Global Insight Perspective | |
Significance | Securing exploration by its first NOC as well as, allegedly, a subsidiary of an oil major, the Kurdistan Regional Government (KRG) is also taking the challenge further by claiming the right to develop discovered fields, contrary to the contested national oil law draft. |
Implications | The wide array of companies that have committed to undertake exploration have established a precedent and a situation virtually impossible for the central Iraqi government to reverse. If exploration leads to discoveries, which looks likely, a new national oil law will have to be structured along these realities. |
Outlook | The KRG is finding takers for virtually all of its promising exploration blocks, in an outright challenge to the Iraqi national government's sovereignty and testing how far it can extend its powers. The national government, however, still controls all export routes, setting the scene for a future showdown, or settlement, depending on how the issue is managed. |
New Entrants
The wide array of companies that have signed up and committed to undertake exploration have established a precedent, as well as a situation virtually impossible for the central Iraqi government to roll back. If actual exploration work is undertaken, which seems likely, a new national oil law will have to be structured with these realities in mind.
Yesterday the Kurdistan Regional Government (KRG) revealed the signing of five new production-sharing contracts (PSCs) with oil companies from Asia, Europe and the United States, collecting yet more influential and experienced oil business entrepreneurs among the crowd now assembling in the Iraqi Kurdistan region. As Global Insight reported yesterday, state-owned Korea National Oil Corporation (KNOC) led a South Korean consortium, consisting of, among others, SK Energy, GS Holdings and Daesung Industrial Holdings, and entered the first NOC-led signing of a PSC with the KRG, by default adding a certain official South Korean recognition to the autonomous region's unilaterally passed oil law (see Iraq: 12 November 2007:South Korean KNOC-Led Consortium Signs for Iraqi Kurdistan Acreage Amid Rumours that U.K.'s Sterling Is Next in Line).
Newly Awarded Production-Sharing Contracts by the KRG | ||
Company | Area | Characteristics |
Norbest Ltd (according to KRG a TNK-BP subsidiary) | Four blocks in the Hawler Contract Area, north-west Erbil governorate (1,532 sq. km) | Low-to-medium exploration risk |
KNOC Bazian Ltd (KNOC, SK Energy, Daesung Industrial Co., Samchully Co., Bum-Ah Resource Development Corp., UI Energy Corp., GS Holdings Corp. and Majuko Corp.) | Bazian Block (473 sq. km) in Suleimaniyah governorate | Low exploration risk |
HKN Energy (Hillwood International Energy) | Sarsang Block (1,226 sq. km) in Dohuk governorate. | Medium exploration risk |
Sterling Energy | Sangaw North Block (492 sq. km) in Suleimaniyah | Low exploration risk |
General Energy Exploration Partners Inc. (Aspect Energy LCC) | Atrush Block (269 sq. km) in the Suleimaniyah governorate | Low exploration risk |
TNK-BP or Not TNK-BP?
Norbest Ltd, according to media reports and the KRG official statement a subsidiary of TNK-BP, the oil major's large Russian venture, constituted the other bit of groundbreaking news yesterday, as the company signed a PSC for four exploration blocks in the region's Hawler area, in the north-western part of the Arbil governorate . However, later in the day a TNK-BP spokeswomen, Marina Dracheva, denied knowing anything about Norbest, telling Reuters in Moscow: "Norbest Ltd is not affiliated with TNK-BP in any way," thus adding some question marks to the whole situation.
The United Kingdom's Sterling Energy bagged a contract for the Sangaw North Block, and a Hillwood subsidiary, HKN Energy, secured one block in the region's Sarsan area. Finally, the United States' Aspect Energy won a contract for the Atrush Block through its subsidiary General Exploration Partners Inc.
Challenge Everything
While the KRG is having a field day signing exploration contracts with willing investors, the Iraqi national government has found it impossible to stop the flow of investment into the KRG, threatening to take national sovereignty over the oil sector away from the national government institutions permanently, as the KRG interpretation of the notoriously unclear constitution gains legal precedence by the creation of a fait accompli. Reports on the Iraq Oil Report website also point towards a growing KRG challenge of the draft oil law's notion that already discovered fields should come under the authority of the Iraqi Oil Ministry and an Iraqi national oil company—a notion that the KRG agreed to during the negotiations preceding the current total deadlock of the Iraqi oil law draft.
The KRG last week awarded a service contract for the Khurmala oil field to a regional government-owned NOC of sorts, with the provoking name of the Kurdistan National Oil Company (see Iraq: 7 November 2007:Northern Oil Rush Continues; Iraqi Kurdistan Signs Seven New PSCs). Not only is this a discovered field, albeit undeveloped, but according to the Iraq Oil Report, the field is yet another example of the KRG awarding acreage in areas under its control, but outside the formal recognised borders of the region. The approach has been planned similarly to the awarding of disputed acreage to the politically connected U.S. oil company Hunt Oil recently (see Iraq: 15 October 2007:Hunt Oil of U.S. Becomes Pawn in Iraqi Kurdistan Territorial Expansion, Ex-Minister Alleges amid Rising Controversy).
Outlook and Implications
As the KRG moves to consolidate its gains (there are still three blocks pending contract negotiation and only a handful more regarded as particularly interesting from a hydrocarbons perspective) and extend its reach and powers further, it is looking increasingly impossible for the Iraqi government to roll back the gains made by the KRG through anything less then a total breakdown of the Iraqi Kurdistan autonomous administration. The central government has not been able to stop the inflow of IOCs, although Iraqi Oil Minister Hussein al-Shahristani has continued to label every KRG PSC contract signed as "illegal" and call upon it to be cancelled. Having achieved this, the KRG will not allow a national oil law to pass that would force it to give up some of the powers and investments gained, making the future of the current log-jammed national draft oil law dead in the water.
The national Iraqi government will try to find a strategy able to obstruct exploration to get under way under the contracts signed. This will not be easy and is probably ultimately fruitless, as the KRG has a strong military hold on its own territory and thereby holds real autonomy from the national government's influence. In the longer term, the only asset the national government has is its control over the export routes out from the KRG. Iraqi Kurdistan's neighbours do not seem particularly interested in letting the region develop its own pipeline links with them, routing the communication with the region fully through Iraq's national government. Hence the KRG will need to facilitate for a solution at some point, as export production from DNO's and Addax Petroleum's fields is not far off. With the oil-rich Kirkuk region being the ultimate prize for the KRG, the political battles, fought in the Iraqi capital, Baghdad, will intensify in the coming year, as Iraqi Kurdistan will need to reach a favourable solution to both the export route issue and its incorporation of most of its disputed areas.
The national Iraqi government will need to use its strategic control of the export routes carefully to exert a maximum of political returns for KRG export volumes. Global Insight's prediction that Iraq's Oil Minister, and indeed the whole government, will come under hard KRG-orchestrated pressure remains for the coming year, as the autonomous Kurdish region will do its utmost to make sure that the national government is led by weak personalities and consists of unstable alliances (see Iraq: 14 September 2007: KRG Calls for Iraqi Oil Minister's Resignation Amid Crumbling Oil Law Unity).