Kurdistan's Gushing Crude Spawns Conflict

The German seismologist working in northern Iraq was not supposed to talk about his job. But after having spent nearly three months in an isolated camp near the Taq Taq oilfields, he could not contain himself.



"You can dig where you want," he said. "The crude gushes!"



For more than two years, foreign companies have been hunting – and finding – oil in the semi-autonomous Kurdish region. They may not have discovered giant fields like the famous "Baba Gurgur" near Kirkuk, but the oil companies and their Kurdish clients are very pleased.



Iraq has 115 billion barrels of proven oil reserves, but its actual oil wealth is believed to be significantly higher. Iraqi Kurdistan and the oil-rich region of Kirkuk are prime territories for speculators because of their large proven and potential reserves.



The three northern provinces of Iraqi Kurdistan are also the safest region in Iraq, an additional draw for drillers and investors. The Kurdistan Regional Government, KRG, has pushed ahead with exploration in the north by signing contracts for oil exploration with foreign companies.



That has irked oil officials in central government in Baghdad, however, and the KRG’s windfall is far from secure. It is threatened by uncertainty surrounding a new national law on Iraq’s oil reserves; by Turkish concerns over Kurdish strength; and by pressure from rival ethnic groups whose territories are not so blessed with natural resources.



In early 2006, the first foreign oil company began producing new oil out of Kurdistan. The Norwegian wildcatter Det Norske Oljeselskap or DNO sealed two production-sharing agreements with the regional government in 2004, gaining a 55 per cent stake in both licenses. DNO will take 10 to 30 per cent of the profits; the rest will go to the region.



At first, DNO estimated that the Tawke field near the city of Dohuk held 100 million barrels and would reach peak production of 50,000 barrels a day next year. Now, it appears that the field may contain much more.



DNO's most recent operation in Tawke has a flow rate of 12,000 barrels a day, 40 per cent more than another well in the same area. DNO has 80 trucks moving as much as 10,000 barrels a day from the site. The flow rate may reach 20,000 to 25,000 barrels per day, but transporting this amount of crude by road could be logistically difficult and expensive.



A second lot of drilling began in May 2006 in the Taq Taq region, south of Sulaimaniyah, and was led by Taq Taq Operating Company, also known as TTopco, and Addax Petroleum, a Swiss-Canadian company. TTopco, a joint venture with Genel Enerji of Turkey, is currently drilling its fourth oil well and hopes to drill two more by end of 2007.



The three oil wells that TTopco has already drilled are expected to produce 75,000 barrels a day, said Kemal Afaraci, an official with TTopco. Oil reserves in Taq Taq are estimated at 1.2 billion barrels. Firms such as Canada's Western Oil Sands and Heritage Oil Corp as well as the UK's Sterling Energy are also exploring the region.



Kurdistan wants to produce 200,000 barrels a day of oil by the end of next year, and increase that to one million barrels per day within five years.



Although northern Iraq's oil reserves are not as large as the giant southern fields round Basra, the local natural resources minister, Ashti Hawrami, has said the area has "good potential", estimating reserves around 25 billion barrels of oil and 100 trillion cubic feet of natural gas.



He also held out the prospect of a second export pipeline from Kirkuk to the Turkish port of Ceyhan, which would run through Kurdish-controlled territory, thus giving it greater protection from the sabotage attacks that plague pipelines elsewhere in the country.



Kirkuk alone has ten billion proven barrels, and Hawrami has estimated that 20 billion barrels are lying in other disputed areas in the north. Based on these estimates, if the Kurds control the north - including parts of Nineweh province, where the KRG already has a strong political and security presence - their potential reserves would be about 55 billion barrels, or almost half of Iraq's known oil reserves.



That would mean Iraq's Kurds would have more oil than Nigeria, Africa's biggest oil producer.



Not everyone is thrilled by this prospect.



A referendum will decide whether Kirkuk and other disputed areas should be governed by the KRG or the central government. But political disputes between Kurdish and Arab leaders over when to hold the poll could delay the vote until 2008 or later.



Turkey, too, is opposed to Iraqi Kurds gaining Kirkuk because it fears that a too-strong Kurdish region might encourage its own Kurdish citizens to demand political rights. Angering Turkey could weaken a pillar of the Kurds' oil strategy by denying the landlocked region an outlet for exports.



"Iraqi Kurds would have nothing if they cannot export their oil," said Soner Cagaptay, director of the Turkish Research Program at the Washington Institute for Near East Policy.



And there is a bigger obstacle which concerns all of Kurdistan's oil exploration - a new oil law that should determine who controls the oil fields and how the revenues are shared. The Kurds are insisting that regional authorities such as the KRG have the right to manage oil projects and draw up contracts, which has been a point of contention with some Iraqi officials.



In early July, Prime Minister Nuri al-Maliki said his cabinet had approved the oil bill and was sending it to the legislature. At a news conference, Maliki described it as the most important piece of legislation in Iraq.



But only days later, despite assurances from Maliki that the bill would soon be debated in parliament, Kurdish leaders, all Sunni factions and the 30 MPs allied to radical Shia cleric Muqtada al-Sadr spoke out against it. Although Kurdish leaders serve in Maliki's cabinet, the KRG said it had not even seen the latest draft and did not support it.



"We hope that the cabinet is not approving a text with which the KRG disagrees, because this would violate the constitutional rights of the Kurdistan region," said the KRG statement.



The key issue for the Kurds concerns the control and management of so-called future oil fields. Although Article 108 of the Iraqi constitution says that "oil and gas are the property of all the people of Iraq" and are to be managed by the federal government in conjunction with regional governorates, only current oil fields, which are controlled by the central government, are mentioned, not those that might be discovered in the future. Many arguments over the law are related to the 2005 constitution, which was written in vague terms in order to garner broad support.



The KRG has made it clear that it wants to negotiate its own contracts and opposes annexes contained in the present bill that give control of 93 per cent of the oilfields to a new state-owned entity, the Iraq National Oil Company, which will be created if the law is passed.



The controversial oil bill is now on hold because parliament recessed for August.



KRG natural resources minister Hawrami has maintained over the past several months that the Kurdish administration would move ahead with its own oil law and would not wait for Baghdad to pass national legislation. The Kurdish regional parliament did just that in early August, when it passed its own law to regulate oil management in the northern region.



KRG premier Nechirvan Barzani said in a statement that the passage of this legislation was "a historic moment that will be remembered for years to come".



The law creates a regional oil company to operate the fields in Iraqi Kurdistan and insists that the KRG should have a joint role, with the Iraq National Oil Company, in managing current oil fields in the Kurdish provinces. It demanded that the Iraqi central government doe not authorise operations in disputed areas such as Kirkuk until the referendum decides who is to govern them.



The Iraqi constitution calls for the country's oil revenues to be distributed equally, and the KRG law says that oil revenues will be sent to the central government. But it gives more regional control than some Iraqi officials would like local governments to have.



In a statement following the KRG's approval of its regional oil law, the Association of Muslim Scholars in Iraq, a leading Sunni Arab group, said in a statement that Kurdish politicians "are not the official representatives of the Iraqis or the Kurds". The association also warned foreign companies not to work with the "so-called Kurdish government".



Most Sunni Arab-dominated regions in Iraq are not believed to have oil, and Sunni leaders support strong federal control over oil revenue and management.



The Kurds believe differently. In a statement, Hawrami noted that "under the constitution of Iraq, oil and gas management is primarily a regional right, and our success depends upon us exercising that right. This law of the Kurdistan Region is the embodiment of that right".



There are also problems between the central government and the Kurdish authorities over current contracts. In March 2007, Iraqi oil minister Husayn al-Shahristani indicated that the agreement with DNO may not be valid because it has not been approved by the central government.



"All the contracts that have been signed either by the previous regime or by the northern region will have to satisfy the conditions of the new law," Shahristani said at an OPEC meeting in Vienna.



In May, Shahristani said at a conference in Saudi Arabia that any contracts signed by the Kurds before the federal oil law was passed would be considered invalid and illegal, reported news agencies.



Barzani insisted the contracts were legal, and issued a statement suggesting that his government may secede if the contracts were rejected.



"If Baghdad ministers refuse to abide by that constitution, the people of Kurdistan reserve the right to reconsider our choice," he said.



Other points of contention for Sunni and Shia leaders include how oil profits are distributed and foreign involvement in Iraqi oil policies and contracts. The Iraqi oil bill is vague on these issues.



But time is short. The White House is increasingly desperate for signs of political progress before the United States military commander in Iraq, General David Petraeus, and Ambassador Ryan Crocker report to Washington next week on the progress made since more US troops were sent in February. If there is little improvement by then, Congress and the American public will likely put pressure on the Bush administration to pull the 162,000 US troops out of Iraq.



The problems of the oil bill bode ill for the other “benchmarks” that the Bush administration has been pressuring Maliki's government to meet. These include provincial elections, reversing a decision by the US-led Coalition Provisional Authority to ban former Baath party members from holding government and military positions, and revising Iraq's constitution. But Iraqi lawmakers show little signs of bending to accommodate Bush on an issue as crucial as oil.



"We have two clocks - the Baghdad clock and the Washington clock - and this is a perfect example," said Mahmoud Othman, a prominent moderate Kurdish MP in Baghdad. "This has always been the case. Washington has been pushing the Iraqis to do things to fit its agenda."