Oilmen have often described Iraqi Kurdistan as the last unexplored on-shore petroleum frontier in the world. Since the region opened to developers after the fall of Saddam Hussein’s regime in 2003, it lived up to expectations of plenty: The U.S. Geological Survey estimated in 2007 that the Kurdistan reserves alone contained a median of over 45 billion barrels of oil and 3-6 trillion cubic meters of natural gas. That year, when discussions over oil and gas laws (as well as revenue sharing) deadlocked in Baghdad, the Kurdistan Regional Government (KRG) introduced its own oil and gas legislation—granting some 40 contracts to companies from over 17 countries. Meanwhile, as the Iraqi federal government sought to centralize the oil sector, Baghdad accused the KRG of corruption—claiming that the KRG’s Production Sharing Contracts (PSCs) with foreign companies are unconstitutional. One of the main issues is that of transparency: Baghdad has criticized that the PSCs were not made public and that they (having unknown content) could not be recognized. 

In recent months, however, the KRG has taken unprecedented steps to increase transparency. In September, the KRG published the majority of the PSCs. On December 5, KRG Prime Minister Barham Salih’s government approved a revised draft oil and gas revenue law. This marks a huge step towards accountability within the semi-autonomous Kurdish government. Though previous efforts have been made to increase transparency, the competing oil and gas bills from the cabinet and parliamentary committees for energy have both fallen short of expressly defining what transparency would entail. The new legislation championed by Salih perhaps sets a new standard. 

The proposed bill will institutionalize the hitherto opaque process of granting contracts and give parliament greater oversight over the hydrocarbon industries. It creates an executive board that will manage and supervise the oil fund. Its members will be chosen by the cabinet (with approval from parliament) and serve for four-year periods. Accounts will be kept in hard or local currency, and only the chair of the board will be able to make payments—and then with the approval of Kurdistan’s parliamentary committee for oil and gas. The bill also ensures that related funds (by-products, signature bonuses, and other allowances given by the central government to the sector or towards environmental protection purposes) will fall under this arrangement. This represents a marked departure from previous measures in which payments were decided ad hoc by the two main political forces: the PUK (Patriotic Union of Kurdistan) and the KDP (Kurdistan Democratic Party). 

Furthermore, proceeds of the oil and gas revenue fund are to be allocated by the parliamentary committee to finance investment in reconstruction and infrastructure projects, and their distribution will be per capita for the Kurdish provinces. While the board can recommend and allocate to different projects, parliamentary approval is required. The main beneficiaries of the fund would be the oil and gas sector, as well as local infrastructure projects. The fund is not allowed to be used for any projects which have not yet been contracted and which do not fall under the KRG’s annual budget—effectively ending the ability of more powerful political parties to withdraw capital for projects they approve unilaterally. Crucially, the bill also proposes an annual independent audit to be conducted by a reputable international accounting firm—making the fund the most transparent in the region.  

Another significant aspect of the legislation is the initiation of a “Next Generation Fund” from oil revenue to act as a sovereign wealth fund. This would siphon money from the national income into major investment ventures as a means of securing future revenue. The account’s creation indicates that the KRG has matured enough to plan ahead in the long-term rather than perpetuate short-term fixes for enduring problems.

Salih’s bill is the newest flashpoint in the tug-of-war between the KRG and the Iraqi federal government. Since 2003, the KRG has made it abundantly clear that it wants to develop its oil sector independently of federal control. Hussein al-Shahristani, the Iraqi deputy prime minister for energy, has become the symbol of opposition to the Kurdish stance. He has vehemently opposed Kurdish attempts to take control of their own, independent oil sector, and his views have put him on a collision course with Ashti Hawrami the KRG’s minister of natural resources. Al-Shahristani has attempted to deter oil companies from Iraqi Kurdistan by threatening them with exclusion from the rest of Iraq, while Hawrami has lured companies to the region by offering a number of lucrative deals—hitherto only seized by the most intrepid investors, but now attractive to many major oil companies. 

Most significantly, ExxonMobil signed a contract with the KRG this past October authorizing the firm to develop oil and gas in six blocks in the northern region—ruffling many feathers in Baghdad. Though condemned by the Iraqi federal government, it could prove the catalyst in the impasse. 

The Exxon deal has been a significant PR coup for the KRG and has made Baghdad rethink its policy of centralized oil development. Although during his recent visit to the US, Iraqi Prime Minister Nouri al-Maliki stated on December 15 that Exxon had promised to rethink the Kurdistan deal, already the federal position has shifted.  Baghdad claimed to oppose the deal on principle (i.e., not allowing international oil companies operating in Kurdistan to operate in greater Iraq) but now appears to only be concerned regarding three of the six blocks awarded for exploration: Barda Rash, al-Qush and Qara Hanjer. These blocks lie in the so-called “disputed territories” (as defined in Article 140 of the Iraqi constitution), and two of them are formally part of the Nineveh governorate—technically not a part of Iraqi Kurdistan per se, but administered to by the KRG since 2003, and control of which has been a subject of contention for the central Iraqi government.

Even if Exxon balks on the blocks in the disputed territories and only the deals in the other three blocks go through, this would mark a significant change in policy for the Iraqi federal government. It sets a precedent for the entry of the other Supermajors. In an independent regional oil sector, Salih’s revised revenue bill could mean a new foundation for transparent and equitable distribution of Iraqi Kurdistan’s vast oil wealth.

Shwan Zulal is a London-based consultant/analyst with a legal background. He writes regularly about politics, security risks and legal issues in Iraq and the Middle East region, specializing in work on the oil and gas sectors, contract procurement, economic development, and legislative change in Iraqi Kurdistan. His blog can be found here.