In our Summer 2010 issue of Global Energy Industry Review, we reflected on the vast oil and gas potential of Iraq, home to the world's fourth largest oil reserves. In particular, we considered the obstacles faced by the Kurdistan Regional Government (KRG), in the north of the country, to establish a strong, investor-friendly oil and gas regime in Kurdistan in the face of an ongoing dispute with the Iraqi federal government in Baghdad.  The main point of contention was the production sharing contracts (PSCs) entered into between the KRG and foreign investors, with Baghdad labelling these as "illegal and illegitimate" and imposing a ban on oil exports from the region.  This has caused significant uncertainty over whether the international oil companies would recoup their investments.  The full article, “Exploration and Production of Oil and Gas in Kurdistan,” is available at

Now, almost one year later, we wonder what, if anything, has changed?

The recent signs appear to be positive.  In January 2011, the KRG announced that, following meetings in Baghdad with the Iraqi federal government, oil exports from Kurdistan would resume on February 1, 2011.  Currently an estimated 100,000 barrels of oil per day are being exported from Kurdistan's two producing fields, Tawke and Taq Taq, through the 600-mile long pipeline to the Mediterranean oil terminal at Ceyhan in Turkey.  Significantly the key issue of payments to contractors for this oil, and whether these payments are made from the KRG's share of oil or Baghdad's, remains unresolved, yet clearly the resumption of exports is a step in the right direction.

New entrants have continued to flock to Kurdistan, most recently the independents Marathon Oil and Murphy Oil.  This confirms that, despite the political impasse, the oil-rich region still holds growing appeal for international investors encouraged by the relative stability, on-shore environment and generous PSC terms offered by the KRG.   There are now more than 40 international oil companies in the region and, as hopes increase for a resolution to the dispute over the PSCs, that number is set to grow.

Recent statements from Baghdad about Kurdistan have also been more conciliatory.  Following the January meeting there were reports that the federal government was finally prepared to accept the terms of the PSCs, with Iraq's prime minister Nouri Al-Maliki citing the more challenging drilling conditions in the region, and the exploration-risk associated with the relative infancy of the industry there, as valid reasons for the more generous terms granted to foreign contractors.  The investment community awaits a formal announcement of an agreement between Baghdad and Erbil, particularly on the sensitive issue of reimbursement of contractors' costs, but with oil flowing again and the parties in discussions, the signs are encouraging.

Meanwhile the oil industry in the south of Iraq, for so long crippled by a succession of wars and international sanctions, continues to re-establish itself.  Between June 2009 and February 2010 the Iraqi Oil Ministry tendered for the award of technical service contracts (TSAs) to develop Iraq's existing oil fields, some of which have production histories going back decades in contrast to the relative infancy of the industry in Kurdistan. 

Many potential bidders balked at the tough terms offered by the TSAs, which, unlike the Kurdish PSC model, offer the contractor a cash fee per barrel of oil rather than a percentage share of physical oil. However, the quid pro quo was the huge proven resources available and the corresponding lack of exploration risk for the contractors.  These promised benefits have proven truthful as the Iraq oil ministry recently announced a record increase in output from the fields, including a 10 percent rise in BP's production against its budgeted targets in the Rumaila field.

The newly appointed Iraq oil minister, Abdul Karim Al-Luaibi, has also given fresh impetus to the oil industry in the country.  Reports suggest he has played an important role in the thawing of relations between Baghdad and the KRG. With the existing fields successfully back on stream in the South, Al-Luaibi has announced a further licensing round for new concessions.  Importantly, these are for exploratory fields, and potential bidders will wait keenly on an announcement of the contract terms on offer.  Given the element of exploratory risk, the TSA model would not appear to be appropriate, so something in between the TSA and the more generous PSC model seems likely.

Al-Luaibi has also recognised the importance of upgrading Iraq's infrastructure, in particular its old and eroded pipelines.  Iraq's state-run South Oil Company is currently holding talks with BP, China National Petroleum Corporation and Eni to build three new pipelines worth up to $500 million.  These would link the key Rumaila North, Tuba and Nahr Ben Umar fields with oil deposits in the Faw peninsula, where crude oil is then shipped via the sea terminals in the Gulf.  A new pipeline will also be built to neighbouring Jordan and discussions are ongoing for a similar project into Syria.

So amid all these signs of progress, what are the notes of caution for foreign investors in Iraq?  While the security environment in the country has improved significantly since the US military surge of 2007, the recent attack on the Baiji refinery, which forced Iraq's largest oil refinery to suspend operations, highlights a growing risk of targeted violence against the oil industry.  The lack of transportation facilities and storage capacity for oil remains a problem, and the long-awaited federal oil and gas law is yet to be enacted, prolonging tensions between the differing oil regimes in Kurdistan and the rest of Iraq.

Given the low margins on offer under the TSAs, only the very largest companies have the economies of scale to successfully operate and stay competitive in the fields in southern Iraq. Meanwhile, the smaller independents in Kurdistan continue to suffer from the lack of clarity over payment mechanisms for exports from the region.  Norway's DNO International, operator of the Tawke field in Kurdistan, reputedly is owed more than $400 million in unpaid revenue. Although some companies have the financial means to survive these conditions, others will be in a perilous condition if the dispute is not resolved in the near future.

The form of contracts offered in the new bidding round in the south will be significant. If, as is widely expected, the impasse over the Kurdish PSCs is resolved and a federal oil and gas law is enacted, we can expect a renewed scramble for concessions in Kurdistan, with some of the smaller contractors likely to become targets for the majors who have up until now been barred from entering the region due the their presence in southern Iraq.  International oil companies, large and small, will be monitoring events in Iraq closely over the coming months.