Less than a year after the departure of U.S. troops from Iraq, Baghdad is losing a primary lever over independent-minded Kurdistan -- its grip on the northern region's revenue-earning oil industry. Kurdistan's secret weapon? Foreign oil companies are exasperated with Baghdad's stinginess and allured by the Kurds' more liberal terms for oil contracts.
These companies are becoming an unintentional fifth column in Kurdistan's march toward economic autonomy. On July 31, France's Total became the third big oil company to break with Baghdad by signing an unsanctioned oil deal with Kurdistan. Baghdad, intent on full mastery over the nation's massive petroleum revenue, forbids oil companies from dealing directly with Kurdistan and instead requires them to bid for projects through the Ministry of Oil and to ship their oil through Baghdad-controlled pipelines. However, ExxonMobil, Chevron, and Total have now flouted Baghdad's wishes, putting their oil deals in Iraq's south at risk in the process. Their calculus is that despite the relative inferiority of Kurdistan's oil reserves, the potential upside there outweighs the downside threat of possibly losing access to Iraq proper, according to oil company executives with whom I have spoken.
The pressure will now be on Baghdad to somehow stem what is looking like an oil-company rebellion. It's yet another challenge for the Iraqi government, which is already struggling with rising violence and dropping oil revenue because of sagging global prices.
History has seen numerous states taken over by companies -- one thinks, for instance, of the United Fruit Company's activities in Latin America. But should this trend continue in Kurdistan, it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous. Of course, it will be up to the Kurdistan Regional Government (KRG) to ensure that it is not swallowed up by the companies, which was the fate of some Central and South American countries in the 19th and early 20th centuries.
On the surface, the companies' decision to spurn Baghdad seems foolish. Iraq is a huge prize in the oil business, with some 148 billion barrels of proven oil reserves -- the second-largest conventional volume in the world. By comparison, the KRG claims to have another 45 billion barrels of oil under its own soil.
After Saddam Hussein's overthrow in 2003, oil companies from around the world rushed in for the right to both rework old, debilitated fields, and to drill new ones. But Baghdad has exacted tight-fisted terms, signing only low-paying service contracts that effectively turn high-risk, high-return wildcatters into mere hired hands. Until recently, the world's oil companies have bristled at the terms, but gone along in hopes of conventional production sharing agreements down the road. Now, the grumbling in the ranks is growing to a roar.
A fourth-round auction of oil properties in May showed both that Baghdad seems to have no intention of greater generosity -- and also that the companies are fed up. Just three of 12 blocks on offer found successful takers.
In October, ordinarily ultraconservative Exxon uncharacteristically signaled the first sign of upheaval by signing an exploration deal with Kurdistan despite having an agreement to produce oil at Iraq's West Qurna field. That seemed quite a gamble: West Qurna, after all, holds some 8.7 billion barrels of oil, and there was a distinct possibility that Baghdad would revoke the deal as punishment for Exxon's opening to the Kurds. Now, Total's decision -- the purchase of a 35 percent stake in two exploration blocks in Kurdistan -- makes what had been a gingerly tip-toeing toward the KRG look more like a headlong rush. Total did not respond to an email requesting comment.