It took more than nine months to form, but Iraq’s new government is showing only a few signs of getting over the main issues that separate its main factions.

Iraq’s Deputy Prime Minister for Energy, Hussain al-Shahristani, has weighed in on the Kurdish oil dispute, confirming Baghdad is seeking to amend the region’s production sharing agreements (PSAs) with international oil companies (IOCs).

“All the contracts we [the federal government] have signed were service contracts and we expect all [Kurdistan Regional Government (KRG)] production-sharing contracts should be amended to be service contracts in order to be approved,” Al-Shahristani said on 7 February.

Conflicting statements

The former oil minister’s statement came after media reports that Prime Minister Nouri al-Maliki had agreed to recognise the KRG’s deals.

“Al-Shahristani has his views on the subject. He was furious when the KRG launched its own oil and gas law,” says Mohammad Amin Baban, an adviser to the KRG prime minister’s office. “But they have agreed to recognise the deals. Implementation and timing may vary from point to point,” says Baban.

Al-Shahristani has his views on the subject. He was furious when the KRG launched its own oil and gas law

Mohammad Amin Baban, adviser to the KRG prime minister’s office

Al-Shahristani and the Iraqi government had previously taken an uncompromising line in response to the KRG’s oil legislation and contracts. But the two sides have been brought together to form a government bringing an end to more than nine months of political stalemate following elections in March 2010.

The KRG has autonomously signed 40 contracts with IOCs, but it remains dependent on Baghdad’s Oil Ministry to ensure its production can reach export markets through the pipeline running from Kirkuk to Ceyhan in Turkey.

The Oil Ministry employs technical service agreements for its three oil and gas field licensing rounds, whereas the KRG has preferred to use PSAs. “Majnoon is one of the largest fields in the world. If you drill there you will get oil, so service contracts work. But nobody really knows Kurdistan, so you have to give the oil companies the right incentive to work to share the risks. That is why the small and then medium-sized oil firms came here,” says Baban.

Accepting the oil contracts has been seen as defacto independence for the KRG, although this appears premature. With a vastly overstaffed government and the peshmerga militia to maintain, the KRG relies almost entirely on oil revenues distributed by the federal government in Baghdad to cover its expenses, says one source close to the KRG.

On 1 December, Iraq approved a draft budget of $79.47bn. The KRG will receive $3.64bn from the 2011 draft budget out the country’s capital expenditure of $24.75bn.

Firms operating in the Kurdish region have been blacklisted for the tendering process for contracts to explore and develop existing fields in areas controlled by Iraq’s federal government. Baghdad’s threats have tended to concern only the major IOCs with much to lose in non-KRG Iraq.

For smaller energy firms, relations with the KRG are more important. Any move to recognise the contracts would mean companies such as China’s Sinopec and the UAE’s Dana Gas will be able to look at opportunities in Iraq. 

Provisional agreement

Iraq’s new Oil Minister Abdulkarim al-Luaibi has struck a much more conciliatory tone on the Kurdish oil issue than Al-Shahristani . Since taking over office, oil exports from Kurdistan resumed on 2 February from the Tawke field in the northern Dohuk province.

Exports from the Kurdish region briefly flowed in 2009, but were halted when the Iraqi government in Baghdad refused to pay the companies involved. The KRG had expected Baghdad to pay, while the central government argued that as the signatory the KRG was responsible.

A provisional deal between Nouri al-Maliki and KRG Prime Minister Barham Saleh was agreed on 16 January. Among the provisions of the agreement, Baghdad will transfer money to the KRG to pay their international contractors, although the amount has not been disclosed.

“The draft oil and gas law is also on the agenda. It is now even more urgent, as the KRG will be exporting and they need to resolve how they share the revenues. This is all still pending,” says Baban.

The oil law has languished for nearly four years. Before it can be approved, the new Iraqi government will seek to tackle a number of other issues, including passing the draft budget for 2011. The draft budget requires the KRG to export 150,000 barrels a day or be penalised.

A full agreement on energy policy between the two side is unlikely to materialise quickly. Baghdad must now carry out an audit of the KRG’s contracts to work out just how much oil has been produced and how much must be paid to the international contractors. The Oil Ministry says it does not have firm figures on the amount of oil production in the Kurdish region.