In a small townhouse in the financial district here, a high-ceilinged room is packed to capacity with oil executives in dark suits. They are men from all over the world, representing some of the largest multinational oil companies, and they sit in rows like schoolchildren, assiduously taking notes. At the front of the room, the minister of natural resources from the Kurdistan Regional Government in northern Iraq is speaking, his English fluent. On the wall behind him is a large map of potential oil fields in the Kurdish region and the beginning of a PowerPoint presentation that reads, "Oil Can Be a Source of Stability."
The government of Iraq may be far from ready to welcome foreign investment into its oil sector right now but, like it or not, the Kurds are moving ahead. While the government in Baghdad is still haggling over its petroleum law and violence wracks much of the country, the Kurds are about to pass their own oil law. They have already signed contracts with a handful of foreign oil companies, and they're aggressively wooing more. The question now is whether these attempts to sign separate contracts, establish a parallel legal regime, and attract much-needed foreign investment will be a source of stability or instability in a country that knows far too much of the latter and very little of the former.
Money. The dispute over oil goes to the heart of the political debate in Iraq. The Kurdish region, currently the only autonomous region in Iraq, has enjoyed self-rule since 1991. Earlier this month, the Shiite-dominated parliament in Baghdad passed a federalism law, allowing other regions to be formed-but not for another year and a half. The law was hotly debated because although the Shiites would like to create their own zone in their oil-rich heartland in the south, the Sunnis fear being left with only an area in resource-poor central Iraq. An agreement empowers the federal government to receive all oil revenues and redistribute them to the regions according to population and "needs."
But the real question is who gets to sign the contracts and manage the fields. And on this point the Kurds won't budge-Iraq's Constitution, they say, gives them control over so-called future fields (existing fields are controlled by the central government, and the fate of those in Kirkuk will be decided by a referendum next year). "In management of new fields, we are adamant that we will not share with federal authorities," says Ashti Hawrami, an English-trained petroleum engineer who is the new minister of natural resources. "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]."
High-level jabs have already been exchanged over the issue. The Iraqi oil minister, Hussain al-Shahristani, has insisted publicly that contracts signed by the Kurdish regional government must be subject to the ministry's review. In response, Kurdish Prime Minister Nechirvan Barzani issued a statement that many interpreted as a threat of secession: "The people of Kurdistan chose to be in a voluntary union with Iraq on the basis of the Constitution. If Baghdad ministers refuse to abide by that Constitution, the people of Kurdistan reserve the right to reconsider our choice."
Iraq has the third-largest proven oil reserves in the world, with an estimated 115 billion barrels, and oil companies have salivated over the country's potential since Saddam Hussein's regime fell in 2003. According to the U.S. Energy Information Administration, 90 percent of Iraq's regions are unexplored, with only about 2,000 wells drilled, compared with about 1 million in Texas alone. But the industry has been in terrible shape for the past 20-some years. International sanctions against Saddam's regime meant that the infrastructure was not upgraded. Oil experts think that if international expertise were brought in and facilities modernized, Iraq could produce up to 4 million barrels per day (which is what it produced in 1990, before the invasion of Kuwait). "Iraq's entry into the market will change the entire global oil game," says Ed Chow, a longtime oil consultant who used to work for Chevron.
And that is what is so tempting for the oil companies. In the London townhouse, after the presentations, the questions come quickly from the audience, as much flattery as inquiry. "Congratulations," one oil company rep tells Hawrami. "When can we come negotiate with you?" His answer: "It's first come, first served. We welcome entrepreneurs, but we want structured companies with experience, who offer something we don't have ourselves."
Reserves. Oil companies say that though there are no producing oil fields in the Kurdish territory, initial exploration has shown geological structures similar to large oil fields in other parts of Iraq. The Kurdish government claims 25 billion barrels of proven reserves in the north, plus 20 billion barrels of potential reserves. A Norwegian company, DNO, began drilling last November and discovered its first well this spring. While there is much more oil in the south, the violence there prevents those reserves from being exploited now.
The Kurds themselves marvel at the change in international reaction to their advances. "Five to six months ago, no one would shake hands with a Kurd," says Hawrami. But in May, the Kurdish government created the Ministry of Natural Resources and appointed the minister. In July, Kurdish legislators passed an investment law, which spells out foreign investors' rights. And last month the Kurds published the final version of their own petroleum law. The regional government intends to move it through the Kurdish parliament this month-despite being asked by the United States to hold off for the sake of national reconciliation. The Kurds have signed four contracts with foreign oil companies, and the government's website says it "expects a large-scale licensing round following the passage of the act."
Downstairs, over bites of salmon and pasta, the oil executives feel one another out warily. One congratulates another on a just signed production-sharing agreement. Another group discusses options for doing seismic testing in Kurdistan (there are only two operators there now, both Chinese). Representatives from two major oil companies chat with a British government official. One was preparing to go to Kurdistan but decided to stay in order to meet with Hawrami. "What stage is the central government at with its petroleum law, anyway?" one asks. "I'm not sure," answers the other. "I guess if there's a conflict, that would make things complicated."
That's the consensus view. The U.S. government has expressed concern about companies investing in Kurdistan before the rest of Iraq is ready. "If the Kurds pass their own law, it definitely complicates things-the opportunity for cooperation probably diminishes," says one senior U.S. official. "But it's a great negotiation tactic-you offer something up that's your ideal and then go from there."
To the Kurds, however, their law is most definitely not just a starting point. In fact, though they are involved in the negotiations over the central hydrocarbons law, Kurdish officials say it will not mean much to the region. "Not for investing in Kurdistan, it doesn't," says Hawrami. "But it does matter for the Kurdish people, because we need our fair share of revenue from the rest of the regions!"
So the companies are going with what is available now. Hawrami comes into the room after having had private discussions with one company and is instantly mobbed. Tibor Szatmari, the CEO of a Hungarian oil company that is the largest in Central Europe, waits to talk with him. When he gets an opening, he thrusts his company's annual report into the minister's hands. He admits that he's desperate to get one of these contracts. "If you wait until the situation is absolutely clear, you'll never go," Szatmari explains. "So you take a calculated risk."
Especially if you don't expect to be entering Baghdad anytime soon. "There's a paralysis in the central government," says one former senior U.S. official who quit to start a company that is now investing in Kurdistan. "It's the cultural baggage of the old regime-no one can make a decision without consulting the top guy."
So what's next? A mess, perhaps, as the Kurds press ahead despite Baghdad's explicit protests. Hawrami finishes his presentation on an upbeat note-and just the hint of a threat. "We will soon be awarding new contracts, perhaps on the strength of the new law," he says. "If you come to Kurdistan, we guarantee that you can go to Basra and work as well. After all, who's going to block you?"