Kurdish Oil contracts and Shahristani's intent

June 2, 2011
News



Kurdishaspect.com - By Shwan Zulal

Kurdistan Region has been in the spotlights ever since the Saddam Regime was toppled from power by the US led invasion. The Region mainly attracted smaller oil exploration companies to tap in to the largely unexplored oil rich region. Ever since the exploration companies have arrived, many of them have described the region as an oilman's dream.

KRG (Kurdistan Regional Government) has took it upon itself to grant PSC contracts for oil and gas exploration and now there are over 40 companies operating in the region. Many companies like Gulf Keystone and Norwegian DNO have had good fortune of discovering large reserves of oil and some have not been so lucky. Only this week Western Zagros WZR has struck oil in Sargala 1 and secured a new rig on site to carry out more exploration.

The disputes between the Iraqi central government and KRG have turned away some investors meanwhile many are undeterred and have invested billions of US dollars looking for oil. The dispute has been over the legality of the contracts and technical details.

Most contracts awarded to operators in Kurdistan Region are PSC's with a levy for local infrastructure. The Iraqi deputy Prime minister for oil, Husain Shahristani, believes that KRG contract should be converted into service contracts in order to comply with the Iraqi constitution and the illusive oil and gas Legislation that is not yet in force.

The infrastructure and development tax applied to the oil contracts in Kurdistan Region varies from zero to 40 per cent of profit. The local tax is the main sticking point between Erbil and Baghdad, because Iraqi government argues that the rest of Iraq would not benefit from the extra taxes paid for locally. Nevertheless, the Kurdish Authorities argue that Kurdistan has been underdeveloped for decades and it needs the extra investment to build-up its basic infrastructure.

Comparing the difference between PSC and service contracts if applied to Kurdistan, one cannot see a very large difference in its profitability for the government in the short or medium term. The difficulties many operators facing in Kurdistan due to lack of basic infrastructure and other challenges, would surly offset the argument for converting the contracts to Baghdad's liking, because the cost involved in drilling for oil in Kurdistan and can be claimed would be very high. If KRG contract with oil explorers were converted to service and all parties to the contract agree-which is very unlikely- the gains for Iraq's coffers would be minimal and in some cases, it may be more expensive.

Seeing the facts and observing the political struggle between Baghdad and Erbil, it is becoming clear that Shahristani's opposition to the Kurdish oil contracts is not for getting the best deal for Iraq as he claims, but in order to take full control of oil and gas industry and leave KRG completely dependent on Baghdad for its income. The policy pursued by Shahristani is also designed to strip as much power as he can from KRG and try to centralise power in Baghdad.

Meanwhile, Kurdistan Region sees granting oil contracts and controlling its natural resources as its prerogative, therefore it would not easily give up control to Baghdad. All matters considered, It is very unlikely that KRG will back down and accept Shahristani proposals, however a compromise must be found otherwise the sorry state of Iraq would continue while Iraqis and investors grow more frustrated.

http://www.kurdishaspect.com/doc060211SZ.html