Iraq's oil squabble heats up again

BAGHDAD, Oct. 14 (UPI) -- Iraq's independence-minded Kurds are clashing once again with the Baghdad government over the increasingly tendentious question of sharing oil revenues.

The feuding threatens to turn the issue into a major power struggle that could result in the splintering of the post-Saddam Hussein Iraqi state.

On Oct. 9 the semiautonomous Kurdistan Regional Government declared it was halting all oil exports from the Kurdish region in northern Iraq until Baghdad pays the international companies operating there.

This was a blatant challenge to the government of Prime Minister Nouri al-Maliki, which insists it is the only authority that can sign oil deals in Iraq and that all revenue goes through Baghdad before being distributed to regional governates.

"We have jointly agreed that no free oil will be pumped for export, and payments have to be made," Ashti Hawrami, the KRG minister for natural resources, announced on the KRG Web site. "We will only resume exports with guaranteed payments."

The Kurds, whose ultimate objective appears to be full independence for their enclave, have signed two dozen contracts with foreign oil companies, none of them majors, over the last two years in defiance of the central government.

However, the KRG needs the state-owned pipelines to neighboring Turkey to get its oil to market. This gives Baghdad a strong hand to rein in the Kurds and fend off their ambition of setting up their own state.

But with the country's oil industry in a parlous state after decades of war, neglect and U.N. sanctions, Baghdad needs the revenue generated by the oil produced in Kurdistan.

This is currently only around 100,000 barrels a day, a fraction of the overall national oil output estimated at 2.3 million barrels a day. However, output is expected to increase to some 450,000 barrels a day by 2011.

So the KRG's action has major implications for Baghdad. The government now faces the prospect of having to pay foreign oil companies it considers to be operating illegally for what desperately needed revenue they are pumping into state coffers.

Baghdad may have no option but to cough -- for now, at least.

But that does not solve the long-term problem of securing at least $50 billion -- but probably double that -- in outside investment to upgrade and expand the ramshackle oil sector and boost production up to 6 million barrels a day in the next few years to sustain economic reconstruction and bankroll future growth.

Even though Iraq has the world's third-largest proven reserves -- 115 billion barrels of oil -- after Saudi Arabia and Iran and has been a producer since the 1930s, it finds itself once again having to rely on foreign help to find and pump the oil.

But the government has still not been able to push through Parliament a much-delayed hydrocarbons law to regulate the industry, opening up to outside participation for the first time since nationalization in 1973.

Deep-rooted sectarian and political rivalries have been the main stumbling block, and as Iraq heads toward new parliamentary elections in January there's little likelihood of it getting on the statute book anytime soon.

That will impede government efforts to attract major international oil companies to bid for drilling licenses and invest heavily in the oil industry.

The government has no choice but to seek outside investment if the postwar economy is to survive.

An auction of licenses in June secured only one contract. Most companies refused to accept the government offer of $2 for every barrel of oil produced, half of what they want.

Consequently, a second auction scheduled for December is not expected to achieve much.

Oil may prove to be one of Iraq's most divisive issues. Two-thirds of known reserves lie in the Shiite-dominated south. The rest are in Kurdish territory or land the Kurds claim.

Given Iraq's sectarian and political fractures and the growing uncertainty as U.S. forces withdraw, the prospect of the majority Shiites and minority Sunni Muslims and Kurds going their separate ways remains a possibility.

So a lot may be riding on how Baghdad and the Kurds settle their differences, and whether the December auction succeeds in roping in Big Oil.

"If the second oil auction flops as badly as the first one did, Iraq risks deterring investors for a long time," The Economist noted in September.