TRENDS

Do oil companies have the power to break up Iraq?

Obsession
Energy Shocks
Obsession
Energy Shocks

The century-and-a-half history of oil is filled with hard-knuckled politics and the propping up of disreputable rulers. Dictators have risen, elected leaders have fallen, all with the connivance of international oil companies. Yet there appears to be no case in which oil companies have been pivotal actors in creating an actual independent country. Until now.

Over the last year, one oil company after another has elected to flout the wishes of Baghdad, and strike exploration and production deals with the autonomous, freedom-seeking region of Kurdistan. Iraq’s leadership insists that only it can decide who drills for oil and who doesn’t, and bars direct negotiations between companies and local venues such as Kurdistan. So the impact of these oil deals has been to undercut Baghdad’s claims to border-to-border authority, and to buttress Kurdistan’s claims to the trappings of independence.

The latest is Royal Dutch Shell, which appears to be discussing a hydrocarbon deal in the semi-breakaway province. If Shell proceeds, it risks igniting a new escalation of tensions between foreign oil companies and Baghdad.

Shell has much at stake. Its business interests in Iraq include a $17 billion natural gas venture, an oil project in the supergiant oil fields of Majnoon, and a partnership with ExxonMobil in supergiant West Qurna-1.

Yet for comfort Shell has a string of rivals who have gone before it. Chevron, ExxonMobil, Russia’s Gazprom and France’s Total have all signed development deals with Kurdistan. So far, none has lost an existing contract with Baghdad, although Iraqi officials have barred Chevron and ExxonMobil from bidding on new projects.

And there are signs that relations are thawing between Baghdad and Kurdistan: a September 18 decision by the Iraqi cabinet allows for the resumption of oil exports from Kurdistan. The two sides remain divided on how to split oil revenue, and also on how to handle Kurdistan’s right to control its own hydrocarbons industry, but Kurdish officials believe they will reach an accord with Baghdad.

Ultimately, the north may be too beguiling for companies such as Shell to ignore. Kurdistan, unlike Iraq, is willing to offer international terms with a significant upside for success. So far, Baghdad has offered only thin profit margins. Baghdad has suggested that in future auctions it may improve its terms. But the companies are still waiting for that day.

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