Baghdad-KRG friction overshadows Kurdistan oil payments

By Shwan Zulal:

While Iraqis struggle to delineate their future in the midst of political deadlock, violence and chaos, the fate of their most valuable asset is being decided behind closed doors. Only recently, the Iraqi deputy prime minister for energy, Hussain Shahristani, made a pact with the EU to export oil and gas through the southern corridor. The deal has taken the Kurdistan Regional government (KRG) by surprise.

This latest deal by the deputy prime minister (who is no longer even an oil minister) has caused raised eyebrows in Kurdistan and Turkey. The terms are not yet clear and the only significant known information about it is that the EU has agreed to buy gas only from the Iraqi central government through the southern corridor. Meanwhile Shahristani  ratchets up his rhetoric, insisting that Kurdistan has no authority to sell its natural resources without Baghdad’s approval.

The Norwegian DNO said on Monday that the first payment of $103.7m USD for its oil exports in 2009 has been paid and the company described the payments as a milestone for its operations in the Kurdistan Region. DNO and its partners commenced oil exports from the Tawke field in mid- 2009 and, after less than four months, production was halted because of disputes between the KRG and Iraq’s central government.

DNO issued a statement regarding the latest development saying, “The payments combined with the recent positive and encouraging results from the ongoing operations, forms a solid basis for increased activities and investments within the company’s portfolio in the region”. The Iraqi finance minister confirmed in May this year that oil export payments to contractors in the Kurdistan Region would be processed and later the KRG Prime Minister, Barham Salih, confirmed the payment from Baghdad in a statement.

This latest payment to DNO has its own significance and in some ways confirms the legality of oil exploration and production in Kurdistan. Nevertheless, it has to be viewed in the context of Iraqi politics and the political ramifications need to be taken into account. Since the new Iraqi minister for oil and gas, Abdul-Karim Luibi, took his office last year, he has been leaning towards accepting the Kurdish oil contracts and in favour of resolving the outstanding legal disputes. However, Shahristani has different ideas and been overriding Luibi’s decisions ever since taking office.

Although parts of the payments have been approved, oil production is commencing in Kurdistan with a cap introduced by the central government, which was agreed in the January agreement. It is not yet clear what the future holds for the foreign investors in Kurdistan and Iraq because although agreements have been made, they are often not adhered to.

Shahristani’s manoeuvring and side-lining of the oil ministry, including by entering into an oil and gas agreement with the EU, clearly sets him on a collision course with KRG. It will be interesting to see the KRG’s response to the Shahristani-EU pact because there are mutterings from the Kurdistan Region about blocking this deal and making it difficult for gas to go through Kurdistan and on to Turkey and Europe.

In order to connect to the southern corridor, the pipelines really need to pass through the Kurdistan Region. Although they could go through Syria, this would not be politically palatable for the EU or provide it with the energy security it seeks. Everything depends on what the KRG does next and how it reacts to the deal. If the KRG makes its views known privately to EU officials, we might see the deal dropped quietly so as to save face for both the parties involved. Otherwise, if the deal goes ahead without the KRG’s explicit consent, the purpose of the deal for the EU – to reduce its dependence on Russia for natural gas – would be defeated.