Iraqi Oil: The Tug-of-War Continues

A worker adjusts the valve of an oil pipe at West Qurna oilfield in Iraq's southern province of Basra (photo: Reuters - Atef Hassan)
By: Joe Dyke
Published Thursday, June 7, 2012

As the Iraqi government announced the winners of a series of new contracts for oil and gas exploration and extraction in the country last week (May 30-31), a new clause was quietly inserted into all deals. It stipulated that all contracts offered would bind the winning parties to recognize Baghdad as Iraq's sole oil authority.

It might as well be dubbed the “Exxon clause,” as it was a reaction to a deal made between the US oil giant and the semi-autonomous Kurdish Regional Government (KRG). To say the deal — which granted Exxon access to Kurdistan’s oil without the agreement of the central government — infuriated Baghdad is an understatement of the highest variety.

Exxon itself was excluded from the latest bids and under the new clause if an oil company were to “play both ways,” so to speak, and sign a contract with the KRG as well as Baghdad then the central government has the right to rip up its deal.

Yet the auction – for 12 blocks of potentially hugely lucrative exploration across the country – was not a success, with only three deals awarded and eight blocks receiving no bids at all. The clause was among the factors scaring off investors.

The bids come amid a series of scuffles between Baghdad and Erbil. Following the US withdrawal last December, Iraq’s Shia Prime Minister Nouri al-Maliki declared the vice-president Tariq al-Hashemi a criminal and demanded he be arrested. Hashemi, himself a Sunni but not a Kurd, fled to Kurdistan where the KRG refused to turn him over despite Baghdad’s protestations, eventually guaranteeing him security as he fled to carry out a tour of Saudi Arabia, Qatar and Turkey.

Then last month, in a seemingly provocative act Maliki decided to host his cabinet meeting in the oil-rich city of Kirkuk – ownership of which is disputed between Erbil and Baghdad. This led to claims that Maliki was heading for dictatorship.

Politics of this nature are not unusual in Iraq, where tit for tat scuffles are common. But the downward spiral of relations over oil is not merely a symptom of Iraqi internal infighting. Iraq finds itself at a strategic fault line between geopolitical camps – with the US and Iran’s battles seeping over the border.

Maliki, who for so long managed the incredible feat of being both Washington and Tehran’s man simultaneously, has become increasingly reliant on Iranian backing. In April he made his first visit to Iran since he began his second term in office, in what Al-Akhbar’s Elie Chalhoub described as a “desperate” attempt to “solicit the political support of Iranian leaders and their help.”

Maliki has isolated himself politically, and his increasingly close relationship with Tehran may be translating into policies on the ground. The three firms that did get awarded contracts last week were from Russia, Pakistan and Kuwait – no Western firms at all.

Meanwhile Erbil has reached out to the West – becoming the de facto capital of huge conglomerates in the country. One Kurdish journalist describes the situation regarding oil. “The contracts in the south are indirectly determined by Iran, to get to Iraqi oil you go through Iran. The government in Kurdistan is going the other way – trying to get as many Western firms in as possible to protect itself from attack.”

Indeed Masoud Barzani, the head of the regional Kurdish government, stated this policy explicitly when he said that Western oil firms, if threatened, could take up arms to protect their assets. “Exxon is an oil giant that equals 10 military troops; it would, for its own interest, defend the territory where it is established,” he said. The idea of an oil conglomerate declaring war on a sovereign state may be a little far-fetched, but they hold much influence over their governments.

There has been fierce debate over the extent to which Exxon was acting in conjunction with the US government when it signed a deal that was always likely to cause tension between Baghdad and Erbil. Officially the US government had nothing to do with it but Shwan Zulal, a leading expert on Iraqi oil, believes the deal had the blessing of the State Department.

“What I think happened with Exxon is part of a bigger picture of US policy. It is very hard to find out exactly what the aims are but Exxon certainly went in with the blessings of the US State Department... they thought they would work as a broker to break the deadlock over the oil,” he said.

“If you are Exxon and you look at it and say there are a few blocks that are very lucrative and KRG are unlikely to give up control. If I get in, my entry into this region will have an impact.”

Critics have charged that the oil companies have been able to get better deals by playing Baghdad against Erbil. One noticeable trend with the current oil bidding in Baghdad, an expert says, is that companies who accepted seemingly tough deals in 2008 and 2009 have been demanding more favorable conditions – thus the lack of deals last week.

Zulal is hesitant to say that Exxon deliberately provoked the crisis in order to get a better deal for their oil, instead accrediting them with playing the game of Iraqi politics. “That charge has been levied against Exxon. I think there is some truth to that but I wouldn't say they deliberately play them off against each other.”

“Iraqi politics is like that and you have to play the game. Whatever you do you have to take sides and if you keep neutral it is very hard to get anything done,” he adds.

The debate continues over whether the oil companies are exploiting pre-existing divides or creating new ones, but regional rivals are also certainly happy to stir the pot. Countries which are in competition with Iraq, and particularly those scared of Tehran’s influence in the Middle East, have little to gain from the country unifying.

Maria Fantappie, an Iraq expert and visiting scholar at the Carnegie Center, sees foreign influence behind the Hashemi crisis. “Iraq’s neighbors are trying to undermine any kind of regional role (the country could have) by playing on this issue. Hashemi went to Saudi Arabia, then to Qatar and then to Turkey – it’s not an accident he travelled to those places,” she said. “These countries are also competing with Iraq regionally and so they want to play the card of domestic tension in order to focus the debate on Iraq’s domestic problems, not on the country’s foreign policy.”

None of this is to say that Iraq is set for full-blown civil war or Kurdish succession any time soon. But with the two governments finding themselves on differing sides of the global coin, rival governments and global oil companies happy to see the country divided, and potential flair points such as Kirkuk ahead, the prospects for unity are slim.


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