Iraq searches for oil compromise

Major international oil companies have hesitated to become involved in Kurdistan whose ultimate relationship to Baghdad has yet to be resolved leaving the ground to a few smaller concerns such as DNO who are seizing opportunities such as Tawke that is estimated to contain 100 million barrels of oil.

For its 55 per cent stake in the venture, the Norwegian firm is undertaking to meet all costs of its production sharing agreement including installation of pipelines and central processing facilities increased its investment.

The contract has yet to be endorsed in Baghdad, and while the Kurdish north and central government argue over oil licenses an even bigger issue is looming with regard to Kirkuk and its adjoining major oilfields.

Kurdish oil

The city, which is home to a majority Kurdish population but also to Arabs and other ethnic groups, is expected to hold a referendum sometime in 2007 on whether to be administered by a Kurdish regional government.

This would mean virtual independence with the region likely to be of much greater interest to the bigger oil companies not just from Europe, Asia and the US but also Iran and Turkey. Kirkuk currently produces about 700,000 b/d valued at some $15 billion a year.

Baghdad is hoping to avoid a rift on the allocation of oil resources with a petroleum council that would allow regions to negotiate oilfield development contracts with foreign companies but still give central government the final decision with all revenues deposited though into one national account

The new body would include a representative from each region, the petroleum minister, central bank governor and co-opted oil, financial and economic experts not necessarily all Iraqis.

If a compromise does emerge a further dilemma will be whether to go ahead with production sharing agreements with foreign oil companies. While maintaining a country's title to reserves these also give a guaranteed long-term share of profits to companies that invest the fields, pipelines and refineries.

PSA formula

Neither Saudi Arabia nor Iran have countenanced such arrangements and firmly retain state ownership of their oil production. However, given the present mayhem in Iraq some believe Baghdad is not in a strong position to avoid a PSA formula if it wants to ratchet up production in the foreseeable future.

With 115 billion of oil reserves Iraq should be one of the world's top three oil producers but its ill-maintained oilfields have been struggling to pump 2.5 million barrels-a-day in a good month. The government has ambitions to raise production to more than 4 million b/d in five years and longer term to 6 million b/d.

Some $20 billion is needed to repair the industry's infrastructure in order to double current oil output. But, expertise, as much as money is needed and without huge security improvements it will be difficult to lure foreign companies to Iraq other than areas in the north.