Wednesday, July 25, 2012

How The New Chevron Deal Affects Oil Dispute Between Iraq’s Central Government And Kurdistan

The struggle between Baghdad and the Kurdistan Regional Government (KRG) over Iraq’s energy policy continues. In July 2012, Chevron announced that it was buying into a joint venture in Irbil. This followed the October 2011 deal between Exxon Mobil and the KRG. These were the first two major oil companies to come to terms with the Kurds, which greatly angered the central government. It has demanded that all contracts must be made with it. There is talk that more large foreign companies might be interested in Kurdistan as well. Recently, the government of Prime Minister Nouri al-Maliki has been feeling more assertive, because oil production is taking off in southern Iraq lessoning the need for any Kurdish petroleum. The only way for the KRG to try to gain some leverage in this dispute is to get big companies like Chevron, Exxon, and others to enter its market, so that it can try to even the playing field with Baghdad.
Chevron’s agreement with the Kurdistan Regional Government was announced in July 2012. The company bought out India’s Reliance Industries that had an 80% share in a joint venture with Austria’s OMV AG for the Sarta and Rovi blocks in Irbil. As a result, the Oil Ministry banned Chevron from any future deals with it. Baghdad has always demanded that all energy contracts go through it. Corporations that have disregarded it have faced similar penalties before. In this case however, it’s going to have little affect. Going into Kurdistan Chevron must have known how the central government was going to respond, but was not deterred.

Chevron follows Exxon Mobil as the second major oil company to do business in Kurdistan. In October 2011, Exxon signed a contract with the KRG for six blocks. Baghdad objected to that deal as well. Prime Minister Nouri al-Maliki recently sent a letter to President Barak Obama asking him to intervene in the matter. Unfortunately for the central government Exxon is too large of a company to retaliate against. Exxon was already working on the West Qurna 1 field in Basra when it decided to work in Kurdistan as well. The Oil Ministry initially threatened to cancel that contract, but has not done so. If it did it would make an already difficult situation worse. Many companies operating in southern Iraq have complained about the bad business environment, the red tape, the delays in getting equipment and personnel into the country, and the tough terms set by the Iraqi government that severely limit profits. If the Oil Ministry were to move against Exxon in any substantial way it and others could decide to leave, and Iraq desperately needs them to develop its oil industry. At the same time, Maliki’s government is afraid that more energy businesses will head towards Kurdistan now that Exxon and Chevron have.

In June, the KRG’s Natural Resource Minister Ashti Hawrami said that several other major oil companies would shortly be doing business with it. There have been various reports that Italy’s Eni, France’s Total, Norway’s Statoil, and Russia’s Lukoil were all interested in Kurdistan. Total might join the U.S.’s Marathon Oil, while Lukoil could sign a deal with the KRG to work in Western Zagros. All those companies have worked with the Oil Ministry, and Statoil even pulled out of southern Iraq, because it didn’t like the working conditions there. That is one of the major motivations to try Kurdistan instead.

Attracting major oil companies has been part of Kurdistan’s long-term strategy to develop its energy resources. At first, only small and medium sized companies were willing to work in the region. Kurdistan was only open to exploration work initially, and any business that went there would be blacklisted by the Oil Ministry, and be denied access to the much larger southern oil fields under its control. As the difficulties of working there have been exposed, interest in the KRG has increased. In 2011 for instance, Tony Hayward, the former CEO of British Petroleum took charge of the Turkish Genel Enerji, one of the largest investors in Kurdistan’s energy field. The KRG is more open to investment than Baghdad, offers better terms, and the promise of larger profits. The Kurds can only hope to truly achieve their goals of becoming a major oil producer if large firms like Exxon and Chevron come there. Then Kurdistan will have more leverage to pressure the central government to come to terms with it, not objects to its oil deals, and allow it to export.

The dispute over oil in Iraq is heating up. In April 2012, the Kurds stopped exports over a payment dispute with the central government. That has reduced it to smuggling to Iran and Turkey that can’t bring in close to the revenues it was earning before. Baghdad has also reduced its fuel shipments to the KRG in retaliation for its independent energy policy. No compromise is seen on either issue, because Premier Maliki has the upper hand currently. With oil production taking off in southern Iraq there is no real need for Kurdish exports. Before Baghdad would protest any deal signed with the Kurds, blacklist the company, and then ignore the matter. Now, the central government is punishing Kurdistan. One way the latter is trying to regain its position is by drawing in more major energy companies. They are too big for Maliki to take real action against. With almost all of the corporations considering work in Kurdistan already having contracts with the Oil Ministry they might lead the two sides to come to some type of agreement. Exxon and Chevron alone are probably not enough to achieve that goal, but if more companies were to join them, then the KRG might finally have the leverage it needs against the prime minister.  


Agence France Presse, “French Total seeks business in Iraqi Kurdistan: chief,” 3/13/12

Ali, Hawar Abdulrzaq, “Chevron Secures Major Deal in Kurdistan, But More is to Come,” Rudaw, 7/19/12

Hadi, Hemn, “Maliki threatens foreign companies investing in Kurdistan region,” AK News, 7/21/12
- “Total in talks to invest in Kurdistan’s oil,” AK News, 5/19/12

International Business Times, “Total Close to Securing Oil-and-Gas Exploration Rights in Iraqi Kurdistan: Report,” 1/29/12

International Crisis Group, “Iraq And The Kurds: The High-Stakes Hydrocarbons Gambit,” 4/19/12

Jacobs, Caroline and Boselli, Muriel, “UPDATE 3-Total latest oil group to shift Iraq focus to Kurdistan,” Reuters, 2/10/12

Lando, Ben, “Chevron announces KRG block buy,” Iraq Oil Report, 7/19/12

Mackey, Peg, “Iraq Kurdistan sees more oil deals with majors soon,” Reuters, 6/19/12

Reed, Stanley, “Chevron Makes Oil Exploration Deal in Iraqi Kurdistan,” New York Times, 7/19/12

Reuters, “Iraq blacklists Chevron for Kurdistan deals,” 7/24/12
- “Iraq warns France against unsanctioned oil deals,” 6/20/12
- “Shahristani says Total cannot sign Kurdistan deals,” 2/12/12

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