Saturday, January 16, 2010

(BN) Kurds' Boom in North Iraq Imperiled by Oil Dispute With Baghdad Government

Bloomberg News, sent from my iPhone.

Kurds' Boom in North Iraq Imperiled by Oil Dispute With Baghdad

Jan. 14 (Bloomberg) -- Outside a newly built go-kart racetrack in Erbil, the capital of Kurdish-controlled northern Iraq, a poster urges would-be drivers to "feed the need for speed."

Kurds are taking that advice to heart, racing ahead of the rest of the country in luring oil investment and rebuilding after decades of war and sanctions. They have hit a speed bump: a four-month standoff with Iraqi Prime Minister Nuri al-Maliki over how to share the country's oil resources and where to draw internal boundaries.

The dispute, which led al-Maliki to refuse payments to oil companies hired by the Kurds, may threaten the boom that has given Erbil new homes, conference centers and underground fiber- optic cables. It may also jeopardize Iraq's stability as it approaches March 7 elections and the pullout of U.S. troops.

The tension "could potentially escalate into live fire" if al-Maliki's government tries to weaken Kurdish self-rule, said David L. Phillips, a senior fellow at the Atlantic Council, a research institute in Washington. "Sectarian violence will never break Iraq but ethnic conflict can."

Since the U.S. ousted dictator Saddam Hussein in 2003, the north has stayed largely free of the violence between Sunni and Shia Muslims in Arab provinces that has killed about 100,000 Iraqis, according to the Web site Iraq Body Count. That stability strengthened the hand of Kurdish leader Massoud Barzani and helped attract investors.

Early Contracts

The Kurdish oil ministry started awarding contracts to companies such as Calgary, Canada-based Addax Petroleum Corp., later acquired by China Petrochemical Corp., and Oslo-based DNO International ASA as early as 2002 -- the year before Hussein's fall.

Now, those companies aren't getting paid because of the dispute with Baghdad.

Al-Maliki, whose central government controls export pipelines and collects all oil revenue, has refused to turn over money pledged by the Kurds to their producers, saying the Kurdish government had no right to sign its own contracts.

The Kurds responded by halting exports in October. DNO and the other producers are supplying the domestic market.

Not repaying the Kurds is "unfair and unreasonable and illogical," and hurts the whole of Iraq by cutting oil sales, said Falah Mustafa Bakir, head of the Kurdish government's foreign affairs department.

Oil Production

Oil output in Kurdistan, which the local authorities say could soar to 450,000 barrels a day by the end of this year, has slumped to 20,000 barrels instead, from a peak of 100,000 last year. Nationwide, Iraq produces about 2.4 million barrels a day.

A dispute over Kurdish borders adds to friction between Barzani and the Baghdad government. Barzani says Kirkuk, a province southeast of Erbil that produces about one-quarter of Iraq's oil, should be part of Kurdistan because it is majority- Kurdish in population.

A referendum on that question has been delayed for two years and, meantime, Barzani and al-Maliki have bolstered their military forces there. Kirkuk was omitted from the 15 oilfields offered by al-Maliki to investors last month.

"If you don't have an agreement between Erbil and Baghdad then all these oil and gas fields can't be developed," said Gareth Stansfield, an analyst at the Chatham House research center in London. "They've got each other by the throat and that's what makes it so dangerous."

'Lots of Industry'

Those dangers don't overshadow the current boom for those in the Kurdish region who recall Hussein's chemical attacks in the late 1980s and the decade of poverty and international sanctions that followed.

"A few years ago there was no money, no electricity, no banks," said Dara Jalil Khayat, head of the Erbil Chamber of Commerce. "Now we have lots of industry and we're working on setting up a stock exchange."

In the 1990s, when most Iraqi Kurds were living on United Nations handouts in an enclave protected by U.K. and U.S. warplanes, Baz Karim turned the offices of his family marble business into distribution posts for food and fuel.

Now Karim's Kar Group has about $1 billion in energy and building contracts, and is mulling a stock market listing -- "maybe in two or three years, maybe in London," Karim said at Kar's office, a villa in Erbil's suburbs. On his desk is a model of its successor, a 13-story skyscraper being built in Erbil.

Kar is extracting oil from the Khurmala field west of Erbil. Last year it opened a refinery that Karim says will produce 75,000 barrels a day by year-end for Erbil's growing fleet of private cars.

Tomato Paste

Investors from outside Iraq are seeking to profit in Kurdistan.

Andrew Eberhart's Marshall Fund, a U.S.-based private equity firm, runs a tomato-paste plant near Erbil that it took over from the UN food program. Eberhart, a former U.S. Army officer and later a banker at New York-based Citigroup Inc., got interested after a Defense Department-sponsored trip to Iraq in 2007. He's now looking at such opportunities as fast-food franchises and the dairy industry.

"The level of institutional interest in the U.S. and the U.K. is picking up," Eberhart said. "There's plenty of really good opportunities there right now."

To contact the reporter on this story: Ben Holland in Istanbul at .

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