IHS Global Insight Perspective | |
Significance | To unlock the ongoing government coalition negotiations and enlist support from the Kurdish parties, the Iraqi cabinet has agreed to reimburse costs for the oil companies in the region, although it still doesn’t want to award them any profit margins for their operations and risks taken. |
Implications | The deal suggests that a coalition is close to being formed, although it might still not be enough for the Kurdish parties to agree, as there needs to be some financial incentive for the oil companies looking to undertake development and production in the future. Meanwhile, the Iraqi Oil Ministry has said that production capacity increases, as work is launched this year on a host of southern megaprojects, are likely to reach 600,000 b/d as soon as 2011. |
Outlook | This deal is one of the most tangible breakthroughs in the long-standing deadlock and indicates that an agreement on the region’s oil exports could be relatively close; although not addressing territorial issues might not be enough for the Kurds, this could bring the formation of national government a step closer. |
Fresh Steps
Iraq’s cabinet is reported to have passed a deal yesterday allowing for the reimbursement of private companies involved in producing oil in Iraqi Kurdistan, taking a major, but not definitive, step towards honouring the region’s contracts with IOCs and allowing for oil exports from the region to start flowing. The deal is understood to involve both the Oil Ministry—including its marketing subsidiary the State Oil Marketing Organisation (SOMO), which has the monopoly on selling Iraqi crude abroad and controls the throughput of the Kirkuk-Ceyhan export pipeline from northern Iraq to the Turkish coast—and the Finance Ministry. It would make sure that the revenues secured by SOMO’s marketing would then be passed on from the Finance Ministry to Iraqi Kurdistan according to the national revenue share, after a remuneration to the oil companies producing the oil had been allocated. The deal does not, however, cover the oil companies’ profits and should not be read as an acceptance by national oil minister Hussein al-Shahristani that Iraqi Kurdistan’s separate contracts are legal, Reuters reports an Oil Ministry spokesman as saying. "We hope that the guarantees offered by the Finance Ministry would be enough to convince the Kurdish Regional Government to start delivering the crude to Iraq to be exported through the State Oil Marketing Organisation," Asim jihad, spokesman at the Iraqi Oil Ministry, said.
The Iraqi Finance Ministry had previously asked the Kurdish authorities and the oil companies active there to submit their exploration, development, and production expenses to the Finance Ministry for auditing, with the idea that costs deemed reasonable would be recovered by the companies from the revenues as the shut in exports go ahead.
Entrenched Positions
The deal could unlock oil exports from Iraqi Kurdistan, where Norway’s DNO could start producing about 50,000 b/d from its Tawke field and China’s Sinopec and Turkey’s Genel Enerji could do the same from their Taq Taq field, with production doubling at both fields before the end of the year and rising to at least 150,000 b/d at the Taq Taq field by sometime next year. The region exported crude for a few months last year in an effort by the Kurds to demonstrate their capabilities and to show the central government what it was missing out on. However, the Iraqi Oil Ministry and cabinet held out, refusing to recognise the region’s right to have its own oil law and award oil deals through a production-sharing agreement (PSA) framework, in order to not once-and-for-all lose central government control over the region’s economy and allow it to become too autonomous.
For the Kurdistan Regional Government (KRG), central government recognition of its own oil law has be a core demand and, along with resolution to the question of its territorial extent, is the main demand that the Kurds want met before giving their support to a new Iraqi governing coalition. With its own oil law honoured, the KRG would be firmly in charge of its own natural resources and the pace of their development. That, however, requires that it can continue to bring in the upstream investment that it initially has been so successful in attracting.
The Necessity of Profit
It is difficult to imagine the KRG agreeing to the Iraqi cabinet’s plan without there being some solution to the issue of profit. Iraqi Kurdistan has been successful in signing up IOCs to invest in exploration at around 35 blocks in the region, with some of the earliest drilling programmes—following on from the Tawke and Taq Taq projects—now starting to show very positive results. Given that only two fields thus far have been developed, however, the KRG will need to assure explorers that their future profit margins will be honoured in order for the necessary investment to be poured into the finds being made and for new production capacity to be brought onstream. Signing up to a deal now, which would reimburse the IOCs involved only money they have spent, would just mean placing a wet blanket over the country’s oil sector for years to come.
The Iraqi Oil Ministry under al-Shahristani has tried to entice the KRG by promising state-industry-led exploration and development investment, although given the Iraqi state oil industry’s depleted and already overstretched capabilities, and the vast undertakings it will be involved with in the country’s prolific South, this promise has from the beginning been a hollow one.
Meanwhile, in the South…
As the negotiations with Iraqi Kurdistan rumble on, the national Oil Ministry has put its production capacity target for 2011 at 3-3.1 million b/d, about 600,000 b/d higher than its current production capacity. "The increase we expect, which is the 10 percent for the oilfields from the first auction and the initial production for the oilfields from the second auction, is a total of about 600,000 b/d," Deputy Oil Minister Abdul Karim al-Laibi was quoted by Reuters as saying. Companies securing the large contracts offered in Iraq’s first and second licensing round last year had to promise quick initial production capacity increases at already producing fields, with most of them finding this relatively easy to deliver, given that easy repairs and renovations—that the weak national industry was unable to undertake—in most of those cases sufficed to reach the required levels.
Al-Laibi also told Reuters that the Ministry is moving ahead with a US$1-billion upgrade and expansion programme at its export facilities and their connecting pipelines, enabling Iraq to export up to 4.5 million b/d by late-2011. There is currently almost no spare capacity in Iraq’s export facilities at all, making it necessary for the Oil Ministry to launch the expansion over the coming months, if bottlenecks in the infrastructure are to be avoided.
Outlook and Implications
The deal announced yesterday could be the most tangible step towards a breakthrough for both the companies active in Iraqi Kurdistan and the formation of the next Iraqi government. It does not look like just enough yet, however, as it would do nothing to incentivise exploration and development to the degree necessary for Iraqi Kurdistan to see its oil sector become comprehensively developed. Most of the needed investment in Iraqi Kurdistan’s upstream play has still to come, so not allowing the companies any profit margins out of the export revenues—forcing the KRG to pay this out of its own 17% national revenue share—would lead to investment and development stalling completely. At the same time, the central government will be loath to hand over definitive power over the region’s resources and allow for the establishment of a separate hydrocarbon legislature within the country, meaning that not all hurdles have been jumped yet. As Iraqi coalition-building continues after the March elections, however, this tentative deal signals that there might be a willingness to compromise further on this issue as long as the issue of Kurdish territorial boundaries is deferred, boding well for the oil companies active in the region, desperately in need of an oil-exporting deal.