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Thursday, April 17, 2014

Shale Gas White Paper

How Far Can the KRG's Oil & Gas take it Towards Economic Independence?

As part of an ongoing dispute with the central government in Baghdad, the Kurdistan Regional Government (KRG) recently released an official statement clarifying its beliefs regarding its management of its oil resources. The KRG’s release is the result of a number of disputes which have occurred with Iraq’s central government. It aims to define the KRG's oil and gas production activities and to condemn the illegality and unconstitutionality of the Iraqi central government's recent agreement with BP.

“Iraq’s citizens are simply tired of this sort of language of threat and intimidation, which in the cynical pursuit of narrow political agendas serves only to create division and strife," the KRG said in the January 17 press release on its oil and gas policy. "Citizens of Iraq know all too well the dangers of allowing the country’s abundant oil and gas resources, and its revenues, to fall under the control of a handful of misguided people in Baghdad. The country will only thrive on a diet of cooperation and coordination, not on confrontation. That is what the basic law of the land, the Constitution, demands."

The crisis started when the KRG announced it was exporting its own very light oil, or condensate, independently to world markets in October 2012, via truck to Turkey’s Ceyhan port, where it was then sold via an intermediary. This prompted negative reactions from Baghdad. On January 8, 2013, the KRG told Reuters it had begun exporting crude oil directly to world oil markets via Turkey. The Turkish-British joint venture Genel Energy delivered via truck the first crude oil from the KRG's Taq Taq oil field to Turkey’s Ceyhan port on the Mediterranean Sea, where it was shipped to be sold on the international market.

The expected oil export volume is relatively low compared Iraq’s annual oil exports. Genel Energy’s CEO announced the firm expects the venture to reach only 10,000 barrels per day (bpd) in a few weeks. In addition, the KRG will receive from Turkey a number of products in exchange for exported oil exported, instead of direct payments.

But this export creates a crisis because it is a symbolic step towards the economic independence of the KRG. The fact that the KRG is delivering oil by truck instead of using the Kirkuk-Yumuratlik oil pipeline (which is controlled by Baghdad), has prompted new concerns about the KRG’s intention to bypass Baghdad in its energy trade with Turkey.

To justify its actions, the KRG refers at first to the Iraqi constitution, ratified in 2005. Article 111 states that oil and gas belong to “all the people of Iraq in all the regions and governorates". The KRG's January 17 statement noted that the constitution "does not state that the oil and gas belongs either to the federal Ministry of Oil or the illegal and unaccountable monopoly of the state oil marketing organization (SOMO), which was created by Saddam Hussein."

The KRG further notes that the constitution gives primacy to regional law over federal law, except in areas listed under the exclusive powers of the federal authorities – pointing out that "oil and gas are not listed under the exclusive powers of the federal government.”

Besides this constitutional justification, Erbil also insists its contributions to Iraq’s economy via production-sharing contracts in the Kurdistan Region have been a great success for Iraq. They have meant an estimated 45 billion barrels of oil can be added to Iraq’s total reserve figures.

The view is not held by Nouri al-Maliki, Iraq's prime minister. Until now, Baghdad's strategy consisted only of threatening to sue companies exporting crude from the KRG, warning them that they must choose between investing in the country's southern fields or the northern ones controlled by the KRG.

On January 17, Baghdad created a new strategy, joining forces with BP. The international energy firm signed a deal with Iraq's central government to develop the Kirkuk oil field, located on the KRG's border. BP accepted to work on the Baghdad-administrated side of the border – and not on the Khurmala side, which is controlled by the KRG. The project's initial considerations are to take relevant measure against the decline of oil production at Kirkuk, followed by improving overall oil production capacities at the site.

The KRG, with its own January 17 announcement, rejected the deal between BP and Baghdad, calling it an "illegal" step in the autonomous region's feud with the central government. Erbil cited article 140 of the Iraqi constitution: “The federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas extracted from present fields, provided that it distributes its revenues in a fair manner… and this shall be regulated by a law.”

From the KRG's point of view the term “present fields” refers to fields already under production at the time of the constitution's ratification (October 2005). The Kirkuk oil field is part of one such field. Kurdish authorities therefore argue that the management of the Kirkuk field must be undertaken not by the federal authorities but by the regional governorate, because it is part of the process outlined under the relevant constitutional clauses.

The original source of this crisis is unresolved problems regarding the sharing of revenues from oil and gas sales. Since the ratification of the new Iraqi constitution in 2005, Iraq's central government and its regional authorities have not yet achieved any agreements on legislation to resolve the problem.

In 2007 Baghdad proposed one such legislative device, but the KRG regionals government rejected it, judging the suggested revenue-sharing formula unconstitutional. Indeed, both side has different interpretation of the constitutions. But with the Kirkuk crisis today, the problem has reached a new level. Especially with the KRG indirectly comparing Baghdad's decisions with those of the Baathist regime under Saddam Hussein, time will tell if the energy market will ultimately revive old conflicts instead of helping grow the Iraqi economy towards new prosperity.

Olgu Okumuş, is a Sociologist and Lecturer at Sciences Po Paris   She can be reached at olgu.okumus@sciences-po.org

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