Tuesday, May 01, 2007

Have the Kurds Abandoned All Hope of a Stable Iraq?

Energy Intelligence Note: 1 May, 2007

Salman Banaei recently published an analysis of Iraq’s draft Oil & Gas Law in the Association of International Petroleum Negotiator’s March issue of "Advisor" (also available via his Western Energy Blog). He shows how the draft law allocates control over production from “current” fields to the Iraqi National Oil Company, and that regional governments retain control over “undiscovered” fields. While regional governments can sign contracts with international oil & gas firms, the draft law ensures federal oversight by requiring approval of these contracts by Iraq’s Federal Oil & Gas Council (FOGC).

Recent events in Kurdistan, however, suggest that the Kurds may have other plans. UAE-based Dana Gas announced recently that they have agreed with the Kurdish Regional Government (KRG) to develop the Kormor gasfield (see graphic). The Kormor Field clearly falls under the draft law’s envisioned federal control, as it is a “current” field, discovered in 1928. The contract has not received FOGC approval, and it breaks the KRG’s promise to avoid signing new contracts until the end of May, to give the federal government time to pass the Oil & Gas Law.

What does this signify? It seems that the KRG is not satisfied with the division of gas fields between federal control (“current” fields) and regional control (“undiscovered” fields). This “current” vs. “undiscovered” designation seems to have little basis in geological reality, but rather is the political gloss given to the apportionment of existing fields, which is detailed in an annex to the draft law. Petroleum Intelligence Weekly reports that the KRG will reject the law if this annex remains as is. The decision to contract for development of the Kormor Field with Dana Gas prior to the official vote on the law suggests that the KRG believes the annex will not be changed, and that the law will not pass the end-of-May vote.

While none of this should come as a shock—Iraq is a sham Nation-State where mutually exclusive minimum requirements by the component national groups will prevent cooperation—it does carry significance. The prospects for a military solution in Iraq are as slim today as ever, and this failure to bridge the competing demand of Iraq’s many nations suggests that a political solution is no more likely. This reality may not seriously deter oil & gas production in the Kurdish region, where there is relative unity and security, but it will likely present a geopolitical barrier to developing the highly theoretical reserves of Iraq’s Western Desert. Furthermore, while it may be possible for the KRG to produce from their oil & gas fields, their export market is highly limited—the pipeline through Syria is non-functional, and the Turkish government is unlikely to help their rival with a viable export channel. The most viable market for Kurdish oil & gas is Iraqi domestic consumption, but reaching this market requires relying on a handful of critical pipelines that are frequent targets of insurgent attacks. It may be impracticable to market any increase share of oil & gas that the KRG may be able to exploit. Will this fact alone be enough to force them to compromise on their short-term selfish interest to form a viable Iraqi state that will benefit them in the long term by way of a valid export route? Is a willingness by the Kurds to compromise enough to bring together the rest of Iraq’s disparate factions in a similar spirit? Probably not—and the Kurds have probably considered exactly these issues in arriving at their decision to go it alone with regional production. Probably a wise choice for the Kurds, but an ominous sign for the future of the figment of Colonial Cartography that we call Iraq.


Salman said...
This comment has been removed by the author.
Salman said...

Thanks for the reference to my article and blog, Jeff. I second your concern with the Kurdish factor. I'll add, specifically, that under all foreseeable outcomes, I see the draft oil and gas law being the beginning of the dismemberment of, what you call "figment of Colonial Cartography that we call Iraq."

My conclusion is supported by considering two binary variables affixed to the possible outcomes concerning the oil and gas law: (1) the success of the Kurdish oil and gas sector under the oil and gas law; (2) the success of the (federal) Iraqi oil and gas sector under the oil and gas law. If the oil and gas law succeeds in increasing Kurdish production and Iraqi production as a whole, then we can see the Kurds wrangle for additional revenues from their share of the oil revenues pie. If the Kurds succeed, and the Iraqis fail, the Kurds would move to secede on the grounds that they're subsidizing a failing industry (and nation). The possibility that the Kurds fail, and Iraq succeeds is nil, if it did happen, you can imagine the Kurds saying "all of the investments are going to the federal government controlled areas, not us, therefore we need to secede." If the Kurds fail, and the Iraqis fail, then the Kurds will argue, "we must secede because the instability (presumably) causing the Iraqis to fail is infecting us - therefore, secession."

The oil and gas law does not discuss who gets the revenues from the annex field categories, but the threats from the Kurds and other sources I've read indicate that the Kurds are going to push for a greater relative, if not absolute rights to revenues generated from fields in their domain.

Tariq Shafiq's article, Iraq’s Petroleum Law: Politicized Management Vis-à-Vis Optimal Resource Management comes from an insider perspective with a genuine concern for the future of a unitary Iraq. His chief grievances pertaining to oil and gas law center on the diffuse decisionmaking structure and vagueness. On the issue of the KRG, Shafiq notes with concern:
"What has been given to the KRG today is bound to snowball vertically and horizontally, with damaging consequences to the effective management of resources and the unity of the country."

In any event, the Iraqi boat is sinking. The KRG's modification of the original draft oil and gas law indicates an intention to secede at some time in the medium-term. Although I see unitary Iraq sinking, I don't see how the oil and gas industry is not salivating over the prospect of entering this country. The terms are likely to be very kind (given the law and government's bargaining position), the geology unparalleled, and the security situation is, in my opinion, likely to improve once we increased regional/religious/ethnic autonomy. Expect the internationals to enter into contracts and sit on them in the short-run. Kurdistan will be hard to pass up.

Don't assume the Turks would interfere with plans to export oil from KRG fields. The first company to enter into a Production Share Agreement with the KRG was Genel Enerji, a Turkish firm.

Jeff Vail said...


Good point on the Turk/Kurd issue. While it may be a "con" from the Turkish perspective to aid the Kurdish economy by providing an export route, that could certainly be trumped by their financial interest in Kurdish oil & gas. They could even play it both ways: use the threat of control, combined with the need to protect their investments, to support internal Kurdish factions that are less supportive of Kongra Gel and pan-Kurdish activity. The wildcard, of course, is what action the Turks will take in the potential power vacuum left by withdrawing US forces when tempted by such alluring prospects just south of their border. The same "protect financial interests" justification could be combined with "protect Turkomen enclaves" to inform a much more heavy-handed approach. Not that I think they're stupid enough to think that they could invade and occupy this area effectively (either from a military or EU-aspirations perspective), but that their activity in the Kurdish region could soon add a military component. If factionalism in a broader Iraq will lead to very "friendly" PSAs, does not the same logic hold that a factionalized (courtesy of Turkish intervention) Kurdistan make for a more lucrative environment? While the conventional wisdom may hold that the Turks won't accept an independent Kurdistan, it may be much more to their benefit to coopt a sham Kurdistan into an oil-producing (via Turkey) province. The Turkish military (secular and ethno-centric as they are) would also love the excuse to leverage this issue with that troubling democracy that keeps electing an Islamist government!

Big Gav said...

He shows how the draft law allocates control over production from “current” fields to the Iraqi National Oil Company, and that regional governments retain control over “undiscovered” fields. While regional governments can sign contracts with international oil & gas firms, the draft law ensures federal oversight by requiring approval of these contracts by Iraq’s Federal Oil & Gas Council (FOGC).

That's a neat trick, given the history of oil field discovery in Iraq and the frequent suppression of large finds back in the 1950's.

I was wondering how the possessors of all the treasure maps floating around were going to be able to monetise them - now its a matter of negotiating with the regional governments...

Randy Kirk said...

Concerning Iraq (broadly), it seems that an operating assumption is that if we divide the country and/or pull out forces then the whole country will collapse and we will get not 100's of deaths a day but 1,000's or 10,000's. Several officials have stated that "The results of a pullout would be catastrophic " and therefore shouldn't even be contemplated. Is this 100% true? Isn't there a probability that violence would just continue as is and we won't (and aren't) having too much of an effect either way?

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