Iraq's oil offensive
Stratfor
The Iraqi government cut off oil exports to South Korean energy firm SK Energy on January 1, and will deny the company oil for all of 2008 unless it backs out of its deal with the Kurdistan Regional Government (KRG) by January 31, Reuters reported today (January 28), citing Iraqi Oil Ministry sources.
The move represents an important development in the ongoing dispute between the KRG and the Shiite-dominated central government in Baghdad over control of Iraq’s oil resources.
Though many of the small- and medium-sized firms involved in exploration contracts in northern Iraq are unlikely to be affected, the few involved in both transport and exploration are at greater risk. These firms must reconsider investments in Iraqi Kurdistan, with all eyes on South Korea’s next move.
The Oil Ministry, run by Hussein Shahristani – a Shi’i closely allied with Iran and a leading figure in Iraq’s largest and most influential Shiite political party – has threatened for months to blacklist any companies doing business with the KRG.
Iraq’s Sunnis and Shia and its neighbors – most notably Turkey, Iran and Syria, all of which have sizable Kurdish populations – have no interest in seeing Iraqi Kurds inch closer and closer to de facto independence. This includes taking a dim view of increased KRG control over lucrative oil revenues from Iraq’s northern fields, which will lessen the Kurdish body’s dependence on Baghdad.
Iraq’s oil
All too familiar with playing the role of the sacrificial lamb in Iraq, the Kurds know this is their time to be as aggressive as possible in signing energy contracts to tie the economic interests of foreign firms into the KRG struggle for greater autonomy. In short, these energy deals are an insurance policy for the Kurds.
While the Kurds have been signing energy deals left and right, Baghdad simultaneously has been exploring every avenue to keep Kurdish ambitions in check. Though the KRG can sign energy contracts with foreign firms to develop fields in the North, the central government can easily block the KRG from exporting crude through the 600-mile pipeline that links the giant Kirkuk oil field with the Turkish port of Ceyhan on the Mediterranean. While the Kurds can still make money by supplying the domestic market, the big payoffs lie in the foreign market.
In the short term, however, Baghdad is focused on using scare tactics to convince foreign energy firms that investing in the Kurdish North is not worth the risk. The Iraqi Oil Ministry previously has threatened to exclude any companies from signing future deals with Baghdad who have production-sharing agreements with the KRG. But this threat could only go so far in frightening these energy firms since Baghdad itself is in political quicksand with no agreement on national hydrocarbons legislation in sight. By contrast, the KRG strategically has passed its own oil law at the regional level to get deals moving.
With tensions over the oil-rich city of Kirkuk flaring up, it was only a matter of time before Baghdad upped the stakes in its energy dispute with the KRG, with Seoul as the Iraqi Oil Ministry’s first target. In early November 2007, the KRG signed a deal with a consortium led by state-owned Korea National Oil Corp (KNOC) to explore the Bazian oil field in the Dohuk region of northern Iraq.
According to a senior Iraqi oil official, South Korea’s top refiner SK Energy is for now the only firm that has deals with both the KRG and top Iraqi state oil company SOMO, making SK Energy a prime target for Baghdad to use to frighten energy investors away from Iraqi Kurdistan.
Unless SK Energy backs out of its agreement with the KRG by January 30, Baghdad will not allow any Iraqi crude to be shipped to South Korea in 2008. In 2007, Iraqi oil imports accounted for about 4 percent of South Korea’s total crude imports (or 2.39 million barrels per day) according to the South Korean Energy Ministry.
Though Iraq’s cut will make a sizable dent in South Korea’s crude supply, Seoul shows no signs thus far of cutting ties with the Kurds. Even if Baghdad does not allocate any crude for South Korea in 2008, Seoul can relatively easily turn to the spot market and Iraq’s Persian Gulf neighbors to make up the difference in imports, though probably at a premium.
The KRG has signed 15 production-sharing agreements with 20 foreign oil firms from 12 countries, including:
Austria (OMV)
Canada (Heritage Oil, Impulse Energy)
France (Perenco)
Hungary (MOL)
India (Reliance Industries)
Norway (DNO)
Russia (TNK-BP)
South Korea (KNOC, SK Energy, Daesung Industrial, Samchully, Bum-Ah Resource Development, UI Energy, GS Holdings, Majuko)
Switzerland (Addax Petroleum)
Turkey (Genel Enerji, A&T Petroleum)
United Kingdom (Gulf Keystone Petroleum)
United States (Hillwood International Energy, Sterling Energy, Aspect Energy, Texas Keystone, Kalegran, WesternZagros, Hawler Energy, Hunt Oil)
Notably, the bulk of these energy firms are small- and medium-sized companies with extremely limited international exposure. Unlike the supermajors – which have expensive supertankers to buy, ship and sell whatever crude is not used in their domestic markets – these smaller companies are not big enough to play the middleman between consumers and producers in the energy market. They are in Iraqi Kurdistan mainly for exploration contracts. Once they find promising blocks, these companies can either sell them off to larger companies for a handsome profit or produce any oil they discover and sell it to the Iraqi government. Since these companies are unlikely to buy crude from the central government, the threats coming from Baghdad do not carry much weight, allowing most of the firms to continue about their business with the Kurds.
However, for the companies involved in both transport and exploration – such as South Korea’s KNOC, Austria's OMV, India’s Reliance Industries and Hungary’s MOL, Russia’s TNK-BP and the United States’ Hunt Oil – the Iraqi Oil Ministry move against SK Energy has given them some serious food for thought. The Iraqi government is clearly stating that these energy firms cannot have their cake and eat it too: The choice is between Baghdad and the KRG, with no legal grey area in between.
This is troubling indeed for these oil firms, which cannot be assured that the Iraqi Oil Ministry will not escalate matters by threatening the home countries of companies dealing with the KRG. But while pressuring these countries might appear to be the next logical step for Baghdad in its standoff with the KRG, the Iraqi Oil Ministry would be shooting itself in the foot if it attempted to blacklist countries like the United States from buying Iraqi crude.
Iraq needs foreign oil majors to explore, produce and extract crude from Iraq’s Shiite-dominated and oil-rich South. So even though small US energy companies like Hunt Oil are dabbling in Iraq’s northern oil fields, the Iraqi Oil Ministry is not about to tell US supermajors like ExxonMobil that Iraq’s massive southern oil fields consequently are off limits. On the other hand, countries like India – a major importer of Iraqi crude without the protection granted by energy supermajors – will be far more vulnerable to Baghdad’s retaliatory campaign against the KRG.
As far as the Kurds are concerned, as long as South Korea’s SK Energy does not end up abandoning the KRG for future contracts in the South, the Kurds will have some time to attract more energy firms to build up their security guarantee against what is becoming an increasingly hostile neighborhood to Kurdish interests. If SK Energy jumps ship, however, a dangerous precedent will be set from the Kurdish perspective regarding existing and future energy investments in Iraqi Kurdistan.
