INTELBRIEF

October 3, 2011

TSG Atmospheric: Iraq: The Players in the Oil Game

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Overview

The last few days have seen the continuation of high-intensity policy discussions, all of which are focused upon deep disagreements between Irbil and Baghdad on the interconnected strands of oil  revenue and politics.

The effective management of the oil and gas sector is an issue of Iraqi national survival and development, as well as of global economic interest; politics is an issue for the political survival of Prime Minister (PM) al-Maliki who continues to be beset by problems, which are growing.

These include a growing dissatisfaction in the staggering levels of corruption in the Iraqi bureaucracy; the failure of the government to provide a stable electricity supply; a lack of acceptable accommodation at sensible cost, unemployment, a fractured education system, and an overworked health service.  The list is, regrettably, not exhaustive.

And, as we noted before, the tinge of corruption permeates all the above.

Meanwhile, as we have been reporting in our earlier analyses, the disagreement between Irbil and Baghdad over the draft hydrocarbon law is a strategic risk, as it could force the Iraqi political component parts to disintegrate in centrifugal disagreement.

Nonetheless, over the last week we have seen developments that indicate that the political pressures on PM al-Maliki and his government might be bearing fruit, and this might result in an agreement over the detail of the disputed oil law.  This in turn could signal a rush for oil companies to Kurdistan in particular.

To set this in context: Halliburton, the second-largest oilfield services company, behind Schlumberger Ltd., has seen its share price fall approximately 35% since the beginning of July, as oil prices declined to around $80 per barrel.

If Iraq comes on stream in the north and the south, then the demand for oil services - both completion and production and drilling and evaluation will be huge, and the major U.S. players stand to benefit from the next black gold rush.

And, as this analysis will explain, there are significant players who are already moving in to Kurdistan - over and above the current companies working there - in the hope of making serious profits.

Analysis

The Irbil / Baghdad Dispute

The Speaker of the Iraqi Parliament, Usama al-Nujaifi visited Irbil last week to patch up the rapidly splintering relationship between Baghdad and the Kurdish Government which has resulted from PM al-Maliki failing to honor the 19 Point Plan.

This in essence agreed the Kurds would support al-Maliki if al-Maliki would agree to Kurdish demands over a revised oil law (among other things.).  Following the visit, the Kurds said that the fractious relationship was improving after the discussions between al-Nujaifi and Kurdish President Massud Barzani.

During the meeting the two sides apparently both agreed to find a solution to the political differences, and thus help to unblock the impasse over Article 140 of the Iraqi Constitution that will determine the status of Kirkuk (which sits atop a supergiant oilfield) and the draft hydrocarbon framework law - which will define the trajectory of Iraq's oil and gas business and which impacts on the global energy market in general, and numerous U.S. oil companies in particular.

Further, it was announced on September 29 that the Kurds will send two negotiating delegations to Baghdad to work on two main strands as announced as follows:  "The first axis will be the discussion of the problems among the political parties, in which the implementation of the Irbil Agreement and the political partnership will be discussed, whilst the other axis will be the discussion of the suspended problems between the Central government and the Kurdistan Region."

The earlier Kurdish brinkmanship appears to be slowly paying off.  The Soufan Group has previously analyzed the potential for Irbil to withdraw its political support from PM al-Maliki, which in turn could cause the delicate power sharing arrangement completely to collapse, thus forcing further elections at a time when such an act would be strategic political folly.

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