Author: Lianna Brinded
The Iraqi government has resolved the longstanding oil dispute with Kurdistan, signalling a short-term increase in oil exports, while the prospect for a petroleum law, which would detail revenue and expense allocations for foreign energy companies in Iraq, such as BP, Eni and Shell, could be closer than the markets initially anticipated.
Foreign energy companies, such as Royal Dutch Shell, Eni and BP, may have more clarification on future oil production revenues and expense allocations, after Iraq's oil minister Hussein al-Shahristani confirmed that Iraq has ironed out an oil agreement with the autonomous northern region of Kurdistan.
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"We reached an agreement with the Kurds that all revenues will be handed over to Iraq's State Oil Marketing Organisation (SOMO) and the Iraqi government will be responsible for paying the extraction expenses in Kurdistan," said Iraq oil minister Hussein al-Shahristani in a media briefing.
In the past two years, consortia led by major energy companies have waded into Iraq, signing producing field technical service contracts (PFTSC) to secure fields for crude oil production. Some of these are pledging production of around 1 million b/d by 2017, a seemingly tall order for a country with high political uncertainty.
A PFTSC was developed by the Iraqi Ministry of Oil to be used for the first bid round. It is a hybrid-model contract to be added to more than 100 fiscal regimes that govern international oil companies' participation in some 75 countries.
Kurdistan halted oil exports in October 2009, after the two countries clashed over how oil revenues should be distributed. Kurdish authorities had said they would not resume crude exports until Iraq paid the foreign energy companies for the oil they have been producing.
"If successfully materialised, the agreement could help to prop up the country's crude production in the short term by bringing fields back onstream in the Kurdish region that have not been producing since last October due to a dispute over the remuneration of foreign upstream players," says Johannes Benigni, managing director at research firm JBC Energy. "According to our estimates, Iraq's crude production fell to 2.29 million b/d in April, which is the lowest level since September 2008, on the back of lower exports due to pipeline disruptions and bad weather."
In 2008, Iraq's crude oil production under the control of the regional state-owned oil companies averaged 2.4 million b/d, up from its 2007 production of 2.1 million b/d, according to the US Energy Information Administration. This is still below its pre-war production capacity level of 2.8 million b/d in 2003.
Earlier this year, Ashti Hawrani, minister for natural resources at the Kurdistan regional government told Energy Risk at a seminar that "an oil-sharing law is the fundamental building block for Iraq to move its oil supply forward. The issues have changed over the years and in 2010 the focus is on who gets a slice of the oil revenue and when".
Market experts have stressed the need for Iraq to develop an oil law and expressed concern over the number of companies operating under contracts with no firm legal basis. They believe this backdrop could lead to a prolonged stall in oil supply.
"We have many companies that signed a bunch of contracts before an oil law has even been put in place," says Majid Jafar, executive director at the first independent, privately owned, Middle East-based exploration and development oil company Crescent Petroleum. "I guess the companies felt they had to get involved because everyone else was getting involved. However, we now have chaos, as the contracts have no legal basis."
An in-depth article on Iraq's oil and energy security appears in the March issue of Energy Risk and online at www.energyrisk.com or www.risk.net. A full interview with Majid Jafar, executive director of the Crescent Petroleum Group will also appear in the June issue of Energy Risk and will be available online.
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