Iraq oil tensions rise as BP enters Kirkuk fray

British oil giant BP (NYSE: BP) isn’t exactly batting 1,000 these days. On top of the fallout from the Deep Horizon oil spill and the high-profile hostage crisis at is Amenas gas facilities in the Algerian Sahara over the past days, it is adding another mark to its controversial track record by dealing with Baghdad over Iraq’s disputed Kirkuk oil field.

This is the deal that could tip tensions toward out-right conflict between the Iraqi Kurds and the Iraqi central government—whose troops are already poised for battle in the disputed territories. The prize is oil (and for the Kurds, independence).

Let’s look at the “deal”. BP wants to begin work on a major (contested) oil field in Kirkuk whose development could increase production at a time when Iraq is struggling to boost declining crude output, which is partially a result of the ongoing natural resources dispute between the Iraqi Kurds and the central government.

The BP proposal has been sent to the Iraqi Cabinet for consideration, and Baghdad is now dangling it to the Kurds as a negotiating chip. Late last week, Iraqi officials rocked the boat by publicly announcing they were in talks with BP. (Related Article: The Coming Oil War in Iraq: Part II)

For now, the negotiations are still informal, and the terms of the proposed deal remain vague. BP is downplaying the potential deal and has refused to provide any information as to the scale of investment. 

After the response from officials in the Kurdistan Regional Government (KRG), BP has taken moves to further downplay the talks, saying that any project would be “pretty small” and “short-term”. Though, in this statement to the Associated Press, it also noted “…whether it develops into something more is another matter.”

As international oil companies hedge their bets in Iraq, the dividing lines have become clearer, with foreign oil companies showing an increasing willingness to sacrifice their relationships (and deals) with Baghdad in order to set up shop in Northern Iraq and to deal solely with the Iraqi Kurds. This situation has done much to embolden the Kurds and strengthen their capability for an eventual bid for Kurdish independence.

BP has remained on the other side of this oil-politics front line. Talk of a pending deal between BP and Baghdad is the Iraqi central government’s way of saying that it has not been wrong-footed in this natural resources conflict.

But BP is setting itself up to play a key role in the inevitable conflict over Kirkuk—the most important pieces of the puzzle for Kurdish independence. The past months have seen a significant deployment of both Iraqi military troops and Kurdish security forces, who are very tensely poised for war at the slightest provocation. The BP deal talk could be that provocation. (Related Article: Iraq - Kuwait - Turkey: Relations Hit a New Low)

The Kurds cannot allow this to happen. The KRG has rejected the potential deal as “illegal”. In a statement, the KRG referred to “details of an illegal and unconstitutional plan to allegedly allow BP to enhance the recovery of some of the depleted fields in Kirkuk... without consulting and obtaining approval of the other parties to the dispute.”

KRG President Massoud Barzani said: “Iraq’s citizens are simply tired of this sort of language of threat and intimidation, which in the cynical pursuit of narrow political agendas serves only to create division and strife.”

Baghdad has upped the ante in this crisis in recent weeks in other ways as well. Namely, by threatening to cut the region’s 17% share of the national budget and threatening to sue Turkey’s Genel Energy—the biggest producer in the KRG—for bypassing Baghdad in its exports of crude from Northern Iraq.

Original source: http://oilprice.com/Energy/Energy-General/Kirkuk-Poised-for-Conflict-BP-Enters-Fray.html