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MENAFN - Arab News - 27/01/2013

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(MENAFN - Arab News) This year could be a landmark as far as the Iraqi oil industry is concerned and its ramification for the oil market and political developments in the region.

Three main factors are expected to shape the course the Iraqi industry will take: whether the long dormant law governing the industry will have a chance to be passed, whether the central government in Baghdad will find a way to strike a balance between the country's national interests and the growing drift of foreign oil companies to operate in the same autonomous Kurdistan region and whether that region will be able either to strike a deal with Baghdad to allow it pump and export oil out of its territory and carry out its plans to build a pipeline that connects with the Turkish Ceyhan port.

For the first point regarding the law governing the national industry, five
years have actually passed so far without politicians being able to work out a deal compromising between the three drafts being circulated: the first being an initial draft concluded between the central government in Baghdad and the Kurdish regional government seated in Irbil; another draft was put out by the council of ministers, but was not recognized by the Kurdish ministers in the same council, and the third draft was put out by the energy committee in the parliament.

The sticking problem was and continues to be the deliberate ambiguity in the constitution regarding the way natural resources should be governed.

The constitution drafted under the auspices of the Americans after toppling of former President Saddam Hussein gives the region the upper hand in controlling and managing their natural resources, including oil.

Baghdad had a different interpretation that managing the hydrocarbon resources is the prerogative of the central government since that resource belongs to all Iraqis and should be utilized for the benefit of all.
It was not just a constitutional or legal debate.

It went into practicalities after Irbil started to sign agreements with some foreign companies.

Baghdad was so alarmed that it threatened any foreign company signing with Kurdistan to be put in a black list and barring it from operating in other parts of the country.

That did not deter both Irbil and some foreign companies from going ahead with their plans.

A group of some 80 top Iraqi oil professionals criticized the move citing serious concerns on the future impact of such development on the national industry.

One of the points they mentioned was that such deals were based on the Exploration, Production Sharing Agreements (EPSA) where companies should take the risk to invest and look for oil, while those deals signed by Kurdistan cover concessions with known oil reserves, which removes the risk factor and give undue revenues to these foreign companies.

However, even if a new law is passed it will raise the question of how to deal with some 18 deals already signed by Baghdad and another 50 by Irbil with foreign firms.

The big shift took place more than two years ago, when ExxonMobil, the world largest listed company signed an agreement with Kurdistan, a move that led Prime Minister Nuri Al-Maliki to protest to his US counterpart President Barak Obama.

Other majors followed the Exxon move, which strengthened Irbil's hand.
The dispute concerning the oil law reflects in effect a deeper concern, whether to allow Kurdistan to go its way and develop the self"government it enjoys now into self-determination that will lead eventually to the creation of a Kurdish state.

The relative security and political stability that Kurdistan enjoyed compared to the rest of Iraq gave it an edge.

Moreover, though oil reserves in Kurdistan represent roughly one third of the country's 143 billion barrels only, but the deals it signed with the foreign companies gave them a return on their investments that range between 25-35 percent compared to 15-18 percent offered by the service contracts by Baghdad.

The sticking point facing Kurdish officials is that they have to rely on the export pipelines of the central government to ship their oil to world markets.

So far Irbil has managed to truck small amounts of the 200, 000 bpd it produces by land to Turkey, but it plans to raise that production volume to one million bpd in two years and eventually two million bpd by 2019, but such plans depend to a large extent in getting into a deal with Turkey to build a pipeline with one million bpd capacity some time later this year to connect with Kirkuk and eventually with Turkish port of Ceyhan.

But such a move, which will strengthen Kurdistan drive for independence may raise question marks for Ankara, who is having a Kurdish problem of its own and may not want to exacerbate it by helping in creating a Kurdish state in the neighborhood.

In the meantime, the oil market will continue its tradition of living with ambiguity.


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