Minor Progress in Opening Iraqi Oil Flow in Kurdistan

Posted by Jared Killeen on February 3, 2010 at 10:47 am

There is a flame of hope in the dark desert of Kurdish/Iraqi oil negotiations. (image: kurdistan4all via flickr.com)

In Iraq, what promised to be one of the greatest oil bonanzas of modern times is now looking less like the proverbial spouting geyser and more like a crude-based quagmire. Since 2002 more than 30 foreign companies have set up operations in oil-rich Kurdistan, a semiautonomous region in Iraq, hoping to cash in on the immense oil reserves recently discovered there.

However, according to Sunday’s New York Times, a complex political dispute between Kurdistan and Iraq, involving the scrutiny of at least one oil contract held between the Kurdish government and an outside company, still threatens to choke off oil production and send profit margins into the red, though there are some faint glimmers of hope.

The controversy first arose in November, in the wake of revelations that a former American diplomat maintained a business relationship with Norwegian oil company DNO while acting as a political adviser to the Kurds during the drafting of Iraq’s Constitution in 2005. The scandal helped to exacerbate the more contentious issue of profit sharing between Kurdish authority and the central Iraqi government, and led some officials in Baghdad to question the legitimacy of the region’s production-sharing agreements. Kurdistan contends that it has every right under Iraq’s Constitution to sign the contracts, while Baghdad maintains that they are illegal in the absence of a national hydrocarbons law, and has gone so far as to blacklist the companies operating in the region.

However, there is some promise of reconciliation, however slight. In an effort to ease some of the immediate business concerns of the heavily invested foreign oil companies now operating in the region, the Kurdish government recently presented Baghdad with a major compromise that would permit DNO, along with a Chinese-Turkish joint venture called Ttopco, to resume exports of about 100,000 barrels a day via Iraq’s pipeline network. The proposed compromise would require the two producers to offer their oil to Iraq’s State Oil Marketing Organization, which would compensate them initially just for their costs.

While the compromise is yet to be accepted by Baghdad, it could lead to at least some oil coming out of Kurdistan. With talk of peak oil and rising demand for crude in China and India, much of the industrialized world has begun to look to Iraq to provide a major boost in supplies in the near future. Whether this happens or not may depend on how and when the dispute between Kurdistan and Iraq is finally resolved.