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grodton May 07, 2010 8:10am
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More on the agreement
More on the agreement
Oil extraction cost dispute ends between Baghdad and Kurdistanregion
by Fox-Davies Capital
Middle East Online reported theIraqi oil minister Hussein al-Shahristani saying that theBaghdad-Kurdistan oil row had ended with the Iraqi government agreeingto be responsible for paying extraction expenses in Kurdistan. Allrevenues would be handed over to SOMO, the Iraq's State Oil MarketingOrganisation which deals with sales of crude and other petroleum-basedproducts, and the Iraqi government will be responsible for paying theextraction expenses in Kurdistan.
Iraqi Kurdistan halted oilexports in October last year due to a payment dispute with Baghdad. Thetwo sides previously clashed over how oil revenues should be distributedand Kurdish authorities had said they would not resume crude exportsuntil Baghdad paid the foreign energy companies which are pumping theoil. The central government had repeatedly said it was opposed to theKurds signing their own contracts, a position which Kurdish officialsdisregarded by making dozens of agreements with foreign firms
Alllicences in Kurdistan are Production Sharing Contracts (PSCs) underwhich production is first used, up to a cap, to recover costs contractedby the operator in exploring and developing the field, this is called“cost oil”. Subsequently any production or “profit oil” left is splitbetween the contractor and the state. The dispute between the KRG andBagdad is essentially about the details of the application of the oilsharing law as to whether cost and profit oil should be paid by Iraq outof gross revenues, i.e. revenue from all of Iraqi production, or shouldbe paid by the regions out of net revenues, i.e. once revenues havebeen apportioned to the regions according to their population. Kurdistanargues the former and Bagdad the latter, despite our understanding thatthe interpretation of the law by the KRG seem to be the closest to theactual law.
Kurdistan having low production and 14% of thepopulation, it is better for them to receive 14% of the net revenues,after cost and profit oil have been paid to contractors our of grossrevenues, as it equates to a subsidy from the rest of Iraq towardsexploration and development costs incurred in Kurdistan. Conversely assoon as the % of production from Kurdistan would be above their share ofthe population the opposite would be true, but may be by then mostcosts would have been recovered anyway.
This latest developmentvindicates the position of the KRG for cost oil but does not mentionprofit oil. We assume that this positive step announced today will befollowed by a full resolution very soon.
For the operators, aslong as the contracts are not renegotiated downward, it does not make adifference who pays them as long as they get paid for the oil produced.The latest news goes a long way towards a full resolution althoughunderstandably the market will remain somewhat cautious as long as someuncertainty remains. Obviously this is positive for all operators inKurdistan with existing discoveries, such as Gulf Keystone Petroleum(AIM: GKP), Heritage Oil (AIM) and DNO International.