IRAQ: Big oil's waiting game over Iraq's reserves

Publisher Name: 
Financial Times

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.

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