If you were to list some of the safer operating environments for the energy sector worldwide, the north of Iraq might not immediately spring to mind. However, the territories administered by the Kurdish Regional Government (KRG) are currently just that.
While not completely immune from the violence that swept Iraq after the 2003 invasion, the region organised itself quickly and managed to stem the flow of bloodshed which wracked the rest of the country in the aftermath. Today, it sees fewer terrorist attacks than its neighbour Turkey, and accounts for less than 1% of the yearly violence seen in the whole of Iraq.
Nonetheless, the evolving territory will still face major challenges in the future, some of which could have a profound effect on its identity, structure and even political survival.
The greatest source of concern is its uneasy relationship with the rest of Iraq, not least because of disputes over territory and oil.
The KRG has disagreed with Baghdad for years over how to share the country’s hydrocarbon revenues, and a law defining how contracts should be structured has yet to be agreed upon.
The country’s draft hydrocarbon law was first submitted to parliament in 2007 and while it was agreed upon in principle the political divisions and rivalry for influence over the lucrative sector have stymied efforts to implement it ever since.
In the interim period, the Kurdish authorities have signed their own oil deals regardless, pursuing production sharing agreements rather than the fee-per-barrel arrangements of the federal government.
The Kurdish authorities then pay Baghdad a proportion of their earnings as indicated in the 2007 draft of the hydrocarbon law while the federal authorities are expected to pay the oil companies in turn.
This preferable arrangement has encouraged several firms to sign deals in the territory, but it has not been a smooth or consistent process, with the federal authorities frequently accused of failing to pay the private companies.
Not that this is exceptionally surprising of course: the signing of deals with the KRG has enraged Baghdad. It considers the Kurdish move unconstitutional and the oil deals illegal and has subsequently blacklisted the firms involved from doing business elsewhere in the country. Despite this, many companies still flock to the north.
Some of the oil majors have even defied Baghdad directly by signing Kurdish oil contracts when already engaged in deals in the south.
Companies such as Total, Chevron and ExxonMobil, even Gazprom, will, says Baghdad, be excluded from future oil and gas bidding rounds held by the federal government as penalisation for the move, and the government has even threatened more severe action in retaliation.
Despite these threats, however, the central government may not overtly oust these firms from the south of the country. To do so would jeopardise Iraq’s reputation as a reliable trading partner. It could also set back the country in its oil production targets, a concerning development for a state which relies of hydrocarbon revenue for 95% of its budget.
The Baghdad government response is therefore considered by firms to have been muted and therefore tolerable, although the loss of face it has incurred for the government could spell more acute measures in the future.
The KRG will want to attract even more of these firms to its territory, not just because of the development and revenue they bring, but because their presence will increase the likelihood of international support in the event that the region comes under threat from external forces in the future. The old saying is that the Kurds have no friends but the mountains, but oil majors may turn out to be their greatest ally.
One of the biggest sources of tension between the KRG and Baghdad is the status of a belt of disputed territory spanning the provinces of Ninawa, Diyala and Ta’mim.
The latter holds the oil-rich, ethnically diverse and strongly contested city of Kirkuk.
At present, the Kurdish security forces hold de facto control over several of the disputed areas, but as the federal security forces become more capable they may increasingly challenge this. Such a move could spark a rise in tension and aggression, which could quickly escalate into standoffs, clashes and even full-scale military confrontation.
KRG territory is evidently not entirely risk-free, but the area is significantly quieter than the rest of Iraq and far safer than other oil producing regions such as the Niger Delta, Colombia or Yemen.
Companies with reliable contingency plans and an ear to the ground can continue to prosper in the oil rich region. Indeed those with an awareness of the situation and the willingness to address the relevant risks are likely to far outperform their regional peers by selecting this emerging market.
AKE has operated in Iraq since 2003. It provides comprehensive security and logistical services to a wide range of clients in the country, including a business support centre and secure accommodation in Baghdad and Basrah. For a free trial of AKE’s Iraq intelligence reports, please contact john.drake@akegroup.com.
John Drake is a senior manager at international security specialist AKE