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Thursday, May 28, 2009

Why Iraqi oil exports do not pick up

A political stalemate between the Kurdistan Regional Government (KRG) and the federal Iraqi government in Baghdad continues to prove problematic for Iraqi oil production in general and troublesome for international oil companies (IOCs) in particular. In the face of a stalled national oil law which were to regulate questions of regional and federal responsibilities but is stuck in parliament, the KRG has autonomously declared it's right emanating from the 2005 constitution to negotiate and sign contracts with IOCs. It has since gone ahead and signed around 25 contracts dealing with the exploration and developments of the fields in its region. At least two of these fields are by now producing limited quantities for the domestic market, both combined could immediately produce 100,000 barrels per day ready to be exported if the political issues were resolved.

The national Iraqi government claims exclusive competence for the negotiations of oil contracts with IOCs. Especially Al-Shahristani, Iraq's oil minister, has taken a strong stance against the contracts awarded by the KRG, calling them illegal and blacklisting the companies having signed them from taking part in the bidding for federal contracts.

Apart from the larger picture of the institutional struggle for power between federal and regional authorities, the contentious issue lies with compensation of the IOCs financing the production and the infrastructural build-up. According to the production-sharing agreements signed with the KRG these companies would receive anywhere between 15-20% of revenues. Exports being administered centrally, the KRG would receive only its regional share of 17% of all export revenues. With the federal government not recognizing the contracts signed by the KRG and its refusal to recompensate the IOCs, the KRG would at most stand to gain only little from any increase in Iraqi oil exports stemming from its region.

Since Iraq's neighbors continue to cooperate with the federal government, Kurdish oil exports are possible solely through national pipelines, giving the Ministry of Oil decisive sway over these decisions. Yet, in the current situation it is the KRG that seems more interested in blocking exports until an agreement over the compensation of production costs has been reached. At the same time pressure on the federal government to strike a deal with the KRG is increasing nation-wide and in the parliament because of sinking government revenues coupled with Kurdish promises of possible exports of 250,000 bpd by the end of 2009.

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