Ban On IOCs In Iraqi Kurdistan May Be Lifted

The recent signing by Iraq’s federal government in Baghdad of three long-term oil and gas sector contracts with the UAE’s Crescent Petroleum – a company also heavily involved in the same sectors of Iraq’s semi-autonomous region of Kurdistan – may indicate that the ban on international oil companies (IOCs) trying to operate in both regions has now been relaxed by Baghdad.  Crescent Petroleum has been highly active in Kurdistan since it and its affiliate, Dana Gas, signed agreements in April 2007 with the government of the semi-autonomous Kurdistan region for the development of its gas resources. The company is still integral to the development, processing, and transportation of natural gas from the Khor Mor and Chemchemal Gas Fields to provide natural gas supplies for power generation plants near Erbil and Sulaymaniyah in the Kurdistan region. 

Meanwhile, the recent three 20-year contracts signed between Iraq’s Oil Ministry in Baghdad and Crescent Petroleum are focused on the evaluation, development and production of oil and gas from two blocks in the Diyala Governorate, adjacent to Kirkuk and Sulaymaniyah in the north, and one in the Basra Governorate in the south. According to comments from the Iraq’s Oil Ministry, the Diyala Governorate’s Gilabat-Qumar and Khashim Ahmer-Injana fields will be developed with a target to produce 250 million standard cubic feet per day (MMscfd) of non-associated gas at first. The Khider Al-Mai block in the Basra Governorate will be focal point for Crescent Petroleum’s development efforts in the south. 

This news will be highly welcome to several IOCs that from the middle of last year had effectively been banned from operating in both the north and the south of Iraq, as demarcated by the regions governed by either the Federal Government of Iraq (FGI) in Baghdad or the Kurdistan Regional Government (KRG) in Erbil. For several years, there had been intermittent legal battles between the two governments on the right, or not, of the KRG to develop its oil own and gas resources and then to sell them independently of the FGI. 

Legally, the issue is highly debatable as to whether the KRG can sell the oil and gas produced from fields in its own region. According to the KRG, it has authority under Articles 112 and 115 of the Iraq Constitution to manage oil and gas in the Kurdistan Region extracted from fields that were not in production in 2005 – the year that the Constitution was adopted by referendum. The KRG also maintains that Article 115 states: “All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organised in a region.” As such, the KRG posits that as relevant powers are not otherwise stipulated in the Constitution, it has the authority to sell and receive revenue from its oil and gas exports. The KRG also highlights that the Constitution provides that should a dispute arise then priority shall be given to the law of the regions and governorates. 

However, the FGI in Baghdad and Iraq’s State Organization for Marketing of Oil (SOMO) argue that under Article 111 of the Constitution oil and gas are under the ownership of all the people of Iraq in all the regions and governorates. Consequently, they believe that all oil and gas developed across all of Iraq should be sold through official channels of the central Federal Government of Iraq in Baghdad. As long ago as 2014, the FGI showed its no-nonsense approach to enforcing this view, with Iraq’s Oil Ministry, represented by SOMO, threatening to sue any buyer lifting Kurdish crude oil. The previous five months in 2014 had seen more than 11 million barrels of Kurdish crude exported through the Iraq-Turkey Pipeline (ITP) and delivered to destinations such as Israel, China and Croatia, according to international legal sources close to the parties, exclusively spoken to by OilPrice.com at the time. Shortly after this, SOMO initiated proceedings in the U.S. District Court for the Southern District of Texas against the ‘United Kalavyvata’, which had allegedly been carrying one such cargo of oil from Kurdistan. 

It was thought that a practical solution to this enduring legal problem had been agreed by both sides in November 2014 in a budget disbursement-for-oil deal agreed between the FGI and KRG. The deal was that the KRG would export up to 550,000 barrels per day (bpd) of oil from the northern region of Kurdistan’s oilfields and Kirkuk via the FGI’s Baghdad-based SOMO in the south. In return, Baghdad would send 17 percent of the federal budget (after sovereign expenses) - around US$500 million at that time - per month in budget payments to the Kurds. 

Although apparently fair to both sides, the agreement rarely functioned as it should. The KRG frequently, and accurately, was cited by the FGI in Baghdad for selling oil independently of SOMO, and the FGI in Baghdad was frequently, and accurately, cited by the KRG for not disbursing the requisite funds from the budget on time or in the correct amounts. This already difficult situation was complicated further by the involvement initially of Iran and then of Russia after it effectively took control of the northern Iraq oil sector in 2017, as analysed in-depth in my latest book on the global oil markets.

Any hopes held by IOCs that the FGI’s view might have softened towards them doing business in both the north and the south of Iraq appeared to have been squashed by a  letter sent on 2 June 2022  by Hassan Muhammad Hassan, the deputy director general of the state-run Basra Oil Company (BOC). In the letter, he called on “all lead contractors and sub-contractors” of IOCs working in Iraqi Kurdistan to pledge that they would no longer work in Kurdistan and that any current contracts should be terminated within three months. This was followed  by an order from the BOC director general, Khalid Abbas, to “all lead contractors” that ordered them to “suspend dealing with the following subcontractors and never invite them to any future works or projects in BOC oil fields as per the licensing contracts signed with your companies”. According to local reports, multiple oil companies working in the northern Iraq Kurdistan region at the time (including DNO, Western Zagros, Gulf Keystone, Genel Energy, and ShaMaran Petroleum) also received personalised letters on 19 May 2022 that summoned them to appear at the Commercial Court in Baghdad on 5 June that year. 

These moves had been presaged by two landmark legal rulings made in February 2022 by the Supreme Court of the FGI in Baghdad, The first of these rulings was that sales of oil and gas by the KRG, done independently of the central government in Baghdad, were unconstitutional and that the KRG had to hand over all oil production to the FGI, represented by the Oil Ministry. The second ruling, and an even greater direct threat to all oil and gas operations of IOCs operating in the northern region, was that the Oil Ministry had the right to: “Follow up on the invalidity of oil contracts concluded by the Kurdistan Regional Government with foreign parties, countries and companies regarding oil exploration, extraction, export and sale.” 

The FGI’s reinvigorated toughness last year on the KRG’s independent sale of oil from the north may have been a function of how badly Russia was doing in its invasion of Ukraine. There had been a distinct lull in such a tough approach after Russia had effectively taken over the KRG’s oil industry in 2017 to when it became clear by the middle of last year that the Russian military machine was not what it once had been, and probably nor was the political shrewdness of President Vladimir Putin either. The potential reappearance of a softer line from the FGI now, though, is unlikely to have resulted from a change in this FGI view of Russia or Putin. Instead, it is likely to have resulted from a renewed desire to bring northern Iraq closer to the central government in Baghdad to present a more united front to a replacement superpower sponsor to Russia. In this context, alongside the recent deals signed by Crescent Petroleum were other deals signed by Chinese firms, including the erstwhile little-known Geo-Jade Petroleum Company (which won two - Huwaiza, in Missan, and Naft Khana, in Diyala), and its United Energy Group (which won Sindbad in Basra). However, it is also apposite to note that Baghdad has a long and successful history, from its perspective, in inveigling the U.S. into extending waivers for it to keep importing gas and electricity from Iran and into bailing out its budget by dangling such rivalries under Washington’s nose.