01/08/2011 07:25 BST | Updated 28/09/2011 06:12 BST

Kurdistan Region defy Baghdad & grants new oil contracts

By: Shwan Zulal

The Rush for Kurdish Oil and Gas has stepped up a notch this week. More options exercised and two other hydrocarbon deal done plus renewed interests from Vallares. The Canadian ShaMaran Petroleum and the Australia Oil Search, have announced that they have exercised an option from a 2009 seismic deal and entered into a PSC (production Sharing Contract) for the Taza block. Meanwhile a UK-based Afren announced that it has bought into two PSCs in the Kurdistan Region for $588 mln, which amounts to a 60 per cent stake in Barda Rash. They acquired the interest from Komet Group and a further 20 percent interest in Ain Sifni, which was granted by the KRG (Kurdistan Regional Government).

Hess Corporation from the US and its Irish partner Petroceltic announced the finalization of two PSCs. The deal stipulates that Hess will be the operator and this will give it a 64 per cent participating interest and 80 percent paying interest in the blocks, according to the company. The block is located northwest of Erbil the capital of the Kurdistan Region in Iraq. Furthermore, the Spanish oil and gas group Repsol has signed agreements with the KRG for the exploration of two blocks in the west of Kurdistan region which has been reported to have been under negotiation for the past 12 month, reported Reuters.

In yet another development, it has emerged that Tony Hayward's investments vehicle, Vallares, have been looking at DANA gas, FT reported. Dana Gas is a private sector natural gas company and has a market cap of $1bn. DANA produces 65,000 barrels of oil equivalent per day of oil, gas and natural gas liquids. It has operations in the UAE, Egypt and the Kurdistan Region. Vallares has other potential targets insight, which includes Turkish Genel Energy, an independent exploration and production company operating in Kurdistan Region and currently one of the biggest oil producers in the Region.

While the deal making continues in Kurdistan Region and investors appear to have overcome their scepticism about the political situation, the Iraqi central government rhetoric has not abated.

KRG has managed to come to an ad hoc agreement with Baghdad in January this year, which included 19 points and lead to resumption of oil export and release of payment withheld by Baghdad. Observing the current development, it appears that neither side have kept to the January agreement. KRG has signed new oil contracts and Baghdad has not implemented its side of the bargain.

The challenge for the KRG and the list of demands put to the Iraqi PM, Nuri Al-Maliki is and has been that the demands involve complicated legislation on issues of Energy, Presidency Council and other intricate legislations, which is likely to ferment in parliament for a long time before reaching the committees and become law.

The consensuses in Iraq has always been that no matter what Maliki has promised or what the KRG undertook, it is likely the overall structure of Iraqi hydrocarbon industry and future exports will be decided in the backrooms among the political elite rather than parliament. Nevertheless, it is becoming apparent that the January agreement is a short-term rapprochement, which enables oil to flow from Kurdistan to boost Iraqi oil exports, and by no means is a concrete deal.

Under the terms of the export deal, part of the proceeds from the KRG's oil sales will pay for the costs of oil development incurred during the life of the contracts. While the rest of the proceeds go into the central government's budget, of which 17 per cent given back to the KRG as its share of the overall Iraqi budget.

The Iraqi Government and the Energy committee are in loggerhead over the future of Iraq's Oil and Gas. The government want to go ahead with new licensing round with or without the new Hydrocarbon law been enacted, while the committee want to stop granting any new licences in January next year unless the law is passed.

Meanwhile Kurdistan Region has resumed exporting oil since January agreement. However, Kurdish ministers are becoming more frustrated with lack political progress in Baghdad. It appears that KRG has lost patience because of the continuation of political squabbling in Baghdad and gone ahead with granting new PSCs this week.

It is not clear if there are any more deal coming soon, but the newfound confidence among investors and the opening of both the US and UK consulate in the Region has given a boost to investors' appetite for risk-taking in the Region. Moreover, the Hayward and Rothschild's interest in Kurdistan has drawn attention to the Region.

The Iraqi government has yet to comment on the new deals and the deputy PM for Energy, Hussein Shahristani would most likely consider the deals "unconstitutional". The bold move by KRG to defy the central government's authority and going ahead with the granting new PCSs indicate a new found confidence and would defiantly lead to a show down between, the Architect of Kurdish oil deals, Kurdistan Region Natural Resources minister, Ashti Hawrami and Shahristani.

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