By Rob Foulkes and Daniel Litvin – This article was originally published in Ethical Corporation.
Companies which strike oil deals with the Kurdish region in Iraq may be helping to undermine the process of Iraqi national conciliation.
Note: Since this article was originally published, the Iraqi government has announced its intention to sign service-provision contracts with multinational oil firms; unlike the deals signed by the Kurdish Regional Government, these do not at present allow for foreign ownership of Iraqi oil. (For further background, see this interview addressing the recent contracts.)
With some 80% of the world’s oil reserves under the control of state-owned companies, and a growing global scramble for resources, the vast reserves of Iraq present a unique opportunity for international oil firms to secure their long term future. Iraq is perhaps the oil industry’s greatest prize, with its low production costs, enormous development opportunities, and potential large-scale opening to foreign investment.
But in their eagerness for an early slice of the action are some firms – even if inadvertently – exacerbating the risk of future ethnic tensions and violence in the country?
Most major oil firms are sensibly awaiting the passage of an oil law by Iraq’s parliament in Baghdad. This is needed to set the regulatory and legal basis for large scale involvement by private sector firms in the industry, but has been stalled for over a year by political wrangling over the regional control of fields and their revenues, among other issues.
Some of the major firms, it is true, have been negotiating technical support contracts and other relatively small-scale deals with the country’s oil ministry in Baghdad but this is officially sanctioned and, as far as the companies are concerned, is aimed at improving their chances when the big contracts come around.
But a different, altogether riskier, calculation underlies the decision of the band of mostly relatively small companies, including European, North American and Asian firms, to pre-empt the oil law and sign contracts with the Kurdistan Regional Government (KRG). The KRG runs Iraq’s oil-rich Kurdish northern region and says it has the authority to sign such contracts (more than 20 of these are reported to have been agreed so far).
The Iraqi constitution makes clear that Baghdad should decide over the management and revenues of existing fields, but it is vague on potential new oil production areas such as those offered by the KRG.
From the companies’ perspective, such deals benefit from the relative stability of the Kurdish region, and from the KRG’s willingness to offer investors Production Sharing Agreements, a form of contract often favoured by international oil firms.
The big commercial downside – which helps explain the oil majors’ absence from Kurdish areas – is that Baghdad considers the deals illegal, raising question-marks over how long they will last. It has restricted its dealings with some of the companies involved, and threatened to prohibit them from competing in central government deals.
Nonetheless, the firms involved in the contracts that have been signed with the KRG appear to have calculated that incurring Baghdad’s censure is a price worth paying for quick access to Kurdish oil.
But these firms’ strategy has implications beyond the commercial risks and rewards they themselves face. For a start, deals with the KRG create obstacles for the swift passage of the national oil law, which in turn may have big implications for Iraq’s future.
For the deals exacerbate a fear among Iraq’s other ethnic groups which, justified or not, partly underlies the current political impasse: that the Kurds are still not committed to the Iraqi state and that their ongoing quest for autonomy could undermine the unity of Iraq.
In particular Sunni groups, whose lands contain little oil, see centralised management of the industry and nationwide distribution of profits as key to tying in the Kurds, and deals that bypass Baghdad can only sow more suspicion.
For its part, the KRG will feel less pressure to compromise at the federal level if it can collect revenues on its own. Passage of an oil law supported by the country’s main factions and ethnic groups has rightly been seen as important to accelerating the process of nation-building and reconciliation in Iraq (as well as to attracting the investment needed to revive Iraq’s war-torn economy).
With issues such as the internal distribution of oil revenues left unsettled, the sectarian relationships at the heart of Iraqi politics will likely remain fractious and lacking in trust. And under these conditions, potentially-explosive disputes such as that over Kirkuk – seen by Kurds as a symbol of their heritage and by other Iraqis as a key hub in the nation’s oil industry – also will be more difficult to resolve.
At worst, dealing directly with the KRG could provide impetus to the centrifugal forces that some Sunnis and other groups fear. Especially if they can win a proto-capital in Kirkuk, oil revenues may tempt nationalist elements among the Kurds to push more strongly for outright independence. Even if this doesn’t happen, the fear that the Kurds might try to secede from Iraq could trigger violent pre-emptive moves by the other groups.
And if, by whatever process, Iraq does begin to fragment, this would not only cause significant bloodshed but would risk destabilising its neighbours (especially those with their own restive Kurdish populations), and threaten vital global interests in the region’s energy and security.
An interesting warning from history in this respect comes from the Congo: in the early 1960s, a decision by Union Minière, a Belgian mining company, to pay its taxes and duties to the regional government of the Katanga province, where its copper mining operations lay, rather than to the country’s central government, gave crucial support to an attempt by this province to secede.
This corporate-backed secession was in turn a major contributor to instability and violence in the Congo during this period. Today tensions in the Niger Delta, Bougainville and elsewhere also attest to the divisive potential of natural resources which can provide independent-minded regions within countries with both the financial motive and means to secede.
The KRG argues that it is not violating the Iraqi constitution, that it is bringing essential revenues into Iraq which it promises to share equitably, and that its success in achieving legislative coherence and relative security should be applauded, not met with international sanctions against its oil industry.
But in the wider and longer-term interests of the country, the region and the world, foreign companies ought now to show restraint to avoid adding to the sectarian troubles of Iraq and its crucial but elusive oil law.
© istockphoto.com/Craig DeBourbon