Thursday, February 23, 2012

Iraq’s Kurdistan Losses One Foreign Oil Company, But May Gain Another

Since the 2003 fall of Saddam Hussein, the central government and the Kurdistan Regional Government (KRG) have been in a dispute over control of the country’s oil resources. The Kurds have followed their own independent energy policy, which Baghdad has objected to. The Oil Ministry has tried to stop companies from signing with the Kurds by banning them from operating in the rest of the country. The latest example of this argument just came to light when a South Korean company backed out of an agreement with the Kurds to take part in a new bidding round for oil and gas fields put on by the Oil Ministry, and a French corporation said it was willing to leave southern Iraq to work in the north.

(Lyngsat Logo)
In early February 2012, South Korea’s SK Energy announced that it was divesting itself of Kurdistan so that it could work with the central government. On February 9, it was reported that SK Energy was selling its share in the Bazian oil field in Sulaymaniya, so that it could participate in the fourth bidding round for 12 oil and gas fields put on by the Oil Ministry in May. SK originally signed its contract with the Kurdistan Regional Government (KRG) in November 2007. In January 2008, the Oil Ministry blacklisted it from working in the rest of the country in retaliation. The corporation is South Korea’s largest oil refiner. Starting in late-2008, SK Energy began backing out of its deal with the Kurds. In November, it said it would not invest anymore money into its Kurdish holdings until Baghdad approved it. It then allegedly refused to join a $2.1 billion infrastructure improvement plan at the Bazian field with the Korean National Oil Corporation. In December, the Oil Ministry said it would sell oil to SK as a result, which started in February 2009. Then a report came forward in October that SK was involved in drilling at Bazian, and the Oil Ministry demanded that the corporation clarify its position, because it would not be allowed to purchase anymore petroleum if it was still working with the Kurds. It took until the beginning of 2012 for SK Energy to do so, and now it wants to be able to bid in the fourth round of auctions. The South Koreans obviously found little profits in Kurdistan, because it was only involved in exploration work there. The attraction of buying oil from the central government, and developing blocs obviously became too powerful, and that led it to exit the KRG, and reconcile with the Oil Ministry. That’s exactly what Baghdad has been hoping for with its oil strategy.

(Iraq Energy)
As Kurdistan lost one company, it might be gaining another. On February 10, 2012, France’s Total let the press know that it was interested in working in the KRG. Total’s CEO said that the fourth bidding round did not look attractive, while Kurdish contracts offered better terms than those offered by Baghdad. In December 2009, Total put in the winning bid along with the China National Petroleum Corporation (CNPC) and Malaysia’s Petronas for the Halfaya field in Maysan. Total is a junior partner in the joint venture, controlling 25%. The consortium agreed to raise production to 535,000 barrels a day, and be paid $1.40 per barrel after reaching an initial output target. Halfaya has reserves of 4.098 billion barrels. Since then, the French company has complained about the deal, saying that the payments are far too law for it to recover its costs in developing the field. Total could join Exxon Mobile as the second major foreign oil company to work in Kurdistan. Deputy Premier Hussein Shahristani who is in charge of energy policy, has already warned Total that no company can sign an energy contract without going through the Oil Ministry. Previously, Baghdad threatened to end its deal with Exxon for a field in Basra, and banned it from participating in the fourth bidding round after it signed a contract for six oil and gas fields in the Kurdistan region. Large oil companies were lining up to work in Iraq in 2009, because the country had been cut off since the 1990s due to international sanctions and wars. It offered huge, largely untapped oil reserves. That gave the Oil Ministry the upper hand, as it negotiated tough Technical Service Agreements, which gave them access to foreign know how and capital, while keeping most of the profits for itself. Since then, many companies have complained about these deals, saying that benefits are too low. They have also found that the bureaucracy holds up all work from getting visas to enter the country to getting paid on time, many of the fields are littered with unexploded ordinance from the Iran-Iraq War, which requires clearing before any serious work can be done, there are occasional attacks by militants, the infrastructure needs massive improvements, and there have been cases of locals protesting and sabotaging fields to demand jobs and compensation. That’s the reason why Total has expressed interest in Kurdistan, and is willing to give up its share in the Halfaya bloc.

The Kurds’ oil policy seems to be winning more international attention recently. In 2003, the Kurds signed their first deal with Turkey’s Pet Oil. After that, it claimed the 2005 Iraqi Constitution allowed it to develop new oil fields. It then went ahead and created its own Natural Resources Ministry in May 2006, and after negotiations over a new oil and gas law broke down in parliament, it passed its own oil legislation in August 2007. It has also offered production sharing agreements, which provides greater profits for companies, which have led to several dozen contracts being signed, mostly for exploration and drilling work. Now, with companies getting a taste of what working with the Iraqi Oil Ministry is like, and experiencing the operating conditions in southern Iraq, they are beginning to show more interest in Kurdistan where none of these problems exist. While there are fewer fields and smaller reserves in the north, companies have the possibility to make greater profits, much quicker than in the rest of the country, which is the reason why Total may be the latest company to agree to terms with Kurdistan.

So far, the central government has held the upper hand in these arguments. It controls the vast majority of the country’s oil, and more importantly, the pipelines that export petroleum, and the revenues they bring in. That has drawn in over a dozen medium to large size international corporations to work with it, and the reason why SK Energy has abandoned its work in the KRG. Now that balance of power seems to be shifting just a little bit. Exxon was the first major to sign with the Kurds, and Total may quickly follow suit. How this works out is the real question now. Will these contracts bring the two sides together, and agree upon a new oil and gas law, or will they continue to battle each other for control of the country’s resources? Prime Minister Nouri al-Maliki has promised the Kurdish Coalition that energy legislation would be passed, but in the meantime, Baghdad has continued with its threats against any company that signs a deal with the KRG. Even if the two sides do not reconcile, it’s apparent that more foreign firms are willing to work in Kurdistan, no matter what the Oil Ministry threatens to do to them.


Abbas, Mohammed, “Iraq Central Gov’t, Kurdistan Agree Oil Exports (UPDATE 2),” Reuters, 11/28/08

Agence France Presse, “Iraq declares Korean oil deal with Kurds illegal,” 4/2/09

Carey, Glen, “Iraq to Start Oil Exports to South Korea’s SK Energy in January,” Bloomberg, 12/24/08

Fang, Bay, “An Oil Rush in (Yes) Iraq,” U.S. News & World Report, 11/13/06

International Crisis Group, “Iraq After The Surge II: The Need for a New Political Strategy,” 4/30/08
- “Oil For Soil: Toward A Grand Bargain On Iraq And The Kurds,” 10/28/08

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

Lando, Ben, “Blacklist enlarged and challenged,” Iraq Oil Report, 10/1/09

The National, “Iraq oil deals,” 12/12/09

Reuters, “Shahristani says Total cannot sign Kurdistan deals,” 2/12/12

Sabri, Abdullah, “Skorea’s SK Innovation participates in 4th round of Oil & Gas licensing after selling shares in Kurdistan,” AK News, 2/9/12

Salaheddin, Sinan, “Iraq to resume oil sales to South Korean firm SK,” Associated Press, 12/6/08


Anonymous said...

Im sorry to say but this blog contains a number of significant factual errors that I think the author should rectify:
SK never had a share in a Bazian production sharing contract.
The only contractor entities in the Bazian PSC are the Korea National Oil Corporation (KNOC), and a KNOC subsidiary, KNOC Bazian Ltd.
SK was a minor shareholder in KNOC Bazian Ltd., and had no rights or responsibilities under any KRG PSC.


Michael Howard
Communications Advisor to the Minister
Ministry Of Natural Resources
Kurdistan Regional Government-Iraq

Joel Wing said...

Michael, can you clarify your point? Youre saying that SK never had a PSC with the KRG for the Bazian field, it was just a junior partner in a contractor company for the field with KNOC.

In the article I wrote that SK was selling its share in the field. Instead they were selling their share in the contracting company that worked at Bazian, not the field itself. Is this correct?

Marph said...

undeniably the oil dispute is brewing between Baghdad and KRG. In this case the lack of transparency and accountability added more speculations into the legitimacy of energy development agreements. It is astonishing that Iraq is sitting on the world's second black gold reserve, and yet this is not been used to revive the country and meet the needs of its population.

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