Iraq Feature: How Kurdistan and Exxon Mobil Out-Manoeuvred Baghdad Over Oil (Van Heuvelen)

Ben Van Heuvelen writes for Foreign Policy:

In 2006, an Iraqi technocrat named Tariq Shafiq was charged with crafting an oil law. A Berkeley-trained engineer, he began his career in the 1950s, rising through the consortium of foreign firms that comprised the Iraq Petroleum Company -- until the Baathists nationalized the oil sector and sentenced him to death, in 1970, for conspiring with the imperialists. Luckily, Shafiq had been out of Iraq at the time, and he didn't return for decades. But now he would again find himself at the center of controversy. In a country that receives 95 percent of its revenue from oil, his oil law would not only shape the management and regulation of the national economy but also determine the extent to which power would be centralized in Baghdad. It was the centerpiece of Iraq's own version of the Federalist Debates.

On the federalist side, Iraq's minority Kurds --- who had already gained significant political and military independence in their semi-autonomous northern region --- argued that dispersing state power could prevent the kind of oppression that had been fueled by Saddam Hussein's complete, unwavering control of oil revenues. It would be a safeguard against tyranny. The centralists, on the other hand, argued that a Balkanization of the oil sector would lead to conflict, with local governments fighting over cross-border oil fields; moreover, they said, it would be a bad value for Iraq. If different parts of the country were bidding to partner with the same top companies, they would inevitably undercut one another. Shafiq had suffered at the hands of oppressors in Baghdad, but he still took the centralist view.

"Without a central unified policy there will be disharmony and competition between [Baghdad] and among the various Regions and Governorates," he wrote in 2006. "This would lead to an unhealthy oil industry ... contributing to the fragmentation of the country." But his prescient words were lost in Iraq's fractured politics.

Six years later, Shafiq's draft is languishing in a Parliament committee, and the debates over federalism still rage. On the ground, however, where both sides have signed billions of dollars' worth of contracts, the battle has been lopsided: The federalists in Kurdistan are winning, for the simple reason that their best ally is more powerful than any of Baghdad's. That ally is ExxonMobil.

It was not always so. For several years, Iraq's central government was in control and Exxon was jockeying to be one of its biggest partners. In January 2010, the company agreed to invest billions of dollars in a super-giant oil field in Basra called West Qurna 1, aiming to increase output there to more than 2.8 million barrels per day by 2017 -- a level roughly equal to Exxon's current total worldwide production. "Our long-term strategic objective in Iraq is to be there for many, many years, and to be a valued partner of the government, and to be a part of the success of their society," an Exxon executive told me in 2009.

Now everything has changed.

On Oct. 18, 2011, Exxon signed six exploration contracts in Kurdistan. The move represented a seismic shift in Iraq's balance of power: Exxon was by far the largest company to align with the Kurds, and it openly betrayed Baghdad to do so. Iraq's top oil official, Deputy Prime Minister for Energy Hussain al-Shahristani, had warned Exxon that signing with the Kurds would be illegal, and constituted a breach of the West Qurna 1 contract. But Exxon's lawyers disagreed. Baghdad was on weak legal footing, since --- in the absence of a modern oil law to bolster its position --- the Oil Ministry's claims, of primary authority over contracting, rested on subjective interpretations of Iraqi law.

In an uncomfortable meeting with Shahristani, a senior Exxon executive explained his company's intentions in Kurdistan. The Iraqi government had made its objections known.

"Thanks to you ... Iraq's position was very clear all along," the executive said, according to Shahristani. But they would sign with Kurdistan anyway.

Several people familiar with the company's internal decision-making have told me there were a few simple reasons that Exxon was willing to risk its relationship with Baghdad. First, Kurdistan's geology looked very promising. Second, the Kurdish government's contract terms offered much greater profit potential. And third, Exxon could probably get away with it. A year later, Baghdad still has not backed up its threats to kick the company out of Basra.

Even so, Exxon is preparing to break ties with Baghdad altogether. 

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