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By Shwan Zulal:
The Kurdistan Region has been in the spotlight since Saddam’s regime was toppled from power by a US-led invasion. It has attracted mainly smaller oil exploration companies, tapping into this largely unexplored oil rich region, which many have described as an oilman’s dream.
The KRG (Kurdistan Regional Government) took it upon itself to grant PSC contracts for oil and gas exploration and now more than 40 companies operate in the region. Many companies, such as Gulf Keystone and Norwegian DNO, have had good fortune in discovering large reserves of oil while others have not been so lucky. Only this week Western Zagros WZR struck oil in Sargala 1 and secured a new rig on site to carry out more exploration.
The disputes between the Iraqi central government and the KRG have put off some investors though many are undeterred and have invested billions of US dollars looking for oil. The dispute has been over the legality of the contracts and technical details.
Most contracts awarded to operators in the Kurdistan Region are PSCs with a levy for local infrastructure. The Iraqi deputy prime minister for oil, Husain Shahristani, believes the KRG contracts should be converted into service contracts in order to comply with the Iraqi constitution and the illusive oil and gas legislation that is not yet in force.
The infrastructure and development tax applied to the oil contracts in the Kurdistan Region varies from zero to 40 per cent of profit. The local tax is the main sticking point between Erbil and Baghdad because the Iraqi government argues that the rest of Iraq does not benefit from the extra taxes paid for locally. The Kurdish authorities counter that Kurdistan has been under-developed for decades and needs the extra investment to build up its basic infrastructure.
Comparing the difference between PSC and service contracts, if applied to Kurdistan, one cannot foresee a big difference in its profitability for the government in the short or medium term. The difficulties many operators face in Kurdistan are due to a lack of basic infrastructure and other challenges. This surely offsets the argument for converting the contracts to Baghdad’s liking because the costs of drilling for oil in Kurdistan are very high and can be claimed. If the KRG contracts were converted to service contracts, and all the parties to the contract agreed (which is very unlikely), the gains for Iraq’s coffers would be minimal if anything.
Considering the facts and observing the political struggle between Baghdad and Erbil, it is becoming clear that Shahristani’s opposition to Kurdish oil contracts is not aimed at getting the best deal for Iraq as he claims. Instead it is aimed at taking full control of the oil and gas industry and leaving the KRG completely dependent on Baghdad for its income. The policy pursued by Shahristani is also designed to strip as much power as possible from the KRG and centralise power in Baghdad.
Meanwhile, the Kurdistan Region sees granting oil contracts and controlling its natural resources as its prerogative and it will not readily give up control to Baghdad. All matters considered, it is very unlikely that the KRG will back down and accept Shahristani’s proposals, However, a compromise must be found – otherwise the sorry state of Iraq will continue as Iraqis and investors grow more frustrated.
This article first appeared on Kurdish Views
