Baghdad (Platts)--29May2012/418 am EDT/818 GMT

When the remaining qualified international oil companies bid on the 12 exploration blocks offered by Baghdad in a licensing round May 30 and 31, they will also be acknowledging that only the central government has the final authority to sign oil and gas deals.

New language inserted in both the Final Tender Protocol and the Exploration, Development and Production Service Contract specifically corrects an ambiguity in contract language in the first three bidding rounds, which ExxonMobil capitalized on last October when, after signing a contract to develop the West Qurna 1 oil field in Basra in January 2010, signed six production sharing contracts with the semi-autonomous Kurdistan Regional Government or KRG.

"We don't like there to be any confusion that it is possible to sign with the provinces or region without participation of the federal Ministry of Oil," said one Iraqi official close to oil policy, who confirmed the new language. Said another: "This new contract is much stronger."

One of the provisions listed in the contract that would be cause for termination is "a contractor, a company or their affiliates either violating in any material respect a law including without limitation any directive or instructions of the government [including the Ministry of Oil], or entering into any contract or agreement relating to the exploration, appraisal, development or production of hydrocarbons in the Republic of Iraq that has not been approved by or consented to by the government."

Iraq initially qualified 47 companies to bid in the fourth licensing round, then excluded Exxon. Oil Ministry sources said 39 companies have paid the fees required to participate.

Many company officials have voiced concerns over the contract terms offered for the exploration blocks, which is a service contract with a sole bidding parameter of a remuneration fee per barrel of oil equivalent produced.

It is understood that Norway's Statoil, which is in the process of divesting its minority stake in Lukoil's West Qurna 2 project, is not participating.

OIL SECTOR EVOLVING INTO TWO

The evolution of the contracts is not just part of the evolution of Iraq's post-Saddam Hussein oil sector, which has signed 11 oil and three gas field development deals with foreign oil companies in three successive bid rounds since mid-2009 -- and one unilateral deal in 2008 -- that has pegged Iraqi oil output to rival Saudi Arabia and finally put in play Iraq's undeveloped hundreds of trillions of cubic feet of natural gas.

Since 2003, Iraq's oil sector has essentially become two: The central government's authority over 15 of 18 provinces, which eclipsed decades-old oil production and export levels in both March and April this year; and the Kurdish region of the northern three provinces, which has since signed 48 controversial contracts with dozens of foreign oil companies, including Marathon, Hess and Repsol.

Baghdad has called the deals illegal, while the KRG claims its interpretation of the still-disputed 2005 Constitution allows for a federalism that authorizes local control over oil development as long as the revenue from oil sales is collected and distributed by the central government.

Prime Minister Nouri al-Maliki was given a second term because of Kurdish political backing in late 2010, showing a balance the Iraqi leader has struck to stay in power between policy and pragmatism. Without approving or somehow mainstreaming the KRG deals, however, it has come to a point where oil development has been forced to slow without a clear path to KRG exports, which in turn pay the companies as part of the production sharing agreements.

The KRG is thus attempting to increase its autonomous powers while encouraging other provinces to turn away from Baghdad. A top official in Basra province this week announced he wanted to re-start Basra's oft-failed attempt to form its own region. Missan province has also demanded more autonomy, though has not called for KRG-like status.

Provinces that are majority populated by the minority Sunni Arab Iraqis that once ruled the country, specifically Anbar and Ninewa, which borders the KRG, have also demanded authority to have a bigger role in the oil sector.

At an energy conference last week in Erbil, the capital of the KRG, Minister for Natural Resources Ashti Hawrami announced the KRG would begin bartering crude for products with Turkey, and is embarking on a trio of oil and gas pipeline plans that would exclude Baghdad entirely.

CONVERGENCE ONLY AT POINT OF EXPORT

Iraq's two oil sectors converge only at the point of export, at Feyshkhabour, 4 kilometers (2.5 miles) from the Turkish border, the last Iraq-controlled metering station of the Iraq-Turkish Pipeline.

On April 1, however, the KRG ended a 14-month agreement that saw exports in exchange for payments to the KRG contractors operating its fields. Aside from blacklisting such companies from oil development or crude purchases, Baghdad, unable to physically prevent oil development in the KRG, took aim at the deals it deemed illegitimate by refusing to pay the contractors per the contracts, thus creating uncertainty for the northern deals and economic constraints.

Under the export agreement reached by Iraqi and KRG leaders in January 2011 and updated late last year, KRG fields would export an average 100,000 b/d in 2011 and 175,000 b/d this year. In exchange, half the revenue from the KRG fields would be sent back to the KRG, specifically to pay the costs of the contractors.

Those were different times in Iraq: oil makes up 95% of state revenue, and since the export deal the central government has more than made up for the KRG exports via increased exports from southern Iraq. But the KRG made up for its lost financial leverage by signing the six deals with the world's most profitable oil company, Exxon; not only did its oil industry have major backing, but the deals forced Baghdad and KRG to face their long-standing dispute.

The unaccountability and politicization of Iraq was too much for the January 2011 deal to hold. The KRG, which peaked at 181,000 b/d in exports in July 2011, claimed it received only two payments, totaling just over $500 million, the last received a year ago, and claims it is owed $1.5 billion. The Finance Ministry essentially refused to honor KRG receipts.

On April 2, a day after the KRG cut exports, Iraq's Deputy Prime Minster for Energy Hussain al-Shahristani and Oil Minister Abdul Karim Luaibi held a press conference in Baghdad and claimed the KRG has not allowed auditors to complete their job as per the January 2011 agreement; has been smuggling crude and product into Iran; and owes $5.6 billion in smuggled and local sales.

The KRG denies it has smuggled any crude and claims the heavy fuel oil exported to Iran was legitimate. Meanwhile, it is expanding its refinery sector to process more oil domestically. Crude sales to the local Kurdish market range from $40/b to $65/b, which government and company officials say will allow companies to operate and Erbil and Baghdad to negotiate a little while longer.

--Ben Lando, newsdesk@platts.com

--Edited by Wendy Wells, wendy_wells@platts.com

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