It’s time for Iraq to rewrite its oil policy. The central government in Baghdad does not want oil companies to deal directly with the semi-autonomous northern Kurdish region, and has threatened to blacklist those that do. But Russia’s Gazprom, France’s Total and Exxon Mobil, which all have operations in the south, have signed deals with the Kurdistan Regional Government. Oil majors think, probably rightly, that they have less to lose than Baghdad from the standoff.
Oil majors have been enticed to the north by more attractive terms and easier working conditions. Total and Exxon make less than $2 per a barrel on oil produced in the south. The Iraqi Kurdish leaders get something they value: a commitment that reinforces their slow push for more autonomy. The more big oil is willing to invest, the stronger the Kurdish position.
Kurdish oil currently flows through infrastructure controlled by Baghdad and revenues come back from Baghdad. The flow of both can be irregular. But Baghdad’s leverage over the Arbil is set to be reduced in two years, with the completion of a 1 million barrels per day capacity pipeline running to the Turkish border. That would take roughly all of targeted Kurdish production. Arbil expects output to rise further to 2 mbpd by 2019.
Baghdad has repeatedly threatened to punish firms that venture north, but its options are limited. Kicking companies out would prompt litigation and might leave key fields fallow, since rival western firms would hesitate to purchase revoked licenses. Exxon is still operating in the south five months after signing contracts for Kurdish blocks. While the US company was banned from a recent license auction, the terms on offer were paltry and interest from qualified firms was minimal.
Improved terms are Baghdad’s best hope for gaining more political and economic leverage, and ensuring that the next license auction isn’t a flop. A more generous approach to foreign oil companies would represent a big about-turn in Iraq policy. But for Baghdad it might be better than the likely alternative - an even more dividend Iraq.
