Oil for soil: toward a grand bargain on Iraq and the Kurds

110 Crisis Group interview, Suleimaniya, 26 June 2008.

111 King, “Wildcatters”, op. cit.

112 Theoretically, the KRG has two options in exporting its oil, assuming agreement is reached under a federal hydrocarbons law. Either it needs to build two branch lines, one from its promising Taq Taq field to Kirkuk (60km), the other from its producing Tawke field near Zakho to the Kirkuk-Ceyhan line (a mere 6km). DNO already built a pipeline from Tawke to the Kirkuk-Ceyhan line, but it remains empty in the absence of permission to export. Given the sensitivities, DNO has not even publicly announced this pipeline.
Alternatively, the KRG is considering constructing its own strategic pipeline from Taq Taq to Zakho that would likewise link up with the Kirkuk-Ceyhan trunk line near the Iraqi-Turkish border. This is complicated by terrain and a history of conflict: It would have to cross low mountains and, in some places, minefields. Crisis Group interview, international energy expert, Erbil, 16 June 2008. If the Kirkuk field starts producing at maximum capacity (up to one million b/d; see below) and the KRG reaches its one million b/d target, a second pipeline would be needed for the additional volume; presumably it would run from Taq Taq to Zakho and then to the Mediterranean parallel to the existing Kirkuk-Ceyhan line. Crisis Group interview, international energy expert, Istanbul, 5 July 2008. See map in Appendix D below.

113 Crisis Group interview, academic who follows oil-related issues, Erbil, 16 June 2008.

114 Crisis Group interview, international energy expert, Istan­bul, 5 July 2008.

115 A senior Turkish official said, “We cannot do much with­out Iraqi government authorisation. We cannot afford a breach of trust. So before the Kurds can export their oil and gas through Turkey, there will have to be a federal hydrocarbons law”. Crisis Group interview, Istanbul, 21 July 2008. A subsequent Crisis Group report will discuss Turkish perspectives on Iraqi Kurds.

116 Crisis Group interview, Suleimaniya, 26 June 2008.

117 For example, Neywshirwan Mustafa Amin, a leading Kur­­dish intellectual and former PUK leader asserted that the Kurds’ first attempt to take (back) Kirkuk was in 1919, when Sheikh Mahmoud faced off with the British colonial power. In 1931, Sheikh Mahmoud prepared to attack British and Iraqi forces in Kirkuk but was defeated and sent into Iranian exile. Crisis Group interview, Suleimaniya, 23 June 2008. While true, the Arab-Kurdish conflict gathered momentum only after the ascent of the Baath party, with its Arab nationalist ideology, in 1968 and the start of Arabisation, which focused on Kirkuk and its oil wealth. Denise Natali, “The Kirkuk Conundrum”, forthcoming in Ethnopolitics, vol. 7, no. 4 (November 2008).

118 Crisis Group interview, Suleimaniya, 21 October 2008.

119 United Press International, 28 November 2007.

120 Some industry sources put the total at ten billion barrels, or 8-9 per cent of Iraq’s proven reserves. Platts Oilgram News, 25 August 2008; and Oil & Gas Journal, 1 January 2008. An Iraqi oil expert with specific knowledge about Kirkuk claimed that the field contains more than 15 billion barrels, not including the nearby “giant” Bai Hassan field, and that much remains to be explored and developed. Crisis Group interview, Amman, 19 October 2008.

121 A Western oil expert claimed Kirkuk is “in rapid decline”, in part because large quantities of oil (in particular, viscose fuel oil that did not have a ready market) are thought to have been re-injected into the field, without knowledge of where or how and contrary to international standards. He estimated $3.7 billion and four to five years of work (in a stable environ­ment) would be needed to reverse the decline. Presentation by Wayne Kelly at the U.S. Institute of Peace, Washington DC, 9 August 2005.

122 Crisis Group interview, Erbil, 29 June 2008. Likewise, the PUK’s representative in Ankara declared: “For us it’s not a question of oil. Kirkuk oil will run out in 50 years or so. We don’t need Kirkuki oil for our independence”. Crisis Group interview, Bahros Galali, Ankara, 1 June 2006.

123 Crisis Group interview, international energy expert, Am­man, 27 January 2008. Implementing a large enhanced oil recovery (EOR) program could make a big difference in rate of decline and output but would require major investment.

124 From 2004 to the middle of 2006, no Kirkuk oil was exported, because of pipeline sabotage. “The Kirkuk-Baiji pipeline…is now protected on either side by a ditch, a dirt barrier, a fence topped with razor wire, and three more rolls of razor wire on the ground. There are two guardhouses at every road crossing; the government has recruited local tribesmen suspected of mounting many past attacks to man them and conduct patrols. Oil has flowed freely since the construction of these defences began [in mid-2007]”. The Economist, 16 August 2008. A Turkoman member of the Kir­kuk provincial council said the pipelines are protected by Iraq’s Oil Protection Forces, which pays local Arab tribes to protect sections through their territory. The line has been safe since local Arab tribes set up awakening councils in late 2007. Crisis Group interview, Hassan Turan, Kirkuk, 18 June 2008.

125 Crisis Group interviews, Manaa Alobaydi, director general of the North Oil Company, Kirkuk, 27 December 2007 and 24 January 2008.

126 In 1999, production was 900,000 b/d after a long period of low activity due to bomb damage during the Iran-Iraq war (1980-1988) and UN-imposed sanctions in the 1990s. “Iraq managing to increase production”, Alexander’s Gas & Oil Connections, News and Trends: Middle East, vol. 5, no. 3 (21 February 2000). Before the 2003 invasion, some 700,000-800,000 b/d were sent through the pipeline to Ceyhan. Current plans are to increase production to one million b/d by 2010, most for export. Dow Jones Newswires, 11 June 2006.

127 Kirkuk has four producing oil fields, of which the Kirkuk field is the largest. The others are Bai Hassan, Jambour and Khabbaz. These three additional fields have combined estimated reserves of as much as four billion barrels and potential production capacity of 220,000 b/d. Platts Oilgram News, op. cit. The Kirkuk field has four domes: Baba on Kirkuk city’s outskirts, Avana in Dibs, Khurmala north of Dibs and Zab north of the Greater Zab, a non-producing field. There are also three discovered but undeveloped fields: Hamrin, Ismail and Judaida, which have been estimated to have combined reserves of 2.5 billion barrels, ibid. See map in Appendix D below.

128 KRG media release, 6 November 2007, www.krg.org/
articles/detail.asp?lngnr=12&smap=02010100&rnr=223&
anr= 21217. KNOC was established under the KRG’s 2007 oil and gas law.

129 United Press International, 28 November 2007 and 17 June 2008.

130 Ashti Hawrami said: “We have shortages of fuel products. Every winter we are suffering. All we are doing is solving that problem by utilizing the crude oil, that’s all”. Quoted in United Press International, 28 November 2007.

131 Ashti Hawrami said, “Khurmala Dome is not in a disputed area. It’s in Kurdistan, period….People say KRG are not allowing them [federal workers] to work in Khurmala. What that really says is it’s under KRG control, and we’d like to get it back from them”. Quoted in United Press International, 17 June 2008.

132 Quoted in United Press International, 28 November 2007.

133 In December 2004, the Iraqi oil ministry awarded a contract to the Iraq-based KAR group to provide engineering and equipment for developing Khurmala dome. Iraq’s oil minister, Hussain al-Shahristani, said Khurmala was “one of the three domes of the Kirkuk field, which is a producing field”. Quoted in United Press International, 17 June 2008. The director general of the North Oil Company declared more specifically that it has been producing 35,000 b/d since 14 August 2004. Faxed letter to Crisis Group, 3 March 2008. The constitution does not define a “producing” or “current” versus a “future” field, but the KRG’s oil and gas law defines a “current” field as “a Petroleum Field that has been in Commercial Production prior to 15 August 2005”, and a “future” field as “a Petroleum Field that was not in Commercial Production prior to 15 August 2005, and any other Petroleum Field that may have been, or may be, discovered as a result of subsequent exploration”.

134 Quoted in United Press International, 17 June 2008. Haw­ra­mi had earlier said, “there is no hard line drawn somewhere that says this is KRG controlled territory and these are disputed territories, it is all gray areas. We provide the security; administratively we run the towns and villages in that area. It is and has always been under control of KRG, under our security”. He also noted, however: “Assuming we go a step further and say it is not, say it transpires later on we were wrong for some reason. Well the contract is an Iraqi contract anyways, and whoever controls that region can administer the contract. It is no problem”. Quoted in United Press International, 28 November 2007.

135 Article 140(1) of the Iraqi constitution instructs the executive authority to implement Article 58 of the interim constitution, the TAL, Article 58(B) of which states, in part: “The previous regime also manipulated and changed administrative boundaries for political ends. The Presidency Council of the Iraqi Transitional Government shall make recommendations to the National Assembly on remedying these unjust changes in the permanent constitution”. Kurdish leaders repeatedly have made clear that they want districts previously belonging to Kirkuk to be restored.

136 Fields not already mentioned that appear to straddle the green line include Demirdagh in Erbil governorate and Jabal Kind, which is located on the boundary between Dohuk and Ninewa governorates. The Ain Zalah and Raffan fields in Ninewa governorate appear to lie close enough to the green line to have the potential to spark conflict. See map in Appendix D below.

137 The Chamchamal gas field also straddles the green line but is not yet technically a field, as no commercially recoverable gas has been found. Three wells have been dug, two dry; a third showed traces of hydrocarbons but appears unable to produce more than 100 b/d – insufficient to be commercially viable (the industrial minimum output for viability is 2,000 b/d). Further exploration could yield better results. Crisis Group interview, Manaa Alobaydi, director general, North Oil Company, Kirkuk, 24 January 2008. A similar but unconfirmed case of a field in the Kurdistan region but extending into disputed territories involves the Khormor gas field, which straddles the green line between Suleimaniya and Salah al-Din governorates. The contract was awarded to the UAE’s Dana Gas and Crescent Petroleum, which announced the start of production in October 2008. Khormor was known as “Al-Anfal” during the old regime, a particularly cruel name, as the genocidal Anfal campaign was fiercest in the area of this oil field, around the town of Qader Karam in the Germian region.

138 A similar conflict could arise over two other possible blocks (K17 and K43) awarded to the KRG-owned KEPCO for joint development with yet-to-be-contracted international oil companies and located in areas directly adjacent to disputed territories.

139 See Middle East Economic Survey, 15 October 2007. The validity of such claims is difficult to determine, as the edges of geological structures do not align with politically determined geographic boundaries. It is easily conceivable that oil fields inside the Kurdistan region would protrude into adjacent areas. See the block map in Appendix C for the approximate location of the block awarded to Hunt Oil.

140 Crisis Group email communication, Ben Lando, United Press International, 18 March 2008. While this sounds fair, revenues from local production are not being shared due to a dispute over the price of KRG-pumped oil. The federal government values it at the international market price; the KRG, perhaps not unreasonably, insists its value is the price at which it is sold on the local market. The conflict may have its origin in suspicion KRG oil is smuggled abroad to fetch a higher price. (See above.)

141 The 7 August 2006 draft was overtaken on 22 October. A memorandum noted the new draft would “not give the Minister the power to administer petroleum operations in the Disputed Territories except by agreement with the Government of Iraq”.

142 It reportedly concerns three oil fields (Qamar, Gullabat and Naudoman) and one gas field (Khashm al-Ahmar). Petroleum Intelligence Weekly, 6 October 2008. See map in Appendix D for locations.

143 The Khanaqin field reportedly started production along with the Kirkuk field in 1927. The local oil company was said to employ 400 people and the associated refinery another 500-600 when both were closed in 1983 because of the Iran-Iraq war (Khanaqin is a border town). Until then, the field had been producing a modest 10,000 b/d for domestic consumption. Crisis Group interview, Muhammad Amin Has­san Husein, Khanaqin district manager (qaym maqam), Khana­qin, 24 June 2008. The field’s name is Naft Khana. Other fields in the Khanaqin district are Nau Doman and Chia Surkh. See map in Appendix D below.

144 In addition to the Kirkuk field’s Avana dome, there are two oil fields in Makhmour: Qarachaug and Makhmour. Wells dug in the 1980s and 1990s are no longer producing. Crisis Group interview, Rokiya Muhammad Salih, Makhmour municipality director, Makhmour, 21 June 2008.

145 For information on fields in the north, including the Kurdistan region and disputed territories, see www.thefreelibrary.
com/IRAQ+-+The+Main+Fields+In+The+North-a0132031663.

146 Crisis Group interview, Erbil, 28 June 2008.

147 Crisis Group interview, Erbil, 29 June 2008.

148 Shahristani declared: “All these contracts have no legal base and do not fit with the existing laws, nor with the draft [oil law] which has been agreed….We hold these firms to be legally responsible … and we have warned them that they will bear the consequences”, Reuters, 24 September 2007.

149 Agence France-Presse, 19 September 2008.

150 Crisis Group interview, energy expert, Istanbul, 25 May 2008.

151 Crisis Group Report, Iraq After the Surge II, op. cit., pp. 7-8.

152 For a discussion, see Crisis Group Report, Iraq After the Surge II, op. cit., p. 8.

153 The five main types of risk companies take in oil and gas projects are explained in Greg Muttitt, “Nationalizing Risk, Privatizing Reward: The prospects for oil production contracts in Iraq”, International Journal of Contemporary Iraqi Studies, vol. 1, no. 2 (September 2007), pp. 145-146.

154 For a discussion, see Greg Muttitt, “Investor Rights vs Human Rights: The implications of oil contracts in the Kurdistan Region of Iraq”, Kurdish Human Rights Project Legal Review, no. 13, June 2008, pp. 58-60.

155 For a discussion of the controversy over PSCs, see Crisis Group Report, Iraq After the Surge II, op. cit., pp. 6-7.

156 This is referred to as “booking reserves”. According to an international oil expert, “For example, if a contract gives a company 10 per cent of the oil it pumps, and it takes out 100,000 b/d, then it walks off with 10,000 b/d, which at current prices and over twenty years is a huge amount of money”. At an average of $100 p/b, the company would earn $7.3 billion in twenty years. Crisis Group interview, Erbil, 16 June 2008.

157 A critic has said that PSCs “are often used in countries with small or difficult oilfields, or where high-risk exploration is required. They are not generally used in countries like Iraq, where there are large fields which are already known and which are cheap to extract”. Greg Muttitt, “Oil Privatisation by the back door”, Niqash Analysis, 26 June 2006, at www.niqash.org. This is precisely the Kurds’ point: They live in a part of Iraq that historically has suffered from neglect, is now autonomous and aspires to economic self-reliance, so consider developing their oil industry, unhindered by federal restrictions, as essential.

158 Article 112(2) states: “The federal government and the governments of the producing regions and governorates shall jointly formulate the necessary strategic policies to develop oil and gas wealth in a way that yields the greatest benefit to the Iraqi people and relies on the most advanced techniques of market principles and investment promotion”.

159 Article 115 states: “All powers not stipulated as exclusive powers of the federal government are powers of the regions and governorates not organised in a region. With regard to other powers shared between the federal government and regions’ governments, the law of regions and governorates not organised in a region shall have precedence in case of dispute”.

160 For an economic analysis by a KRG consultant, see Pedro van Meurs, “Maximizing the value of government revenues from upstream petroleum arrangements under high oil prices”, 7 June 2008, at www.krg.org/articles/detail.asp?
smap= 02010100&lngnr=12&asnr=&anr=24710&rnr=223.

161 Muttitt, “Investor Rights”, op. cit. “[T]he oil contracts are set to lock in this [Iraq’s] weak rights framework for their entire duration. The contracts contain ‘stabilisation clauses’, which require the government to compensate investors for any costs incurred as a result of changes in the law, including human rights and environmental law. This threat of econo­mic compensation is likely to discourage future governments from using regulation to protect the rights of its citizens”. Ibid, p. 54. PSC critics say windfall profits to oil companies that they associate with PSCs contradict the constitution’s call for maximum benefits to the Iraqi people. Tariq Shafiq, an Iraqi oil expert and founder of the Iraqi National Oil Company (INOC), argued, based on the KRG’s draft August 2006 law: “[W]hile the draft law’s fiscal terms and conditions for the PSA [ie, PSC] are impressive, KRG’s record from its PSA agreements shows windfall profit to the investing contractor. This contravenes Iraq’s national constitution which requires maximum return to the nation”. Middle East Economic Survey, vol. 49, no. 37 (18 September 2006).

162 Middle East Economic Survey, 18 September 2006, op. cit. Muttitt has claimed, citing Iraqi experts such as Tariq Sha­fiq, that “a fully regionalised and therefore fragmented oil industry, on the lines suggested by the KRG, would be unable to function successfully at a technical level”. They argued, he said, that “much of the oil infrastructure (such as pipelines, refineries and export terminals) is necessarily shared between regions, and so requires central management; that effective economic, geological and industrial management requires central coordination (rather than competition between Regions); and that the Regions simply do not have the technical expertise or capacity to develop their oil industries independently”. “Investor Rights”, op. cit., p. 57.

163 The “super-majors”, all publicly traded, are ExxonMobil, Chevron, Royal Dutch Shell, Total, Conoco-Phillips and BP. Powerful state-owned companies known as the “New Seven Sisters” include Saudi Aramco of Saudi Arabia, JSC Gazprom of Russia, CNPC of China, NIOC of Iran, PdVSA of Venezuela, Petrobras of Brazil (partly privatised) and Petronas of Malaysia.

164 Crisis Group interview, Ali Ak, general manager, Pet Oil, Ankara, 3 June 2008.

165 Crisis Group interview, independent energy expert, Erbil, 16 June 2008.

166 A future conflict could arise over an acceptable production balance between Iraq’s southern fields and the KRG’s, namely if and when overall output rises to such a level that OPEC would reinstate a production quota for Iraq. If, for example, the quota was 3.4 million b/d, a decision would have to be taken about how much the federal government and the KRG would each be allowed to produce to fill it.

167 Crisis Group interview, independent energy expert, Istanbul, 5 July 2008.

168 Crisis Group interview, Suleimaniya, 23 June 2008.

169 Crisis Group interview, a Kurdistan Alliance member of the council of representatives, Amman, March 2008.

170 Signs are that this is happening. A KRG official was outspoken: “The Kurds had a historical opportunity to bring Kirkuk into Kurdistan, but our leadership lost this opportunity”. Crisis Group interview, Suleimaniya, 21 October 2008.

171 Crisis Group interview, international energy expert, Amman, 28 November 2006.

172 Many Kurds saw in the Maliki government’s August-September 2008 actions in Khanaqin and its sub-districts a harbinger of a resurgent central government intent on stifling Kurdish aspirations (even if military pressure was directed at areas outside the Kurdistan region), as it has often over the past century. For example, Mahmoud Othman, a veteran Kur­dish leader and lawmaker, declared: “The Khanaqin issue is a very small part of the conflict with the Maliki government because the conflict is about whether Iraq is a federal country in which those who are participating in the government are making decisions together, or whether it’s a central government as in the past, run by the Prime Minister and his party”. Quoted on Sbeiy.com, an independent Kurdish web-based news agency linked to Kurdish leader Neywshirwan Mustafa Amin, 2 September 2008.

173 The KRG recognises that Turkey is likely to be its only significant economic partner for some time, as well as a necessary bridge to the West. Fuad Hussein, chief of staff to KRG President Masoud Barzani, said, “It is up to us to be close to Turkey. We like its model of democratic values. By force of geography, Turkey is our window on the West. We want to have an economic open door. Turkey won’t find any other friends in Iraq, so our relationship will be mutually beneficial. De facto, the Kurds are friends of the Turks and can protect Turkey’s interests, something the Turkomans cannot do. Plus both of us are friends of the West, so everything is aligned. We have much in common”. Crisis Group interview, Salah al-Din, 28 January 2008.

174 This is true even of ISCI, which (jointly with the Kurdish parties) has advocated a region formation process that would gut critical central state powers. In its view, division into regions would not lead to dissolution. See Crisis Group Middle East Report Nº70,