Global Policy Forum

By Sumedha Senanayake

On October 22, the Kurdish regional government published the final draft of a petroleum law. The draft document is to be debated within the regional assembly and, if passed, it would place the region's government in opposition to the central government in Baghdad, which has indicated that it will publish its own completed hydrocarbon law sometime in December or early 2007.

If parallel legal frameworks are established in the Kurdish autonomous region and Baghdad, foreign firms wanting to do business may have to sign separate contracts and adhere to the laws of two governments. It therefore remains unclear whether a compromise can be reached between the Kurds and the Iraqi central government, or whether the division of oil revenues will prove to be a source of further instability in a country already reeling from insurgency and sectarian strife.

While violence engulfs much of Iraq and the Baghdad central government continues negotiations over a petroleum law, the Kurds have moved ahead and are poised to pass their own oil law. In addition, they have already signed a handful of contracts with foreign firms to explore oil fields in the north.

Issam al-Chalabi, a former Iraqi oil minister, said the right to control local oil reserves constitutes a major complication between the Kurds and the central government, AP reported on October 25. "The Kurds have submitted a draft petroleum act to be adopted that gives them the right to control oil, regardless of the government in Baghdad. The Oil Ministry has submitted another completely different draft that gives the authority to the ministry, not regions. It's the main issue of the conflict: oil and Kurds," he said.

The establishment of a petroleum law in the Kurdish region not only underscores the decentralization of oil resources, but it constitutes another step in the Kurds' move away from the Baghdad government.

In another area of contention, the Kurdish administration has moved ahead and signed exploration contracts with several foreign oil firms, including the Norwegian oil company DNO and the Turkish firms PetOil and Genel Enerji. The contracts place the local administration at odds with Baghdad by stressing Irbil's autonomy at the expense of the central government.

The issue came to a head when Iraqi Oil Minister Husayn al-Shahristani told the state-owned daily "Al-Sabah" on September 24 that contracts signed with foreign firms to develop oil fields in the north without the approval of the central government are subject to review by the ministry. Officials in the Oil Ministry also said that foreign firms currently working in the Kurdish region will be banned in the future from signing contracts to develop oil fields in southern Iraq.

In response, Kurdish Prime Minster Nechirvan Barzani said the move would be unconstitutional and he issued a statement suggesting that his government may secede if the contracts are rejected. "If Baghdad ministers refuse to abide by that constitution, the people of Kurdistan reserve the right to reconsider our choice," he said.

The key issue concerns the control and management of so-called "future oil fields." Although Article 108 of the Iraqi Constitution says, "oil and gas are the ownership of all the people of Iraq" and are to be managed by the federal government in conjunction with regional governorates, only "current" oil fields, which are controlled by the central government, are mentioned, not any discovered in the future.

Kurdish Natural Resources Minister Ashti Hawrami insisted that future oil fields in the Kurdish region are to be managed by Irbil and won't be shared with Baghdad, "USA Today" reported on November 6. "In management of new fields, we are adamant that we will not share with the federal government. Planning, coordination -- no problem. But who has the right to write contracts? We can consult with the center, but the ultimate authority lies with the Kurds," he said.

The issue of future oil fields will become all the more significant when the fate of Kirkuk is decided by a referendum in 2007. Recent demographic shifts as part of the Kurds' attempts to reverse the Hussein regime's "Arabization" campaign suggest that Kirkuk may very well have a Kurdish majority, thereby placing the Kurdish government in a good position to annex Kirkuk and take control of its massive oil fields.

The fact that the Kurds have already drafted their own petroleum law even before the creation of a federal law is itself indicative of the strength of Irbil's position, in that the Kurds are a major component of the Shi'ite-led coalition government and without their support the government would probably fall.

Conversely, it may be in the Kurdish administration's interest to back down and show willingness to compromise with Baghdad. The Kurdish region is land-locked and export outlets are crucial. Experts contend that the existing Ceyhan pipeline from northern Iraq to Turkey does not have the capacity to carry additional crude exports. Furthermore, if Kirkuk is annexed by the Kurds, it may complicate matters with Turkey, which is already concerned that the Iraqi Kurds' ambitions of autonomy may incite their own sizable Kurdish population to follow in their footsteps. Even if the dispute is resolved, the oil industry itself is in shambles because of widespread corruption and insurgent attacks.

The Special Inspector General for Iraq Reconstruction, the U.S. agency responsible for overseeing Iraq's reconstruction, issued a report on July 30 describing smuggling as "pervasive," "virtually pandemic," and a threat to Iraq's ability to maintain, let alone increase oil production.

Even though Iraq is rich in crude oil and natural gas, it must import much of its refined petroleum. Years of UN sanctions left much of Iraq's oil infrastructure in a dilapidated condition, crippling its refining capacity.

Finally, caught in the middle of the dispute are the Sunni Arabs, who fear that Iraq is moving toward partition into three sections: a Kurdish north and Shi'ite south, both rich in oil, while the Sunnis are left with a resource-poor center. The Kurds' demands and aggressive posturing might aggravate the Sunnis' feelings of marginalization and provide more fuel for radicals among them.