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By Shwan Zulal:
It has been three weeks since the KRG (Kurdistan Regional Government) published the Kurdish PSCs (Production Sharing Contracts) and surprisingly there has been very little reaction from Baghdad and the media in general. Before the publication of the oil deals, commentators were speculating about the content of the contracts and allegation of corruption was rife. Nevertheless, so far little evidence of corruption charges pointed at the KRG or companies involved has emerged.
Due to the volume of the documents published it may be some time before the Kurdish opposition or Baghdad make any comments on the content of the contracts. This may also be due to the ongoing talks between the political blocs to find a way forward on the range of issues crippling the Iraqi government.
The publication of the contracts is a step forward for KRG in its transparency initiative. There have been debates within the KRG for some time now on whether or not to publish the PSCs, but it appears that PM Barham Salih’s efforts to open up the KRG have taken a step forward by successfully publishing all the contracts. The initiative is also highly political and annuls the Iraqi government’s arguments over the transparency of the contracts and corruption allegations.
The Kurdish PSCs have adopted a regressive fiscal regime by having bonus payments at the commencement of the contract. While oil prices go higher and production starts, the incremental cash flow increases and with it the contractors’ profitability. There have been allegations of wrongdoing and misappropriate use of the bonuses by the government, but so far no evidence of this has emerged.
It is not a secret that the Kurdish PSCs are on more favourable terms compared to TSCs on offer by Baghdad. Companies that entered PSCs with the KRG enjoy a higher rate of return and their windfall profit is significantly higher if the oil prices stay above $70.
While Iraqi oil exports are about to hit 3 million bopd- pre-war production levels – soon, the Kurdistan region has not been able to increase oil production as fast, largely due to infrastructure limitations and partly because of the political impasse with Baghdad and geopolitics. The political deadlock with Baghdad has been eroding confidence and holding back many investors and companies which otherwise would be willing to invest in the region.
The Kurdistan Region has deliberately given favourable terms to the oil companies to attract as many operators as possible and it has managed to do that successfully. Policy makers appear to believe that it is a price worth paying to gain control over the vast untapped oil and gas reserves in the region. Kurdish control over its natural resources gives the KRG the influence it needs to be listened to in Iraq and the region.
Kurdish PSCs typically give the oil operators a five year period for exploration and in some cases it can be extended by another two years. Some contracts have been awarded since 2007 and the companies involved have undertaken their obligation under the contracts by surveying the blocks and undertaking a drilling campaign at considerable expense. Many have been successful and a few have suffered setbacks. A number of operators are ready or will be in a position to start production soon. However, due to the lack of infrastructure and political disagreement with Baghdad, more delays are expected.
The debate over a suitable oil and gas law is still raging, and different versions of the law put forward by different blocs have yet to be agreed upon. It is unlikely that the law will make it to the statute book any time soon. The Iraqi deputy PM for energy matters, Hussain Shahristani, continues to challenge the Kurdish PSCs and only today (Monday) he was quoted by Reuters repeating his stance on the Kurdish deals and declaring them illegal. He has also reiterated the exclusion of companies operating in Kurdistan from Iraq.
While the political wrangling continues, oil companies are becoming nervous. Baghdad appears to be using delaying tactics. Time is of the essence for the Kurdish oil contracts and the companies involved in the region will inevitably face challenges. The longer the stalemate drags on, the more operational and financing costs will mount. Although the exploration period can be extended for a limited period, smaller operators will find it difficult to raise funds in the future and may be forced to sell or relinquish part of their obligation under the contract at a cost. It is needless to say that, under the terms of the contracts, a large part of the cost is recoverable and, the longer the disagreement carries on, the KRG and Iraqi government will ultimately incur increased costs, as and when oil production starts.
Consolidation is already taking place as the Vallares-Genel and DNO-RAK merger is concluding. Moreover, Gulf Keystone petroleum has raised $ 200m and is looking for a buyer to sell its 20 per cent interest in the Akri-Bijeel block, possibly funding new pipelines for exporting oil from its mega oil find. Larger oil companies like Hess have entered the region and others are weighing their options and some are negotiating their contracts.
The Kurdistan Region’s bold oil and gas strategy has so far proved effective by attracting investors and upstream operators. However, exporting the hydrocarbon and building up the much-needed infrastructure will require a fresh approach.
This article first appeared on Kurdish Views
