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Page added on January 30, 2008

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Iraq’s oil offensive

The Iraqi government cut off oil exports to South Korean energy firm SK Energy on January 1, and will deny the company oil for all of 2008 unless it backs out of its deal with the Kurdistan Regional Government (KRG) by January 31, Reuters reported today (January 28), citing Iraqi Oil Ministry sources.

All too familiar with playing the role of the sacrificial lamb in Iraq, the Kurds know this is their time to be as aggressive as possible in signing energy contracts to tie the economic interests of foreign firms into the KRG struggle for greater autonomy. In short, these energy deals are an insurance policy for the Kurds.
While the Kurds have been signing energy deals left and right, Baghdad simultaneously has been exploring every avenue to keep Kurdish ambitions in check. Though the KRG can sign energy contracts with foreign firms to develop fields in the North, the central government can easily block the KRG from exporting crude through the 600-mile pipeline that links the giant Kirkuk oil field with the Turkish port of Ceyhan on the Mediterranean. While the Kurds can still make money by supplying the domestic market, the big payoffs lie in the foreign market.

In the short term, however, Baghdad is focused on using scare tactics to convince foreign energy firms that investing in the Kurdish North is not worth the risk. The Iraqi Oil Ministry previously has threatened to exclude any companies from signing future deals with Baghdad who have production-sharing agreements with the KRG. But this threat could only go so far in frightening these energy firms since Baghdad itself is in political quicksand with no agreement on national hydrocarbons legislation in sight. By contrast, the KRG strategically has passed its own oil law at the regional level to get deals moving.

With tensions over the oil-rich city of Kirkuk flaring up, it was only a matter of time before Baghdad upped the stakes in its energy dispute with the KRG, with Seoul as the Iraqi Oil Ministry’s first target. In early November 2007, the KRG signed a deal with a consortium led by state-owned Korea National Oil Corp (KNOC) to explore the Bazian oil field in the Dohuk region of northern Iraq.

According to a senior Iraqi oil official, South Korea’s top refiner SK Energy is for now the only firm that has deals with both the KRG and top Iraqi state oil company SOMO, making SK Energy a prime target for Baghdad to use to frighten energy investors away from Iraqi Kurdistan.

Business Spectator

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