Northern Oil Rush Continues; Iraqi Kurdistan Signs Seven New PSCs

Oil Rush in the North

The Kurdistan Regional Government (KRG) has signed seven production-sharing contracts (PSCs), based on its own unilaterally developed and enacted oil law, with IOCs from Europe, North America, and Asia in the biggest single award notification since its establishment. In this challenge to the central Iraqi government, the KRG has proved that it is successful in attracting the confidence of international companies of size. Nonetheless, the acreage on offer has not been regarded as sufficiently promising to sway majors from supporting the central government's efforts to pass a national Iraqi oil law, or to see them run the risk being barred from the large oilfields in the country's south, or the Kirkuk area, as a result of signing contracts with the KRG.

Austria's OMV has been awarded two blocks close to the region's capital, Erbil, while Hungary's MOL—together with Gulf Keystone Petroleum—secured the right to explore and develop the Akre-Bijel block through MOL's subsidiary Kalegran Ltd. MOL also won the right to another block with Gulf Keystone and Texas Keystone. India's Reliance secured two prospecting blocks, in a deal that had been widely rumoured for weeks and one that was being negotiated since before the KRG oil law was enacted. The seventh PSC was apparently signed by another Western oil company, the details of which will be released "in the coming days", the KRG press release said.

A NOC Strategy Takes Shape

The KRG also revealed that it has founded a government-owned oil company, the Kurdistan Exploration and Production Company (KEPCO), giving it the right to explore and develop four blocks under the same financial terms as the IOCs. KEPCO will itself be required to partner an IOC to help it develop its E&P capacities and know-how in the Erbil-Suleimaniyah area blocks awarded to the company. Another Iraqi Kurdistan NOC in the making, with the overtly secessionist-sounding name of Kurdistan National Oil Company (KNOC), was yesterday awarded the right to develop the Khurmala field as an integrated project including a 50,000-b/d refinery. KNOC will be expected to develop the up-to-250,000 b/d project by issuing service contracts.

Under its own oil law, the KRG has the right to a 20-25% participation interest in all PSC contracts signed with IOCs, and also retains the right to assign a third participating party to the block, with an interest of between 15% and 25%. While this can be seen as continued openings for IOCs to come in as partners to contracts already awarded, the KRG will most probably also use these rights to increase involvement of Iraqi Kurdistan's government-owned oil companies to order to progress the region's development of the sector, as well as to further institutionalise KRG control over the developments that will begin.

An Iraqi Kurdish National Strategy Takes Shape?

Taking its challenge of Iraq's national government one step further, the KRG yesterday also stated aims to lift northern Iraqi oil production to 1 million b/d. This goal obviously includes the current 434,000 b/d of production (but 700,000 b/d capacity) from the Kirkuk area, although that area currently legally remains outside the KRG's remit. Control over the Kirkuk area will become increasingly disputed as the referendum concerning the extremely oil-rich area's place within the country's internal divisions , promised in the national Iraqi constitution, is postponed so as not to aggravate current tensions. Kurdish factions have extended much of their political control to the area and have been practising a resettlement policy—paying inhabitants of other ethnicities to move— and thus increasing the chances of an outcome in favour of the region joining Iraqi Kurdistan. The national and international implications of that move are, however, what has delayed the referendum, and KRG rhetoric suggesting that Kirkuk belongs to Iraqi Kurdistan shows the extent of the KRG's challenge to the national government, while at the same time aggravating tensions with neighbours Turkey and Iran. The strategy of awarding blocks in areas not formally part of KRG territory—as in the case of Hunt Oil (see "Related Articles")—has also been used, as the KRG tries to cement its current position as the strongest individual faction in Iraq, with full military, political, and legal control over a coherent swathe of territory.

Outlook and Implications
Iraq's government has already repeatedly accused the KRG's oil law, and its awarding of PSCs, as being illegal and in conflict with the national oil law—although the latter looks increasingly unlikely to be passed by the Iraqi parliament this year. By contrast, the KRG uses its interpretation of the Iraqi constitution's deliberately unclear provisions on regional autonomy (a compromise on which everybody could agree), as well as the lack of national progress, to legitimise its unilateral awarding of oil exploration blocks on the territory it controls. The increasingly impressive turnout of companies signing PSCs with the KRG further cements the region's control over its natural resources and de facto creates "facts on the ground".

Companies such as OMV, MOL and Reliance are a new breed compared to the previous turn-out of extreme risk-taking minnows such as DNO, or even Hunt Oil. With yet another Western oil company's entry soon to be announced and nine blocks now under negotiation, the central Iraqi government will have to face the facts. Unless there is a large-scale Turkish incursion destabilising the KRG and bringing it to the verge of a collapse—which at this point looks highly unlikely—it is hard to see the KRG reversing its now entrenched political, military, and legal gains.

Related Articles

Iraq: 31 October 2007: Reliance Looks to KRG for Acreage as IOCs Continue to Position Themselves for Iraqi Entry

Iraq: 15 October 2007: Hunt Oil of U.S. Becomes Pawn in Iraqi Kurdistan Territorial Expansion, Ex-Minister Alleges amid Rising Controversy

Iraq: 9 October 2007: KRG Defends Oil, Gas Autonomy; Oil Products, Refinery Investment Law Vote Postponed

Iraq: 3 October 2007: Heritage, Perenco Among New Kurdish PSAs, Refinery Deals; KRG Challenge to Iraqi Government Deepens

Iraq: 28 September 2007: Hunt Oil on Receiving End of Official U.S. Criticism over Iraq-Kurdistan Contract

Iraq: 14 September 2007: KRG Calls for Iraqi Oil Minister's Resignation Amid Crumbling Oil Law Unity

Iraq: 11 September 2007: Hunt Oil's Iraqi Deal with KRG Termed Illegal by Central Government