Numerous news outlets have recently reported that oil giant Exxon Mobil has signed an oil and gas exploration deal with the autonomous Kurdistan Regional Government (KRG), much to the chagrin of the central government in Baghdad, which claims that it has exclusive authority over the oil industry in the entire country.
Of course, contracts between foreign petroleum firms and the KRG are nothing new: indeed, approximately 40 such deals have signed since 2006, yet Exxon Mobil is the first major international firm to take such a step. Consequently, Baghdad has threatened to cancel Exxon Mobil's contract to develop the 8.7-billion-barrel West Qurna Phase One oilfield in the south of the country, being developed in partnership with Royal Dutch Shell.
However, regardless of whether the central government carries through with its threat (and given the size and importance of the oilfield being developed by Exxon Mobil, it could well prove to be mere rhetoric), there are good reasons to think that foreign firms will increasingly look towards the Kurdish areas for exploration and development of oil reserves.
First, it is necessary to appreciate that, despite popular suspicions that the American-led invasion in 2003 was driven by a desire to seize Iraq's oilfields for the ownership of American firms, the oil industry is still state-run and firmly in the hands of the central government.
Although some Bush administration officials initially entertained the idea of privatizing the petroleum sector, it never became a matter of policy for the Coalition Provisional Authority (CPA) or for U.S. policymakers after Iraq regained its sovereignty in June 2004, fearing potential local resentment. The real role oil played in the decision-making behind the invasion was the fear that Saddam Hussein could threaten the free flow of oil through the Persian Gulf with WMDs.
Only in 2008 did Baghdad sign its first deal with a foreign firm: namely, with China's National Petroleum Corporation (CNPC) to develop the Ahdab field in Wasit province- a contract that was in fact a reworking of a 1997 agreement Saddam Hussein had signed with the Chinese corporation. This deal and all subsequent agreements (mostly joint ventures) with foreign firms to develop the oil fields in central and southern Iraq have been heavily tipped in the government's favor.
Iraqi crude- like Saudi petroleum- is among the cheapest oil in the world to extract at only a few U.S. dollars per barrel, and is thus potentially lucrative for any oil company, but the Iraqi government has refused to shift from its very low fee-per-barrel offer of $2 per barrel for oil companies- including Exxon Mobil- that signed the most important contracts in 2009.
Hence, the oil companies' profit margins are also low, and given the high taxation imposed by Baghdad, the revenues overwhelmingly flow into the central government's coffers, where the massive income has hindered liberalization of the centralized command economy despite rhetoric for years in the capital about moving towards free-market reforms. In contrast, the KRG has been willing to offer more favorable terms for petroleum firms, even if limited so far largely to exploration work.
Furthermore, it is apparent that in center and south of Iraq, there is a growing problem with the fact that exportation capacity is not keeping up with oil production. As Joel Wing of the blog Musings on Iraq notes, the country has witnessed a steady decline in oil exports over the past four months even as production has increased.
Owing to the state-run economy (complete with its excessive bureaucracy) and international sanctions prior to the invasion, the pipeline infrastructure and the facilities in the port of Basra are heavily outdated, and therefore highly vulnerable to insurgent attacks and poor weather conditions. For example, in October insurgents blew up oil pipelines at the Rumaila oilfield, the largest in the country. This attack was able to bring down production from 1.24 million bpd (barrels per day) to just 530,000 bpd.
Unlike the rest of Iraq, the KRG administered areas are generally free of the menace of the remnants of the Sunni and Shi'a insurgencies in the country. Security is naturally an issue for the oil companies and their employees working on the fields in central and southern Iraq. The only issue here though is that the KRG areas lack direct access to the sea.
In any case, given the unfavorable operating terms for the oil companies that have signed contracts with the central government, as well as the problems of security and the poor oil infrastructure in the central and southern regions of Iraq, it is plausible that more major petroleum corporations will follow Exxon Mobil's lead in striking up deals with the KRG, in spite of the objections of Baghdad, which is heavily dependent on oil companies anyway to boost output at the oilfields. This prospect becomes all the more likely if the oil exploration deals yield the discovery of further significant reserves in the near future.
A further implication is that the KRG may reignite Massoud Barzani's conciliatory approach towards Turkey that has somewhat dampened in light of the intense Turkish bombing campaign undertaken against PKK militants based in northern Iraq; for at present the only viable exportation routes for the wider market are pipelines leading to the Turkish Mediterranean port of Ceyhan. In short, if the foreign firms increasingly focus their attention on Iraqi Kurdistan, friendly ties with Turkey could be revived.
For the first time, the actions of a major international oil firm have sharply increased tensions between Iraq's central government and the KRG. With ExxonMobil set to explore, as part of its deal with the KRG, disputed territories like Bashiqa, which is part of Nineveh province but has been occupied by the Kurds since 2003, Iraq appears to be ever more fragmented.