In This Report:
Companies Mentioned: - Afren, Asiacell, BP, CNPC, DNO, Exxon, Genel, Gulf Keystone, Korek, Lukoil, Shell, WesternZagros, Zain
Action Calls - GoI threatens KRG with its big gun - revenues
If the GoI goes there, it could accelerate KRG autonomy Headlines - Turkish troops kill 18 PKK rebels in major offensive
Common enemy in PKK binds Erbil and Ankara more strongly together Calendar - 9 October - Appeal deadline for Hashemi sentence
Watch the Iraqi courts, as well as the street, between now and 9 October, the 30 day deadline for Tariq al-Hashemi, Iraq's fugitive Sunni former Vice President, to appeal his death sentence. The verdict, handed down Sunday, was seen by many as inspiring a widespread explosion of violence across the country the next day, as many Sunni Arabs see the conviction as a politically inspired move, perpetrated by the Maliki government. We would watch a number of things as indicators of Maliki's strength and the mood among the Sunni populus. First, among the Sunni leadership, we will watch to see what Hashemi's counsel does next, and whether the uproar is fanned by Sunni politicians seeking political leverage. Second, it will be interesting to see what reaction comes out of the Maliki camp - a strong crackdown, appeasement of Sunni consituencies, or a combination of both. And most importantly for the stability of Iraq, we will watch to see if the Sunni discontent blows over quickly, or continues apace, as the issue ignites the ongoing Sunni grievances. Action Calls
>> GoI threatens KRG with its big gun - revenues. The Iraqi government has threatened to cut Kurdistan Regional Government’s 17 percent share of the national budget by $3 billion if it fails to send a delegation to Baghdad in a week to discuss the issue. The Iraqi government says the $3 billion is the equivalent of losses incurred by the KRG’s halting of oil exports over the past few months due to disputes with Baghdad over oil deals. Ali al-Mussawi, an adviser to the Iraqi Prime Minister Nouri al-Maliki has said a government committee formed by Baghdad has found the losses caused by KRG’s failure to export the amount of oil that was agreed upon by the two governments in order for the region to receive 17 percent of the general budget. Al-Mussawi has said that a Cabinet meeting on Tuesday a KRG delegation was given one week to discuss the issue with the Baghdad government or the central government will go ahead with the budget cut plans. [Source: Aknews] DUNIA'S TAKE: No reason to start believing them now. As we have repeatedly said, we focus on actions rather than words in the ongoing standoff between Baghdad and Erbil. The Government of Iraq (GoI) has made many empty unfulfilled threats before in this continuing saga. Of course, the GoI's rhetoric has finally caught up with reality this time. Baghdad is finally reaching for the only truly viable leverage that they have over the Kurdistan Regional Government (KRG) - the power of the purse. On the other hand, should they choose to go down this path, the GoI will lose the only thing continuing to tie the KRG to them. While independence for Kurdistan is highly unlikely, given the fact that the KRG's biggest sponsor, Turkey, wants no such thing, the KRG could become much more of a de facto autonomous state than it already is. So, mainly because it opens the possibility of action, finally putting the revenue threat formally and publicly on the table is important. Watch this week. Interestingly, the GoI, giving the KRG "one week" from last Tuesday to come to Baghdad to discuss the issue, falls this week, as does the KRG's own deadline of 15 September when they will again shut off exports of Kurdish oil via the Iraq-Turkey pipeline. Further, the United States State Department revealed last week that it has been engaged in shuttle diplomacy between Erbil, Baghdad, and Ankara in an effort to help resolve the conflict, and a parliamentary committee to resolve the differences over the oil and gas law of 2007 has been formed. So there are two ways to interpret this confluence of events. The hopeful one is that there is a breakthrough in the offing, that all these signs mean that the wheels are in motion to bring this to some sort of resolution in the coming week. But we would posit a second interpretation: that the wheels never really stopped, as we believe talks had to have been continuing on and off behind the scenes throughout this years-long crisis. However, the deadlines this week are more important as another indicator than because they will force any resolution. If the parties find a reason to postpone dramatic action by the end of the week, then that will signal a (small) hope of incremental progress. But if they do indeed pull the trigger - the Kurds shutting off exports or the GoI declaring the Kurds' $3 billion to be in forfeit, then we will have another step up in conflict. Our view. We expect that the parties are not likely to move towards anything that could be called a major breakthrough yet. They have not yet exhausted their capacity for unilateral moves, and events have not yet forced them to come to the table. The KRG is still entitled to their revenue tranche (for the moment). Baghdad still doesn't see contraband Kurdish oil exports in volume. However, we are creeping slowly towards that day. Even though Baghdad has now threatened to pull the budget card, we think it could take weeks passing without a Kurdish concession, or possibly the initiation of next year's budgetary discussions, before the threat is close to being executed. And as for the Kurds, if anything the threat has likely only accelerated plans. The Kurds know that when the axe eventually falls on their budgetary allocation, they need to be ready with alternative funding to keep the lights on. As for Kurdistan oil companies, they will be fine as a group. Some small companies may be forced to sell out when they face dwindling bank accounts, but those with substantial oil flows should survive - DNO and Genel today, and next year Gulf Keystone. Afren and WesternZagros should also be fine because of alternative funding from other properties for the former and deep-pocketed investors for the latter. The oil majors of course can wait indefinitely. It will be the KRG that will need alternative funding - and that, Baghdad may already surmise, will likely force them to accelerate oil exports via truck among other things, while they wait for their pipeline to be completed at the end of 2013. In effect, Baghdad could end up driving them in the exact direction from which the "big gun" was meant to deter them.
* * * * * >> Shell may bid in Iraq's next oil auction. Royal Dutch Shell PLC is considering taking part in Iraq's next auction of oil exploration rights, provided the opportunities on offer are sufficiently lucrative. Iraq has said it would provide better incentives to foreign oil and gas firms than it did in a previous tender in May. Not one Western major made a bid in that round, with only a handful of the 12 unexplored plots up for grabs awarded, mostly to smaller independent companies. "The license terms have to be attractive and they have to be competitive," said Mark Carne, Shell's executive vice president for the Middle East and North Africa. "We have to decide where to best use our human resources and our financial capital on a global basis, so we will bid for licenses in those places that are competitive and, if they're not competitive, then we will use our resources elsewhere." [Source: Wall Street Journal] DUNIA'S TAKE: "Good" players getting rewarded. As we have mentioned from time to time, one of the ironies of Exxon's move into the KRG was that some of the "good" oil companies who played by the GoI's rules would benefit from Exxon's risk taking. And so, here is the poster child for Maliki and Shahristani's preferred way of doing business with the IOC's, Shell, benefitting. Indeed, Shell has extensive operations in the south from Majnoon to the massive $17 billion gas capture contract, and so has a lot more than some others to keep it from bolting to Kurdistan. What will be interesting is to see just how much Shell and others benefit, because so many majors pointedly did not take part in the fourth oil round. Indeed, just as pointedly, Shell is reminding the GoI in the article of the need for the GoI to be competitive this time. Further, to keep from further embarassing itself in the next auction, the GoI will want a strong showing from the oil majors it retains good relationships with, such as BP, CNPC, and Lukoil. So the pressure will be on to offer terms lucrative enough to keep them in the boat.
* * * * * >> Iraq mobile phone operators appeal fines. Iraq's three main mobile phone companies have appealed against a communications regulator decision to fine them for failing to list on the local stock exchange, the phone operators and a senior official at the watchdog said on Wednesday. Iraq's Communications and Media Commission (CMC) decided to fine Zain, Asiacell and Korek for missing an August 2011 deadline to list on the local bourse as a condition of their $1.25 billion operating licenses. The CMC on July 5 fined the Iraq unit of Kuwait telecoms firm Zain, Iraq's No.1 mobile operator, $12,864 a day day starting from Sept. 1, 2011. This followed fines in June for Asiacell, majority-owned by Qatar Telecom, of $8,500 a day and for Korek, in which France Telecom and Kuwait's Agility have stakes, of $2,500 a day. Both penalties were also backdated. Ahmed Alomary, a CMC commissioner, said Asiacell and Korek had both paid the fine but also appealed the decision to an appeal body affiliated with the Iraqi Judiciary council. [Source: Reuters] DUNIA'S TAKE: One sign of how far Iraq has to go. Iraq's burdensome regulatory regime remains an issue for any business operating there. The Iraq Telecommunications industry is the second fastest growing in Iraq after the oil industry, and likewise, the state has tried to squeeze it for economic benefits as well. Here the issue is not the fines themselves, which are relatively minor in the grand scheme of things, but the requirement that the three mobile operators list on the Iraqi Stock Exchange, which is not only immature from a regulatory and governance standpoint, but has a total market capitalization that would be dwarfed by any reasonable valuation of the three companies. We estimate that the three could be worth a combined $11.1 billion, making their combined 25% required floatation, at $2.8 billion, close to 70% of the ISX's entire market cap! Clearly, even if it weren't for the regulatory issues, the ISX would not be ready to handle such a listing. (Of course, given the liquidity and governance risks, the result would more likely be a heavily discounted listing price.) Our expectation is that the three firms will continue to drag their feet with their IPOs, even though Asiacell's has been approved, as they have much more to lose in equity control at fire-sale prices, than the small daily fine. The hope for resolution here would be that eventually the listing issues will be resolved over time, so that at some point, the value of finally listing will exceed the pain. But that day could be a long time coming.
Headlines >> Turkish troops kill 18 PKK rebels in major offensive. Turkish soldiers have killed 18 Kurdish rebels in two days in an offensive involving over 2,000 troops, as well as by F-16 fighter jets operating on both sides of the Turkey-Iraq border, security sources said on Friday. The operation against separatist rebels from the Kurdistan Workers' Party (PKK) began on Wednesday night in Sirnak, a southeasterly province bordering Iraq and Syria and the site of frequent clashes between rebels and Turkish troops. The summer has been one of the bloodiest in Turkey since the PKK took up arms against the state in 1984 with the aim of carving out a Kurdish state. [Source: Reuters] Our take: Turkey has accused Assad of arming the PKK, leading to this flareup on the borders. Assad seems to be doing this not only as a warning to Turkey not to support the Syrian rebels, but also as a warning of what a post-Assad Syria could look like - with PKK-aligned Syrian Kurds turning on Turkey. At first blush this might seem to have the potential of creating a wedge between Erbil and Ankara, as the Turks launch their offensive, spilling over the Turkey/Iraq border. On the contrary, we see this as an opportunity for Barzani to further ingratiate himself to Erdogan. Barzani has shown his hand with moves like arming Syrian anti-PKK Kurds in Erbil before sending them back over the border into Syria. Given the conflagration caused by the Syrian conflict, the KRG becomes all the more important as an island of stability and an ally in the region. With no great friends in the area, the two will continue to be bound together, the bond made all the stronger by their shared challenges. >> Kirkuk pushback on command spanning Tamim, Diyala. In a near-unanimous vote, Tamim (Kirkuk) province council last week passed a resolution rejecting an order from the Office of the Commander in Chief of the Armed Forces, Prime Minister Nouri al-Maliki to establish a new Dijla (Tigris) Operations Command structure spanning Tamim and Diyala provinces. The session was held at the behest of the Turkmen bloc, who suggested that in place of the new Maliki-linked forces, that a “Kirkuk Operations Command” be formed, staffed exclusively by “qualified officers from the province of all nationalities”. Interestingly, the Arab Bloc boycotted the meeting. [Source: Aknews] Our take: We see this as the Kurds and Turkomen seeking to maximize local control of security in Kirkuk. As minorities in an ethnically split, Arab-dominated country, it helps to have local mixed-ethnic security, rather than Arab-dominated security emanating from Baghdad. So whereas a command structure spanning two provinces would consolidate power at the Ministry of Defense level, in Maliki's hands, the locals prefer that peace be kept by and among themselves. Unfortunately for the local Kurds and Turkomen, we have heard that the command structure is nonetheless being put in place over their objections. However, the pushback registered in the Tamim provincial council clearly shows to us that there remain vocal local objections to Maliki's dominance in Kirkuk, and so the fate of the dispute is still not settled. >> Bizarre Arrest at Diyala Province Council. Anti-terrorism forces stormed the Diyala Provincial Council building on September 4, arresting and spiriting away a gubernatorial candidate, local officials reported. The council—which had convened to elect a replacement for recently deceased Governor Hisham al-Hayali— had barely begun its proceedings when a SWAT team raided the complex, arresting Ismail Ibrahim, a candidate to replace Hayali. Nisreen Bahjat, a Kurdish MP, said that Ibrahim, a member of the Iraqiya list was officially arrested under Article 4 Terrorism violations despite the pleas of Diyala Provincial Council President Taleb Mohammad. Bizzarely, just hours later, Ibrahim was released by the authorities, and returned to the provincial council building. In balloting, Ibrahim lost out to Dr. Omar Aziz Hussein al-Hamiri, a member of Iraqiya’s Tawafuq party, who received 19 of 25 votes. [Source: Aknews] Our take: Another lesson in how things work in Maliki's Iraq. Our guess is that this was a simple straightforward message to the council - that Maliki was not in favor of Ibrahim as governor, and that electing him could cause bad things to happen in Diyala. Detain Ibrahim for a few hours, message received, and Ibrahim fails to win the governorship. Of course, there is no way to prove or disprove our assertion, but Maliki's use of anti-terror statutes to harrass his rivals was just demonstrated (e.g., the death sentence issued today in the trial-in-absentia of former Iraq VP and Iraqiya rival Tariq al-Hashimi). The lesson being it is dangerous to oppose Maliki.
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