Kurdistan defies Iraqi authorities on oil contracts

Kurdistan has raised the stakes in the fight over the world's third largest oil reserves, insisting it would continue to sign production contracts with foreign oil companies despite the protestations of Iraq's central government, which has deemed the deals illegal.

Dr Ashti Hawrami, natural resources minister of the Kurdistan Regional Government (KRG), said it was "exercising our constitutional rights in the oil and gas sector" by signing so-called production sharing agreements (PSAs) with Western oil companies over the head of the central government.

"The KRG is leading the way in Iraq's recovery by exercising our constitutional rights in the oil and gas sector," Dr Hawrami said. "Our approach and policies will become a model for all of Iraq."

The remarks came just days after Iraq's oil minister, Hussein Shahrastani, retaliated against a pair of companies that had signed PSAs with Kurdistan. Korea National Oil Company and OMZ of Austria both saw export contracts they held in the south of the country cancelled.

Dr Hawrami's remarks will heighten the tension in the already bitter row between the federal government and the region, which is keen to take greater control of the oil reserves in the north of the country.

The KRG reacted to the oil ministry's punitive moves by publishing an independent formal legal opinion from James Crawford, a widely respected expert in international law at Cambridge University, that the PSAs were legally valid.

The KRG has thus far signed nearly 20 PSAs with different companies. It is in discussions "with several other parties" and was keen to reassure those thinking about going into the country that they will not later be invalidated by the federal government.

Alex Munton of Wood McKenzie said: "The legal opinion is so important because it allows [the KRG] to respond quite strongly to the argument that what Korea National and OMZ have done is in any way illegal."

Under the terms of PSAs, foreign oil companies agree to put up all of the initial cost of finding and exploiting wells, and then to share in the revenue they produce for periods of between 20 and 30 years.

The Iraqi oil ministry has refrained from signing PSAs, which critics say give too big a share of the revenue to foreign oil companies, while it tries to finalise a long-delayed hydrocarbon law that will govern the exploitation of the country's 115bn barrels of reserves.

Muhammad-Ali Zainy, of the Centre for Global Energy Studies, warned that the Kurds' strategy could backfire. "They are being unnecessarily confrontational, and I don't think they will be able to get away with it because Kurdistan is landlocked," he said. "Whatever they produce they'll have to export it, and if the Iraqi government insists that they should have the final say, I don't see how the Kurds will be able to export unless they do a deal with Turkey, which obviously isn't likely."

The oil majors have steered clear of Kurdistan so far for fear of angering the oil ministry, which controls access to the giant and super-giant fields in the south. Most of the industry's biggest companies, including BP and Shell, made initial bids to the oil ministry at the end of January for technical service agreements to develop fields there. Of Iraq's 80 known oil and gas fields, only 20 have been developed.

The KRG argues that the PSAs do not violate the constitution, which addresses the exploitation of known reserves. All of the deals signed so far are for the exploration of new wells.