Baghdad government will not recognize deals.

October 10, 2007.

The Kurdistan Regional Government is offering the global oil industry its first and, so far, only chance at entering the Iraqi crude sector. Despite anger in Baghdad, the KRG plans to sign even more controversial oil deals and is waving the "For Sale" sign proudly.

"We have many opportunities to excite you," KRG Natural Resources Minister Ashti Hawrami told United Press International when asked what the "sales pitch" is to international oil firms. "And if you don't come forward now, you will lose."

The KRG, covering a three-province region in the north of the country, has pressed forward with its own oil agenda, claiming the national government refuses progress. Baghdad, however, says it's the Kurds who are the roadblock.

A proposed oil law that would govern the sector has been stuck in negotiations for a year. It's now on a Parliament committee's agenda, but its future is unknown.

The Kurds, with only a small portion of Iraq's known reserves but an expectation of finding a lot more, are demanding less central control. They want oil-producing regions and provinces to have the power to negotiate and sign contracts for exploration blocks. They also want the nationalized sector to be available to foreign/private investors.

Most in the Shiite-led central government, as well as the Sunni minority, are arguing for a central government to set the strategic oil policy, and there is a dispute as to foreign investment, for which the powerful oil unions want strict guidelines.

Both sides say the 2005 constitution supports their claims.

Iraqi Oil Minister Hussain al-Shahristani was at an Iraq oil conference in Dubai early last month when the KRG announced a production-sharing contract with Dallas-based Hunt Oil Corp., the first deal signed since the KRG passed its own regional oil law; both are thorns in Baghdad's side.

"Those contracts have no standing as far as the Iraqi government is concerned," Shahristani said after the deal was announced. He said until a new oil law is passed, as called for in the constitution, a Saddam-era oil law that places the power in the federal government's hands still stands.

"We have a law, and the law only authorizes the Ministry of Oil to sign contracts and nobody else in Iraq now," he said, "so any contract signed by any other group has no standing." He called all but the very first KRG deals "illegal."

Shahristani said he wants to wait for a federal oil law. The major oil firms are waiting as well, fearing a deal with the KRG will blacklist them from any deals in the rest of the country, where nearly all of Iraq's 115 billion barrels of proven reserves are located.

At the Dubai conference, senior officials at most of the major oil companies told UPI they were waiting on Baghdad. None would speak on the record.

With an ambitious oil development plan -- especially considering the state of security in the country -- Shahristani said he'd sign development deals by the end of this year, with or without a new oil law.

The KRG says the constitution legitimizes its semiautonomous region, thus its own oil law. Hawrami said the law is in line with a February version of the national oil law. That law was agreed upon by a negotiation team but has since fallen out of favor because of KRG objections.

"It is unfortunate, really, the behavior that's taking place by the Kurdistan region," Abdul-Hadi al-Hasani, deputy head of Parliament's Energy Committee, told UPI after the KRG last week announced two more oil deals. "They're supposed to wait until the oil and gas law is to be passed by the Parliament."

"We anticipate more partnerships as companies who have been studying the area for a while make their move," said Bob Fryklund, vice president of industry relations for the global energy consultants IHS.

"The independents are focused on KRG, while the majors are focused on the existing major fields in the south and central Iraq," Fryklund said. "Thus, continued signature of new blocks in the north by companies like Perenco and Heritage is not unexpected.

"The independents are looking for a foothold in high-potential exploration plays, and most know that in plays which are immature the first companies usually get the better position. … Big fields are found by the first in," Fryklund said.

The deals are with Heritage Energy Middle East Ltd., a subsidiary of the Canadian firm Heritage Oil and Gas, and Perenco Kurdistan Ltd., a subsidiary of Perenco S.A. of France. Two more contracts were approved by the regional oil council and will be announced soon, Hawrami said.

"All sorts of companies have been in contact and registered with us since the approval of the regional law," he said. "The list includes American companies and many other nationalities."

"We are working on new contracts and we have no shortage of takers, but we have to go through the process in each case to get the best terms for Iraq under these contracts," he said.

When asked whether the future deals will be decided by negotiations with firms or by a bidding process, Hawrami said, "Many parties are interested to make a deal on each block, so we talk to them individually to see how they may fit with our policy and how to maximize our returns from one party versus another."

So far, Hawrami said, the production-sharing contracts give the contractors "15 percent of the profits after the approved cost recoveries."

The deals include a signing bonus, which Hawrami wouldn't detail, other than "not very significant, but designed to get ongoing commitments of the contractors."