oil it could theoretically be seized.”

According to the U.S. Energy Information Administration, the Iraqi Oil Ministry requires all hydrocarbon contracts for drilling to be signed by the central government in Baghdad. All oil must then be exported through the State Oil Marketing Organization or SOMO. In 2007, the KRG passed its own hydrocarbon law and then further challenged the central government in 2011 when it signed oil production agreements with Exxon Mobile.

The Kurds in Iraq, Iran, Syria and Turkey want to create their own state. Iraqi Kurdistan has been a semi-autonomous region since 1991, but the Kurds are still fighting for complete independence. Now with more oil in their territory, independence would mean not having to go through the central government in Baghdad to export. Add but the rest of Iraq doesn’t want them to split because they would loose the oil revenue.

Although there is a calculated risk involved, Ebinger said, several oil companies including BP, Exxon Mobile and France’s Total S.A. have signed expiration production agreements with the KRG.

An expiration production agreement means those companies have signed agreements that give them access to the area – allowing them to look for oil and eventually produce it.

Ebinger said this is a long, typically five-year process at a minimum because of the technological and legal uncertainties that come with oil production in Iraqi Kurdistan.

“I think effectively the Kurds will go ahead and anyone they can attract to come in and look for oil and gas in Kurdistan, they will welcome,” said Ebinger.

Attracting companies is exactly what the Kurdish have done. The following companies are in Kurdistan, but not necessarily producing oil from the region:

“I think a lot of them are just saying, ‘Hey nothing is going to be stabilized in the rest of Iraq in any length of time and Kurdistan seems to have functioning government, so let’s put our interest and money in Kurdistan at the moment,’” Ebinger said.

On the other hand, Gal Luft, senior adviser of the United States Energy Security Council, said the fields in Kurdistan are relatively tiny in comparison to the fields and the potential of southern Iraq. The United States Energy Security Council, a non-profit educational organization, focuses on diminishing the strategic importance of oil and its “monopoly over transportation fuel.” He said it wouldn’t make sense for American companies to choose a quick gain over long-term relations with the Iraqi government.

Looking to the future, Luft suggested that the inhospitable investment climate in Iraq could lead to oil shortages.

“Iraq is one of the few places in the world that geologically has enormous potential,” Luft said. “Iraq would technically be as productive as Saudi Arabia under the right investment climate.”

He said that every projection about the future of oil by the International Energy Agency along with energy consulting firms have counted on a steep increase in Iraqi oil production.

“It’s really hard for me to see who’s going to pick up the slack and compensate for this loss that will be generated due to the fact that the investment climate has deteriorated so much,” Luft said.

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