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Iraqi petroleum and the damage done
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News outlets have recently reported that oil giant ExxonMobil has signed an oil and gas exploration deal with the autonomous Kurdistan Regional Government. This development was much to the chagrin of the central government in Baghdad, which claims that it has exclusive authority over the oil industry throughout Iraq.

Contracts between foreign petroleum firms and the KRG are not new. Approximately 40 such deals have been signed since 2006. However, ExxonMobil is the first major international firm to take such a step. Consequently, Baghdad has threatened to cancel Exxon Mobil’s contract to develop the 8.7-billion-barrel West Qurna Phase One oilfield in southern Iraq, being developed in partnership with Royal Dutch Shell.

Regardless of whether the central government carries out its threat (and given the size and importance of the oil field being developed by ExxonMobil, it could well prove to be mere rhetoric), there are good reasons to think that foreign firms will increasingly look toward the Kurdish areas for the exploration and development of oil reserves.

First, it is necessary to appreciate that, despite popular suspicions that the American-led invasion in 2003 was driven by a desire to seize Iraq’s oilfields, Iraq’s oil industry is still state-run and firmly in the hands of the central government. Some Bush administration officials initially entertained the idea of privatizing the petroleum sector. However, because there was a fear of local resentment, the Coalition Provisional Authority never took this up as a matter of policy, or for that matter American policymakers after Iraq regained its sovereignty in June 2004.

Only in 2008 did Baghdad sign its first deal with a foreign oil firm. It did so with China’s National Petroleum Corporation, to develop the Ahdab field in Wasit province. The contract was in fact a reworking of a 1997 agreement that Saddam Hussein’s regime had signed with the Chinese corporation. This deal, like all subsequent agreements (mostly joint ventures) with foreign firms to develop the oil fields in central and southern Iraq, was heavily tipped in the government’s favor.

Iraqi crude – like Saudi petroleum – is among the cheapest in the world to extract, at only a few U.S. dollars per barrel. Therefore, it is potentially highly lucrative for oil companies. However, the Iraqi government refused to shift from its position of offering a very low fee-per-barrel, equivalent to $2 per barrel, to oil companies, including ExxonMobil, that signed the most important contracts in 2009.

Hence, the oil companies’ profit margins are particularly low. Given the high taxation imposed by Baghdad, the revenues have principally flowed into the central government’s coffers. The massive entry of funds has hindered liberalization of the Iraqi command economy, despite years of rhetoric about the need for Iraq to move toward free-market reforms. In contrast, the KRG has offered more favorable terms to oil firms, even if this has been largely limited so far to exploration work.

Furthermore, in central and southern Iraq, there is a growing problem in that export capacity has not kept up with oil production. As Joel Wing of the blog Musings on Iraq has noted, there has been a steady decline in oil exports over the past four months, even as production has increased.

Owing to the state-run economy and international sanctions prior to the invasion, the pipeline infrastructure across the country and facilities in the port of Basra are outdated. Therefore, they are highly vulnerable to insurgent attacks and poor weather conditions. For example, in October insurgents blew up pipelines at the Rumaila oil field, Iraq’s largest. This brought production down from 1.24 million barrels per day to just 530,000 barrels per day.

Unlike the rest of Iraq, KRG administered areas are generally free of the menace of the remnants of the Sunni and Shiite insurgencies. On the other hand, security remains an issue for oil companies and their employees working on the fields in central and southern Iraq. The only difficulty is that the KRG areas lack direct access to the sea.

Because of the unfavorable operating terms for oil companies that have signed contracts with Bagdad, as well as the security problems and poor infrastructure in the center and south, it is plausible that more major oil companies will follow ExxonMobil’s lead in striking up new deals with the KRG, despite the central government’s objections. The reason is that the government is heavily dependent on oil companies to boost output. This outcome becomes is all the more likely if the oil exploration deals lead to the discovery of further significant reserves in the near future.

A further implication of such a development is that it may revitalize the relationship between Massoud Barzani, the president of the KRG, and Turkey, which had dampened somewhat following the Turkish bombing campaign undertaken against PKK militants based in northern Iraq. The reason is that the only viable export routes to the international market are pipelines leading to the Turkish Mediterranean port of Ceyhan.

For the first time, the actions of a major international oil firm have sharply increased tensions between Iraq’s central government and the KRG. With ExxonMobil set to explore, as part of its deal with the KRG, disputed territories like Bashiqa, which is part of Nineveh province but has been occupied by the Kurds since 2003, Iraq appears to be ever more fragmented.

Aymenn Jawad al-Tamimi is a student at Brasenose College, Oxford University, and an intern at the Middle East Forum. His website is www.aymennjawad.org. He wrote this commentary for THE DAILY STAR.

 
A version of this article appeared in the print edition of The Daily Star on November 21, 2011, on page 7.
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