Iraq Punishes Oil Firms With KRG Deals

16 January 2008

Iraqi Oil Minister Hussein al-Shahristani has followed up on threats to punish companies that sign deals with the Kurdistan Regional Government (KRG) by canceling the memoranda of understanding (MOU) some had inked with his ministry, a ministry source told International Oil Daily from Baghdad Tuesday. This is the first concrete step toward depriving them of any future deals with Baghdad.

Al-Shahristani had persistently told companies that Baghdad considered the KRG contracts illegal, warning of dire consequences if they persisted. In letters sent to a number of firms that have signed MOUs offering Iraq technical support over the past four years, he informed them that he would in his “capacity as minister and on behalf of the Iraqi government declare the annulment of all the contracts that have been recently signed” with the KRG without the approval and authorization of the Iraqi government.

“You are requested to note that the Iraqi ministry of oil has suspended the MOU signed [with the company] together with its related activities stipulated therein,” a letter to one company read.

The letters were reportedly sent to India’s Reliance Industries, Austria’s OMV, the UAE’s Crescent, and Canada’s Western Oil Sands and Heritage Oil. About 15 firms have inked deals with the KRG, but these are thought to be the only ones that had also signed MOUs with the oil ministry.

The letters follow a warning to SK Energy, South Korea’s top importer of Iraqi oil, that Baghdad would end its term contract for Basrah crude by Dec. 31 unless it halted exploration in the Bazian Block in Sulaimaniah governorate, awarded to a Korean consortium by the KRG. Sources in Baghdad said the termination has come into effect.

Between 30 and 40 oil companies have signed one-year MOUs with Baghdad since 2004, with the deals viewed as a first step toward securing a future commercial contract. Under the MOUs, companies offered the oil ministry free technical support to deal with problems in specific fields, and some provided training for ministry staff, as well as regional oil companies based in the north and the south. In exchange, the ministry provided data on the fields for which it was seeking help, but did not commit to awarding them to the companies in the future.

BP, Chevron and Royal Dutch Shell were among the first to sign the MOUs in 2004, and they have since been renewed every year. Late last year, the ministry offered to take the MOUs one step further by offering the three companies, plus Exxon Mobil — which signed a similar MOU in 2005 — a two-year technical support contract to help boost production in five major fields. But long-term deals remain elusive, as Baghdad still lacks a hydrocarbon law to regulate long-term international investment in its fields. A draft law approved by the cabinet last year and awaiting endorsement by Parliament has been bogged down by differences between Baghdad and the Kurdish authorities in Erbil.

Reliance has been eyeing Iraq’s southern Tuba field since the late 1990s, when Baghdad initiated talks with companies willing to sign contracts while Iraq was under UN sanctions. Reliance continued to show interest under its MOU with the ministry. It was also part of a consortium led by India’s Oil and Natural Gas Corp. (ONGC) that signed a deal for Block 8 in the Western Desert in 2000. ONGC is expected to try to revive this once Baghdad starts the review process it has promised for contracts signed under Saddam Hussein.

In November, Reliance signed a production sharing agreement (PSA) with the KRG for the Rovi and Sarta Blocks through Dubai-based subsidiary Reliance Exploration and Production.

OMV, which signed similar contracts for the Mala Omar and Shorish Blocks in Erbil governorate in November, is among companies targeting the East Baghdad oil field under its MOU with the ministry.

Canada’s Heritage — eyeing Iraq’s southern Gharraf field — signed two deals with the KRG in October. One was a PSA for the Miran Block in Sulaimaniah governorate, and the other a 50-50 venture to build a 20,000 barrel per day refinery in the Taq Taq-Miran area.

Western Oil Sands, through wholly owned subsidiary WesternZagros, is working on three structures in Kurdistan’s Zagros Fold Belt, under an agreement signed in mid-2006 and ratified in March. Western had previously been talking to Baghdad about the Ein Zalah field in northern Iraq.

UAE-based, Iraqi-owned Crescent signed a series of deals with the KRG last year through subsidiary Dana Gas. These included developing the Khor Mor field and appraising Chemchemal — two major nonassociated gas fields — and building power plants.

Crescent has also been eyeing Iraq’s Rattawi oil field and Block 5 in the Western Desert.

By Ruba Husari, Dubai

(Published in International Oil Daily Jan. 16, 2008)

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