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Oil frontier in Iraq loses its allure

The Kurdish region has begun to lose some its allure within the oil industry as the dispute over energy autonomy between Baghdad and Erbil rumbles on.

Erbil and Baghdad are locked in a dispute over Kurdish ambitions to grow its hydrocarbon sector. Ali Al-Saadi / AFP
Erbil and Baghdad are locked in a dispute over Kurdish ambitions to grow its hydrocarbon sector. Ali Al-Saadi / AFP

Erbil // The Kurdish region in northern Iraq has been hailed as one of the last frontier oil territories, but it has recently begun to lose some its allure as the dispute over energy autonomy between Baghdad and Erbil rumbles on.

International oil companies (IOCs) are continuing to pile into Kurdistan, lured by good prospects and favourable contracts. However, established producers are tiring of the endless uncertainty over payments for their hydrocarbons.

On Sunday, the Iraqi central government released about US$540 million (Dh1.98bn) to IOCs operating Kurdish assets, bringing relief to the small and mid-sized companies that must cope with the funding shortfall.

The Kurdistan Regional Government (KRG) and Iraq's federal government hammered out an agreement in September, a development that was greeted enthusiastically by the industry. But the optimism was tempered by past experience.

"I was sceptical because I have seen agreements like that before, and unfortunately, almost as soon as the ink was dry, there was slipping," said Majid Jafar, the chief executive of Sharjah-based Crescent Petroleum, the parent company of Dana Gas, which produces gas and condensate in Kurdistan.

Optimism will fade further if a second payment worth $290m, promised by Baghdad in September, is not made.

Erbil and Baghdad have been locked in a dispute over Kurdish ambitions to grow its hydrocarbon sector for many years.

Disagreements over the contracts handed to IOCs have prevented the adoption of an oil and gas law that would lead a regular flow of funds to producers.

The central government insists that the production-sharing agreements signed by the KRG and the oil companies are illegal, while Erbil maintains it has the right to enter into contracts under Iraq's constitution.

At the heart of the dispute lie Baghdad's concerns that Kurdish autonomy over the abundant hydrocarbon resources of the region would lead to a breakaway from Iraq.

Secession from a country that not long ago poured poison gas into the remote mountainous region is already a tempting prospect for many Kurds, who miss out on few opportunities to remind foreigners about the acts of genocide committed against them by Iraq's late dictator Saddam Hussein.

Baghdad is doing its best to undermine the KRG's contracts by paying companies in the region only the cost of production, and only intermittently at best.

The capital also blacklists producers active in the KRG from work in the rest of Iraq.

Regardless of this threat, even the biggest fish have entered Kurdistan in search of a smaller pond.

ExxonMobil, Total and Chevron, three of the five biggest IOCs, have all committed themselves to production in Kurdistan, risking or forgoing operations in the country's south.

After signing a production-sharing agreement with Erbil last year, Exxon responded to Baghdad's pressure by putting up for sale its share in the West Qurna-1 supermajor field near Basra in the south. Unfavourable terms under the technical service contracts offered by Baghdad are providing little incentive to stay.

Having made their bed, companies are determined to lie in it, and to believe in a positive outcome.

"We expect we will do good business here for a long time to come," said Bijan Mossavar-Rahmani, the executive chairman of DNO, a Norwegian company that has merged with the UAE's RAK Petroleum.

"I believe that the political divisions will be resolved as production grows and more companies come to the region," said Mr Mossavar-Rahmani, who thinks that more payments will be released.

Negotiations over the next round of payments are continuing. But companies have been shocked by paltry sum the central government suggested be released to Kurdistan's producers under next year's budget.

fneuhof@thenational.ae

Correction (December 6, 2012): In "Oil frontier in Iraq loses its allure" (Business, page 5; December 6), we incorrectly stated that Iraq's central government had released $1 billion to IOCs operating Kurdish assets. The correct figure is $540 million, which has been corrected above. This article has also been modified to reflect the fact that a second payment worth $290m has been promised by Baghdad. It was also stated that DNO is a Danish company, when it is in fact Norwegian. This has been corrected.