Sunday, June 28, 2009 Focus The scramble for Iraq's 'sweet oil'
By Nicole Johnston, Al Jazeera correspondent
With proven oil reserves of around 112 billion barrels and up to another
150 billion barrels of probable reserves, Iraq is the greatest untapped
prize for international oil companies.
To put that in context, if Iraq does turn out to have around 300 billion
barrels of oil, it will rival the world's biggest producer Saudi Arabia -
which has around 160 billion barrels of proven reserves.
So it is little wonder that giant international oil companies are lining
up to get back into Iraq after the industry was nationalised in the 1970s
and the oil majors were kicked out.
On June 30 major companies - including Exxon, Shell, BP and Total - will
gather at Iraq's oil ministry in Baghdad for a two-day meeting to take part
in the first bidding round for oil service contracts.
However, what the oil companies will be entitled to if they secure a
contract has become one of the most controversial elements of the bidding
process.
The companies want a long-term share of the oil they produce under a
Production Sharing Agreement, which allows them to book reserves in advance
and
tell the market exactly how much oil they expect to produce.
This is exactly the type of contract that Iraqis in the oil industry are
opposed to. They argue oil companies should be awarded Technical Service
Agreements, meaning they will be paid solely to develop Iraq's oil fields.
Fayad al-Nema, general manager of Iraq's South Oil Company, has written to
Hussein al-Shahristani, the Iraqi oil minister, outlining his company's
objections.
Iraqi objections
"We in the South Oil Company, that is all of its leadership, reject the fir
st bidding round because it is against the interests of Iraq's oil
industry."
Al-Nema, and others, argue that it would serve the national interest
better if foreign companies were brought in on a short-term basis only, until
Iraqi firms are capable of managing and developing the oil fields themselves.
Oil workers' unions in Iraq have also spoken out against the contracts.
Hassan Joumah, president of the Federation of Iraqi Oil Workers Union,
says: "Unfortunately, there are many problems with the first round of the
allocation of Iraq's oil contracts, which have given huge advantages to the
foreign companies to invest in Iraq's oil.
"Giving such returns to foreign companies will put Iraq's economy in the
hands of foreign companies."
The Iraqi oil workers gained some concessions including establishing joint
operating companies.
Under this arrangement, international oil firms will not receive a share
of Iraq's oil but they will be working in the country for the next 20 years
with a 75 per cent stake in the operation.
Over the last two weeks, al-Shahristani has been forced to defend the
terms of the contracts before parliament.
He argues that without outside help Iraq can not boost its oil production
levels, warning lawmakers: "We will not achieve our desired goals and our
country will fall behind."
However, the contracts on offer are not the only controversy surrounding
the exploitation of Iraqi oil.
KRG dispute
Iraq's newest oil field is not in the desert of western Iraq or the barren
landscape of the south near Basra. It is in the semi-autonomous region of
northern Iraq which is controlled by the Kurdistan Regional Government
(KRG).
The Norwegian company DNO has already excavated the Tawke oil field in
this region.
Its owners proudly show off their new field and their enthusiasm is
contagious; they have discovered the type of oil Iraq is renowned for - what
oil
experts here call "sweet oil".
It is easy to produce and costs less than $2 to get out of the ground.
Within a couple of years they hope to be exporting 200,000 barrels per day
from here.
But Iraq's federal government says contracts signed by the KRG are illegal
and refuses to recognise them.
The main bone of contention is who controls Iraq's oil and gas reserves.
The Iraqi constitution should provide the answer, but conflicting articles
in the document have exacerbated the power struggle between Baghdad and
the KRG over the management of these resources.
Both sides have teams of lawyers and consultants arguing that the
constitution gives them the right to sign contracts and manage the resources.
Falah Kadhim Al-Khawaja, an Iraqi oil expert in Amman, says the central
government in Baghdad is right.
"Based on the constitution, there is a clause that says oil and gas is the
property of the Iraqi people and the central government is responsible for
the budget. So the Iraqi budget is based on oil and gas revenues. How can
the central government plan without having control of oil and gas
resources?"
Nevertheless, the KRG has pushed ahead and signed dozens of oil contracts
with foreign companies.
Interestingly, the world's biggest oil companies, Exxon, Shell,
BP and Chevron, have avoided signing contracts with the KRG.
They do not want to risk the wrath of the federal government, opting
instead to wait for the most lucrative contracts for the super-giant fields in
the rest of the country.
Until recently, the Tawke oil field was caught in the middle of the
dispute.
Since early 2009, the oil field has been ready to begin exporting around
60,000 barrels a day. Instead, the KRG told DNO to delay exporting until it
the conflict with Baghdad is resolved.
So DNO filled up its main exporting pipeline with water and waited.
Pipeline politics
At the end of May, the KRG gave DNO the go-ahead to begin pumping oil out
of the country through the northern Iraq-Turkey pipeline.
However, the tension between Baghdad and the KRG is far from resolved.
Ashti Hawrami, the KRG's oil minister, accuses the federal government of
being "afraid of good news".
"They are afraid [that] oil flowing from Kurdistan shows Baghdad in an
even worse light. They failed and this will highlight their failure even
more," she says.
This is the KRG's first foray into the oil-producing business and, as
Hawrami likes to remind people, the regional authorities "do not want a single
penny out of it".
The oil revenues will all go to the federal government and the KRG will
receive its 17 per cent share of the national budget to manage its region.
Al-Shahristani, however, insists: "Any contracts for field development
that is not approved by the federal government of Iraq has no standing with
the Iraqi government and the oil companies have no right to work on Iraqi
territory."
The pipeline politics are likely to continue unless a deal is reached
between the two parties.
Source: AlJazeera and agencies
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