Iraqi Dinar Exchange Rate - Iraq: The Energy Battle Heats Up

Now that US forces are leaving Iraq, Its Time for some of that Iraqi Tea, that bubbling crude to start paying off?

Iraq: The Energy Battle Heats Up

Stratfor Today » June 26, 2009 1124 GMT
ALI YUSSEF/

Summary:

Iraq's oil minister is being forced to defend himself against various charges stemming from the country's stagnant oil production. The charges come during a period of heightening tensions over oil among Iraq's feuding Shiite, Sunni and Kurdish factions. Ultimately, it will probably be up to an outside power to manage this political maelstrom - and of these powers, Turkey is the one to watch.


Analysis:

Iraq's OilIraqi Oil Minister Hussein Shahristani returned to the Iraqi parliament on June 25 to defend himself against a multitude of complaints from parliamentarians involving such issues as Iraq's declining oil output, its languishing hydrocarbons law and the corruption and mismanagement of the Iraqi oil industry's profits.

Due to a steep drop in once record-high crude prices over the past year, and aggravated by budget constraints and political infighting, Iraq's current oil output has stagnated at around 2.4 million barrels per day (bpd) - well below the country's enormous oil production potential. Since oil revenues account for 95 percent of the state's income, Shahristani has become the natural scapegoat for Iraq's current political and economic woes.

And with a major oil auction on the horizon, the country's first since the fall of Saddam Hussein, the Iraqi oil brawl is bound to escalate in the coming weeks. Given what he is up against, there is no guarantee that Shahristani will make it out of these June parliamentary grill sessions in one piece, but he has given no indication that he is prepared to bow out of this fight.Shahristani's plan to breathe some life back into Iraq's oil industry involves circumventing parliamentary approval to allow 32 of the world's major energy companies on June 29-30 to bid on 20-year-long service contracts to develop Iraq's six largest oil producing fields and two untapped natural gas fields. These energy companies, which include ExxonMobil, Chevron, Royal Dutch/Shell, ConocoPhillips, Turkish Petroleum Corp., BP, France's Total, Italy's Eni, Russia's Gazprom Neft and LUKoil, India's Oil and Natural Gas Corp. and China National Petroleum Corp., are taking a risk in investing in a country that has yet to pass an oil law, and whose politics pose a severe threat to business deals. Despite the risks, all these firms have a deep interest in securing these potentially lucrative contracts. But first, the oil minister must answer to the Federation of Oil Unions in the Shiite southern oil hub of Basra.

The southern labor unions produce the bulk of Iraqi crude and are extremely hesitant to allow foreign companies a piece of their contracts. The union federation has strongly criticized the oil minister for offering long-term service contracts, asserting that Iraqi companies and their employees are fully capable of developing the fields themselves. Shahrahstani's opponents in parliament argue that oil exploration - not production of existing fields - is needed to increase production. Shahristani, on the other hand, claims that exploration will take too much time, and there is a stronger need to focus on boosting current production. He argues that the foreign companies are the ones that the have the training, technological expertise and tools to more rapidly and efficiently boost Iraq's oil output by an additional 1.5 million bpd within four to five years.

This debate is not only about southern oil unions worried about being edged out by foreign oil majors. As Shahristani himself has claimed, there is a much wider political agenda involving multiple Iraqi factions currently in play.The Islamic Supreme Council of Iraq (ISCI), currently the largest Shiite party in parliament and the political bloc most closely aligned to Iran, carries a great deal of clout in the Shiite south that could strengthen the anti-Shahristani movement. After having fared poorly against Shiite Iraqi Prime Minister Nouri al-Maliki and his allies in January provincial polls, the ISCI is doing whatever it can to weaken the prime minister's power base so that it can be on a stronger political footing for legislative elections slated for Jan. 30, 2010.The ISCI's strategy involves using its clout in parliament to chip away at al-Maliki's Cabinet appointees.

Already, Iraqi Trade Minister Falah al-Sudani and former Parliament Speaker Mahmoud al-Mashhadani have been forced to resign. Shahristani, who maintains his political independence - and yet is in agreement with al-Maliki's vision of a strong, centralized government - is next on the target list.In addition to natural political competition, the ISCI and al-Maliki are on two different wavelengths in trying to shape the future of Iraq. The ISCI, and the Iranians by extension, envision a federalist model of Iraq that essentially carves out a Shiite autonomous zone in the south (similar to the Kurdish autonomous zone in the north). This would augment Iran's influence in Iraq via their Iraqi Shiite allies.

This vision, however, is directly at odds with that of Iraqi Prime Minister Nouri al-Maliki, smaller regional Shiite parties and the mainstream Sunni parties, who all agree on the need for a strong, centralized government in Iraq that can build up its immunity to foreign penetration. Al-Maliki and Shahristani have been able to draw support from Sunni and Shiite factions for their strong stance against federalism and their iron-fist approach with the Kurds, but they are also up against a number of sore losers from the provincial elections who want to see the prime minister weakened.The ISCI has no shortage of allies to use against al-Maliki. The oil unions in the south do not always get along politically with the ISCI, but they do share a common interest in fighting Shahristani's oil investment program. The ISCI also has a parliamentary alliance with the Sunni Iraqi Islamic Party, which recently succeeded in getting its own man in the parliamentary speaker position to use as a platform to challenge al-Maliki directly.

Finally, the ISCI has found an ally among the Kurds, who have the most to lose in this oil battle against al-Maliki and Shahristani.Iraq's Kurdistan Regional Government (KRG) is locked into conflict with Baghdad over how to manage the country's massive oil wealth. Blessed by its energy resources and cursed by its geography, the Kurdish region is up against not only Iraq's Shiite and Sunni Arab communities, but also by its far more powerful neighbors - Turkey, Iran and Syria, who all share a common interest in extinguishing any notion of Kurdish independence or even expanded autonomy.

The Kurds' best defense against their rivals is to gain as much control as possible over energy resources in the north and to use their region's energy appeal to lure in foreign investors. The more foreigners buy into the Kurdish region, the more protection the Kurds receive against outside penetration. Consequently, from the moment Saddam Hussein fell from power and the Kurds organized politically, the KRG has been extremely active in inviting foreign firms to explore and develop Iraq's northern fields.To sweeten the pot, the Kurds have offered these firms extremely attractive Production-Sharing Agreements (PSAs) that offer firms ownership stakes in the fields. This policy directly opposes Shahristani's push only to allow foreign firms to charge fees, as opposed to offering them ownership rights that would undermine Baghdad's central authority, for raising output.

The Kurds know they have a narrow window of opportunity to secure these energy rights, and will thus fight tooth and nail in parliament to shoot down Shahristani and al-Maliki's policies that aim to assert central authority in Iraq and undermine Kurdish autonomy.But the Kurds can only go so far in their dealings with foreign energy firms, dealings Baghdad terms "illegal" and "unconstitutional." Energy companies have been exploring and developing fields in the north, but any plan to export for real profit must have both Turkey's (as the export link) and Baghdad's approval.

The Kurds, however, are feeling more emboldened after the central government - under heavy pressure to raise Iraq's oil output - reluctantly allowed oil to flow from KRG fields in the north to the Turkish port at Ceyhan for export beginning June 1. The budget pressure on Baghdad allowed the KRG to take another step forward in furthering Kurdish autonomy, but the Kurds also know this export opportunity can just as easily be snatched away by their rivals. For now, the Kurds are trying to exploit the wider criticism against Shahristani, a move that will allow them to continue with business as usual on the energy front while Baghdad remains at odds with itself.From intra-Shiite rivalries to panicky oil unions to Kurdish-Arab political battles, there are a number of reasons for the world's oil supermajors to be nervous about the June 29-30 auction. These political fissures run deep, and will continue to hold the country back from checking off critical items on the parliamentary agenda, such as signing a viable oil law.

With the central government on the defensive, it will most likely be up to an outside power to manage this political maelstrom.Of these powers, the United States is too distracted to enter into Iraqi internal politics to resolve these conflicts, and Iranian influence is largely limited to their Shiite allies. Turkey, however, is the country to watch in Iraq's energy evolution. The Turks are already on an ascendant path in the region, and have been busily shoring up ties with key members of each of Iraq's warring factions, including the Kurds. If Turkey intends to fulfill its long-term objective to control a substantial portion of Iraq's energy industry, it is only a matter of time before Ankara dives deeper into Iraqi politics.