Fireworks as Kurdish oil flows

Monday marked the official start of oil exports from Iraq’s Kurdistan region, celebrated by a ceremony complete with strobe lights and a musical score.

For investors who have attempted to follow the byzantine politics leading up to this event, Monday might have appeared the breakthrough that has been anticipated for a long time, after lengthy tussling between Iraq’s central government and the Kurdistan Regional Government over who had the right to authorise exports, and under what terms.

Except for the payment problem. There is no mechanism yet by which DNO and Addax, the small oil companies invested in the fields that started production on Monday, will be paid. The vagueness surrounding this issue raises old fears that politics are driving the development of Kurdistan’s vast hydrocarbon, not economics.

In an interview with the FT last month Ashti Hawrami, KRG oil minister, made two main points about the payments to DNO, Addax, and Turkey’s Genel Enerji.

First, there was no question that the companies would be paid.

Second: “How we work it out; that is an internal matter at the moment,” he said, adding that a discussion with the finance ministry in Baghdad was needed before payment was made. “Maybe not in the first month [will the operators be paid]. But we have given them assurances they will get paid. At the finance ministry we are talking to sensible people.”

His repeatedly drew a line between Hussein Shahristani, Baghdad’s oil minister, and “sensible people” and “sensible policies.”

“His is a politicised view. He represents himself – he does not even represent his entire ministry,”  Hawrami said, responding to questions about why Shahristani still insists the KRG’s production-sharing oil contracts with developers like Addax are illegal.

Mr Hawrami’s frustration plainly intensified in recent months, as Kurdistan’s hydrocarbon potential remained blocked even as Iraq’s revenues continued to drain as the oil price remained under $60 per barrel. A political snap occurred in May, when the KRG announced oil would flow (through the international pipeline controlled by the central government) on June 1. “Enough already!” was the subtext of the statement.

The drive to block the stalemate, get oil flowing, and indeed help prop up Iraq’s federal fiscus (which Mr Hawrami says is his prime motivation since “this is not about Kurds, it is about all Iraqis”) succeeded in a fait accompli turn of the oil-pipe valve on Monday, to applause, in Kurdistan.

On Monday, Mr Hawrami told Reuters that payment would not come from the 17 per cent portion of total state oil revenues allocated to the KRG each year.

Now comes the time for “details”. Foreign investors will be observing whether operators like DNO are paid promptly, clearly, and with a clear sign-off by the central government, as a way of looking for reassurance that Monday’s initial flow of 100,000 bpd was the start of something other than a war of egos.

Related stories:

Kurdish exports resume despite Iraq impasse (FT, 27/05/09)
Exports offer hope in Iraq oil row
(FT, 12/05/09)

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