Tuesday, November 06, 2007

Kurds Defiantly Issue More Oil Contracts

A guest post by Ken Anderson from the Bonehead Compendium

In a move certain to raise hackles in Baghdad and Washington, the Kurdistan Regional Government (KRG) today announced that seven more oil contracts have been unanimously approved by the Kurdish Regional Oil and Gas Council (ROGC). The oil companies involved all appear to be, as Resource Investor calls them, "international oil minnows" from Europe, the Gulf States (UAE), India as well as the Kurds' own Kurdistan National Oil Company (KNOC). One notable exception is Texas Keystone, based in Pittsburgh.

The move follows directly on instructions from the US State Department that oil companies should eschew contractual entanglements until a national oil law is passed. Deputy assistant secretary in the Bureau of Near Eastern Affairs, Lawrence Butler, said that any PSAs signed with the Kurds "have needlessly elevated tensions between the KRG and the central government."
We continue to advise companies from outside of Iraq that they incur significant political and legal risk in signing any contracts with any party inside of Iraq before a national (oil) law package is passed by the Iraq parliament.
The KRG, on the other hand, continue to assert that their own regional oil law is "the supreme law governing oil and gas activities in the Region," that the KRG oil law is constitutional and that oil revenues garnered will be "shared proportionately throughout Iraq pursuant to the Constitution." Fears that such PSAs would be heavily weighted in favour of the oil contractors appear to be allied, at least by these particular contracts, as the Kurds claim to have negotiated an 85% share of revenues. These contracts are further notable in light of recent economic sanctions imposed by Turkey on Kurdistan in a bid to force the Kurds and Baghdad to try and contain the PKK. Such sanctions could have a serious impact, both on the economy of Kurdistan and the US military, which received large quantities of supplies from Turkey.

Interestingly, Big Oil players continue to remain on the sidelines, mindful that they will have a much larger role in Iraq, if and when the Iraq Parliament finally does approve a national oil law. They clearly do not want to risk raising ire in Baghdad, especially in light of the fact that the Iraqi government continues to smack down LUKoil and their claims to an Hussein-era production sharing agreement. This, despite the fact that US oil major ConnocoPhillips holds a 20% share of LUKoil.

It is hard to know what the fallout from this wrangling will be. Considering that the contracts in question are really small change in the large Iraq oil drawer, once Baghdad does approve an oil law, and the big PSAs start rolling out, such lightweight deals may be considered negligible and quietly allowed to stand. Right now, the noise emanating from State and Baghdad over KRG's defiance is more political than pragmatic.

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