< Back to Iraqi Dinar in the News September 18th, 2007

Big oil

By Ed Crooks and Sheila McNulty

Published: September 18 2007 23:07 | Last updated: September 18 2007 23:07

In Iraq, oil companies face a dilemma. They can wait for the central government in Baghdad to agree a new oil law that will give them a legal framework in which they can operate, and for the security situation to become manageable.

Or they can press ahead and sign agreements with the Kurdistan Regional Government, the authority in the autonomous north of Iraq, at the risk of souring relations with Baghdad and shutting themselves out of deals in the rest of the country.

It is a decision that has so far divided the smaller operators from the majors.

In Iraqi Kurdistan, the companies that are active include DNO – which has produced the first oil from a new source in Iraq since the invasion of 2003 – Addax, Dana Gas, Sterling Energy and Western Oil Sands, which is spinning off its activities in the region as part of its takeover by Marathon.

Most recently, they have been joined by Hunt Oil, a privately held US independent, which this month signed a deal to explore in Kurdistan.

The majors, on the other hand, have been conspicuous by their absence, aware that Iraq’s central government does not recognise the legality of agreements signed with the KRG.

Hussain al-Shahristani, Iraq’s oil minister, said recently about Hunt Oil’s deal: “All these contracts have to be approved by the Federal Authority before they are legal . . . This was not presented for approval; it has no standing.’’

Only 3 per cent of Iraq’s vast reserves of oil and gas are in Kurdistan, and while the minnows of the oil world might be able to make a good business out of 3 per cent of Iraq’s reserves, the big fish want access to the remaining 97 per cent.

That is why the majors that are interested in Iraq, including Total and Chevron – which plan to collaborate in the country – and Royal Dutch Shell, are all working with the government in Baghdad.

While they wait for contracts to be offered, the majors are building relationships, training engineers and carrying out technical studies for free, in preparation for the day when they might be able to operate.

The question is how long their patience will last. The level of violence is still unacceptably high, and the oil law is stuck in parliament. If anything, the prospect of agreement appears to be receding as tensions between the parties grow.

If the political situation in Iraq continues to deteriorate, there may come a time when the majors decide it is better to have 3 per cent of a large amount than 97 per cent of nothing.

Last week, the US commercial officer in Iraq said Hunt Oil was “smart” for becoming the first US oil company to sign a high- profile exploration and production deal in Iraq, even though the deal was with the KRG.

He was careful, however, not to suggest that other US oil companies should follow the Hunt model, saying: “I can’t recommend that as a US government official.”

DNO said last month it had rejected an offer of $700m from an unnamed international oil company for its Kurdistan assets. The identity of the bidder remains unknown, but the offer is a sign that at least one major has given up on the strategy of getting close to the Baghdad government.

Mr al-Shahristani, the oil minister, suggested recently that some contracts could be offered before the oil law is signed. But even if there are deals on the table, concerns about security will be a powerful deterrent to potential partners.

It looks as though the majors will have to keep waiting for Iraq for some time to come.