October 6, 2007 / 3:35 AM / 10 years ago

Iraq Kurds need Baghdad's nod for oil exports

5 Min Read

DUBAI (Reuters) - Iraq's Kurdish Regional Government (KRG) has signed new oil deals in defiance of Baghdad's wishes but the landlocked region still needs central government approval before it can export any oil.

The semi-autonomous KRG approved four oil and gas production sharing agreements with international oil companies this week, as it moved ahead with plans to lift output to a million barrels per day (bpd) from just a few thousand bpd in about five years.

Iraq's Oil Minister Hussain al-Shahristani said last week that all deals signed by the KRG since February were illegal and that crude from the deals could not be exported legally.

Iraq's draft oil law gives Baghdad's State Oil Marketing Organisation (SOMO) the exclusive right to export, he said.

The KRG said its deals were legal and SOMO had no such right in the draft law.

The spat over export rights was of little consequence, as no sovereign government from surrounding countries was likely to strike an import deal with the KRG without Baghdad's approval, analysts said.

"Getting oil and gas out of any landlocked region is always problematic," said Julian Lee, senior energy analyst at London's Centre for Global Energy Studies. "And it is distinctly problematic for the Kurdish region, especially if it is seen as carrying out that policy regardless of Baghdad."

Turkey would be the favored export route, as a pipeline already exists from Iraq's northern oilfields to the Mediterranean port of Ceyhan.

But Baghdad holds the export agreement with Ankara, while Turkey has a sizeable Kurdish minority and is suspicious of the progress of Iraq's Kurdish region.

Ankara wants to avoid dealing with the Kurdish region directly for fear of encouraging independence, which in turn could have a destabilizing effect on Turkey, analysts said.

"The major issue is that Kurdistan is still dependent on reaching agreement with the federal government to export its oil," said Alex Munton, analyst at global consultancy Wood Mackenzie. "This is also influenced by foreign policy. The Turkish government is strongly opposed to Kurdistan taking on greater powers of independence. When it comes to bilateral relations, it deals with Baghdad and not Arbil."

Iran and Syria may be less resistant than Turkey to doing a deal with the KRG, which is based in the city of Arbil, but they too have Kurdish minorities and would be unlikely to sidestep Baghdad, Lee said.

Problem Already

The KRG agreed four new oil deals this week, taking the total number of production sharing agreements its holds to 10.

It plans to contract out all of its oil and gas exploration blocks by the end of the year. Its target of one million bpd would be well above Kurdish consumption and the region plans to export most of its future oil output.

Despite public disagreements with Baghdad, the KRG has done the deals on the assumption that it will have some form of agreement with the central government in place in time to avoid any disruption to oilfield development, Lee said.

But the question of exports has already become an issue for Norway's DNO, which has built a spur to link its Tawke oilfield in the Kurdish region to the pipeline to Ceyhan. DNO has yet to receive permission to export from Baghdad and delivers its oil in trucks to local refineries.

Swiss-based Addax Petroleum is preparing to submit a $1 billion oilfield development plan to the KRG that could bring 200,000 bpd from the Taq Taq field. But the blueprint requires access to an export route.

The passing of the oil law was expected to eventually lead to an agreement on the export route for Kurdish oil, or at least establish the framework for a deal, analysts and industry sources said.

Iraq's cabinet agreed a draft law for dividing the world's third-largest oil reserves in February. But rows with the KRG and objections from some Shi'ite and Sunni Arab politicians have delayed it.

The KRG was considering a privately-financed, one million bpd pipeline from the Kirkuk oilfield north to link up with the Ceyhan line, industry sources said. This project too, would depend on the oil law and the approval of Baghdad, which has itself considered this route in the past.

The line north would allow exports from Kirkuk to bypass the section of the Ceyhan pipeline that dips south towards Baiji and is the frequent target of sabotage attacks that have rendered it mostly unusable since the U.S.-led invasion in March 2003.

Additional reporting by John Irish

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