Oil on the flames (cute title, huh?)

Exxon-Mobil is throwing in with the Kurds in the upcoming battle over Iraq.  The battle takes off again.

Whatever the prospects of finding oil in the north of Iraq, observers are surprised that Exxon is prepared to hang its future in Iraq on the outcome of the power struggle between Iraqi Kurdistan and the central government. Control of the right to explore for oil and exploit it is crucial to the authorities on both sides since they have virtually no other source of revenue. 

The Kurds have won a degree of autonomy close to independence since the fall of Saddam, and the ability to sign oil contracts without reference to Baghdad will be another step towards practical independence and the break-up of Iraq. A parallel would be if the Scottish government were to sign exploration contracts in the North Sea without consulting London. 

What makes the Exxon-KRG deal particularly inflammatory, says Mr Shahristani, is that three of the six blocs where Exxon is planning to drill are understood to be "across the blue line – that is outside the border of the KRG". This means they are in the large areas in northern Iraq disputed between Arabs and Kurds since 2003, but where the Kurds have military control. 

The government must now decide if it will make good on its threats and replace Exxon at a mammoth oil field called West Qurna 1 at the other end of the country, north of Basra. Iraqi oil officials hint that Royal Dutch Shell might replace the American company. 

Both sides have much at stake. The Iraqi government is totally reliant on its oil revenues to pay its soldiers, police force and civilian officials. It needs vast sums to rebuild the country after 30 years of war, civil war and sanctions. In 2009, it began to expand its oil industry by signing contracts with firms such as BP, Royal Dutch Shell and Exxon to boost production in under-exploited and poorly maintained fields. 

These companies thereby gained access to some of the largest fields in the world, each with reserves of more than five billion barrels. Vast sums are being invested, mostly around Basra in the south of Iraq. Oil output, now at 2.9 million barrels a day, is due to rise to a production capacity of 12 million b/d by 2017, potentially putting Iraq on a par with Saudi Arabia as an oil exporter.

Since the Kurds have had a bad deal for generations, my sympathies are with the Kurds.  But even if they succeed to get the state they want, the transition is going to be hard.

Exxon's deal with the Kurds inflames Baghdad