Submitted by Big Dinarhawk-
Kurdistan – the semi-autonomous enclave of northern Iraq – excites international oil companies such as Chevron and Tony Hayward’s Genel Energy, because of its vast untapped resources and the attractive contractual terms the authorities are willing to offer to bring in vital foreign investment.
Mr. Hawrami told, “We actually have a contractual model similar to most of the world, it’s just different from the one used in Iraq.” He also added, “Iraq has a type of oil contract that you only find in Iran and Venezuela, whereas our model is similar to that for the North Sea, for example, based on a shared risk and reward structure. For the newer projects involving exploration and for fields not yet in production, I have no doubt in my mind that the model we have is far better suited to attracting investment.”
Mr. Hawrami met the UK energy minister Matthew Hancock briefly last week and sees Britain as a key partner for Kurdistan’s burgeoning oil industry. However, his close links with the UK, where he worked as an oil engineer in the North Sea in the 1970s, have also come with some controversy. In 2013 he was cited in evidence used in an insider trading case brought against the high profile City banker Ian Hannam in relation to shares Mr. Hawrami bought in Heritage Oil – a client of Mr. Hannam at the time. However, Mr. Hawrami denied wrongdoing and the then Financial Services Authority found he had broken no rules.
In a decade, Kurdistan has gone from being a very high-risk bet to a potential powerhouse with reserves estimated at 45bn barrels and an industry close to producing 1m barrels per day (bpd) of crude in a few years.
Such is the success of Kurdistan’s efforts to lock in foreign investment that Mr. Hawrami expects the federal government in Baghdad to soon follow its example and reform its own oil contract terms.
Mr. Hawrami believes that Iraq’s oil ministry, unlike the KRG, doesn’t currently provide terms that allow international oil companies to significantly benefit from increasing production and efficiency and instead ties operators to fixed fee structures.
“The contracts they (Baghdad) have signed need some amendments in a positive way between the contractors and the government,” says Mr. Hawrami.
Recently, KRG ended a long-running dispute with Baghdad over the sale of crude from its fields and the distribution of federal budget revenues. The legal battle had forced KRG to borrow billions of dollars to cover the shortfall in its domestic budget and delay payments to international oil operators.
But a new deal reached earlier this month will see the KRG send 250,000 bpd to Baghdad to sell, and export a further 300,000 bpd from its northern pipeline, in return for a share of the federal budget. The KRG will also be allowed to sell any additional barrels it pumps via its main export route to Ceyhan in Turkey. According to Mr. Hawrami, the agreement will enable Kurdistan to reach 1m bpd of production by 2016 and raise Iraq’s overall export levels to the second highest in the Organization of the Petroleum Exporting Countries (Opec), behind Saudi Arabia.
“We hope that with the right policies and the right coordination throughout the country we will get Iraq to that number two position in the shortest period of time,” says Mr. Hawrami. “In the medium term, we expect to reach 1m bpd. A small amount of that we will consume but the rest will be available for export from 2015. In the longer term we do have more difficult oil, which is heavier and requires better technology, such as horizontal drilling and different pipeline structures. We’re looking at 2019 when production can be enhanced substantially above the level of 1m barrels.”
Up to this point, most of the investment in Kurdistan has gone into the search for oil, but this is soon expected to change. The agreement with the federal government will also enable Erbil to begin repaying the $7bn (£4.48bn) that it was forced to borrow to cover its own budget shortfalls during its dispute with Baghdad and catch up with payments owed to international oil companies.
“So far we have been just in the exploration phase, so the money going into finding the oil and gas is approaching $20bn now.
“Exploration is just a small part of the expense, when you find oil you have got to develop the wells, facilities and pipelines, so the expenditure increases substantially. We are now at that phase when we need infrastructure and facilities to handle the oil. More money will be needed to realize our full export potential,” says Mr. Hawrami.
Of course, the big uncertainties hanging over the oil industry’s further development in Kurdistan at present are the falling price of crude on world markets and the threat posed by militants from the Islamic State of Iraq and the Levant (Isil, also known as Islamic State and Isis) on the region’s borders. However, Mr. Hawrami believes that the current situation with oil trading at around $60 per barrel is ultimately unsustainable and more about “politics” than the fundamental principles of supply and demand.
“Separating oil from politics is always difficult,” he says. “The oil price is not sustainable because the world has too many expensive projects and once you take them off the design stage it is difficult to come back to those schemes quickly. It will cause permanent damage to delay certain projects, in which case the oil price goes back up. It is not in anybody’s interest to play this game, but part of it is also supply and demand. But it does have some politics attached to it.”
Much of the political intrigue Mr. Hawrami hints at is being played out between Saudi Arabia and its rivals, led by Iran, with Opec the cartel that controls about a third of global oil supply.
“Iraq is very concerned. We all agree that we want to see higher prices. Iraq still needs to rebuild security and its own infrastructure. For the last 20 years, or maybe longer, Iraq has never realized its full potential to sell oil on to international markets because wars, whether internal or external, have always held it back and it’s unfortunate that we might have to cut oil along with other producers who have possibly benefited through these times,” says Mr. Hawrami.
Although, he argues that the oil industry generally needs to be depoliticized, he also suggests that energy can provide positive outcomes, which bring former rivals closer together.
“Politics is always associated with big economic decisions involving natural resources, which is a problem,” he says. “But it also has some positives. For example, if you look at Kurdistan’s relationship with Turkey, five years ago it was a completely different thing. We had hostility – almost threats, both ways. But when our oil was found we ended up talking and the politics was put aside and the economy took over.
“Our biggest partner in Kurdistan is now Turkey, with $10bn of trade, which is not insignificant. Now they are also helping us to fight terrorism as well as exporting our oil. If someone had said this five years ago we would not have believed it. The economic benefits for both countries overcame the prejudices.”
Earlier this year, authorities in Erbil were shaken by the dramatic rise of Isil, which captured Mosul and at one stage looked to be preparing to push deeper into Kurdistan. They have since been checked by Kurdish fighters known as Peshmerga, supported by British and US air strikes.
“We highly appreciate the role of the UK and other allies who came in with logistical support and later with training and military support,” says Mr. Hawrami. “I think we need more, but it has helped us to get organized to deal with the threat of Isis [Isil]. They have been pushed back, but we still have unfinished business with respect to the threat to the rest of Iraq and the region overall. It is in everyone’s interest to beat them, otherwise they are a disease that will affect not just stability in the region but also the free world.”
Mr. Hawrami also warns terrorists fighting under the banner of Isil returning to the UK and Europe.
“They are completely brainwashed and they carry with them danger, whether they come back home to Britain, or stay in the region. They need to be beaten and there needs to be security coordination and cooperation to do this,” he concluded.