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December 1, 2005

BAGHDAD — A controversial oil exploration deal between Iraq's autonomy-minded Kurds and a Norwegian company got underway this week without the approval of the central government here, raising a potentially explosive issue at a time of heightened ethnic and sectarian tensions.

The Kurdistan Democratic Party, which controls a portion of the semiautonomous Kurdish enclave in northern Iraq, last year quietly signed a deal with Norway's DNO to drill for oil near the border city of Zakho. Iraqi and company officials describe the agreement as the first involving new exploration in Iraq since the U.S.-led invasion in 2003.

Drilling began after a ceremony Tuesday, during which Nechirvan Barzani, prime minister of the Kurdish northern region, vowed "there is no way Kurdistan would accept that the central government will control our resources," according to news agency reports.

In Baghdad, political leaders on Wednesday reacted to the deal with astonishment.

"We need to figure out if this is allowed in the constitution," said Adnan Ali Kadhimi, an advisor to Prime Minister Ibrahim Jafari. "Nobody has mentioned it. It has not come up among the government ministers' council. It has not been on their agenda."

The start of drilling, called "spudding" in the oil business, is sure to be worrisome to Iraq's Sunni Arab minority. They fear a disintegration of Iraq into separate ethnic and religious cantons if regions begin to cut energy deals with foreign companies and governments. Sunnis are concentrated in Iraq's most oil-poor region.

Iraq's neighbors also fear the possibility of Iraqi Kurds using revenue generated by oil wells to fund an independent state that might lead the roughly 20 million Kurds living in Turkey, Iran and Syria to revolt.

Iraqi legal experts and international oil industry analysts have questioned the deal. Oil industry trade journals had expressed doubts that it would come to fruition.

Iraq's draft constitution, approved in an Oct. 15 national referendum, stipulates that "the federal government with the producing regional and governorate governments shall together formulate" energy policy. However, it also makes ambiguous reference to providing compensation for "damaged regions that were unjustly deprived by the former regime."

Iraq's Kurds have argued that the country's existing oil fields and infrastructure, such as those in the largely Kurdish cities of Kirkuk and Khanaqin, should be divvied up by the central government but that future oil discoveries should be controlled by each oil-producing region.

In his speech Tuesday, Barzani, the nephew of Kurdish politician and former guerrilla leader Massoud Barzani, eschewed the language of the law and couched the deal in political terms. He invoked the Kurds' years of deprivation at the hands of the Sunni Arab-dominated government of Saddam Hussein.

"The time has come that instead of suffering, the people of Kurdistan will benefit from the fortunes and resources of their country," he said during the ceremony in the western portion of Kurdish-controlled territory.

The Kurds, who during the last several years of Hussein's rule maintained sovereignty in northern Iraq under the protection of U.S. warplanes, made millions in transit and customs fees as the Baghdad government smuggled oil to Turkey in violation of United Nations sanctions. Since the end of the sanctions, the Kurds have sought ways to make up for that lost income.

The eastern administrative half of the Kurdish region also is rushing to sign energy deals with foreign companies without Baghdad's approval. The government of the Patriotic Union of Kurdistan, based in the city of Sulaymaniya, has signed an electricity agreement with a Turkish company and explored a possible oil deal with a foreign partnership near the city of Chamchamal, the site of several dormant oil wells.

During months of painstaking constitutional negotiations, Kurds insisted on the authority to cut energy deals without Baghdad's approval. Under the draft charter, the task of determining how oil resources will be allocated is left to the National Assembly that will be elected Dec. 15.

The language in the constitution regarding the power of regions to pen such contracts was a major reason that the vast majority of Sunnis voted against the charter in October.

The announcement of the DNO drilling took many Iraqis by surprise Wednesday.

"This is unprecedented," said Alaa Makki, a leader of the Iraqi Islamic Party, a Sunni Arab group. "It's like they are an independent country. This is Iraqi oil and should be shared with all the Iraqi partners."

Makki said Kurds were trying to have it both ways, controlling the Iraqi presidency and several powerful ministries in the national government while also trying to lay claim to extra-constitutional powers in the north. Jalal Talabani, a Kurd, is the Iraqi president.

However, Helge Eide, managing director of Oslo-based DNO, said he believed Iraq's new constitution gave the Kurdish north jurisdiction over certain drilling and oil exploration activities.

"That was clearly pointed out by Mr. [Nechirvan] Barzani," said Eide, who attended the Zakho ceremony.

Oil companies have become used to operating in hostile and unstable territories. DNO, founded 25 years ago, is considered an upstart in the oil business, with projects in Yemen, Mozambique and Equatorial Guinea, the site of a coup attempt last year, as well as northern Europe.

Eide said his company was more than willing to work with the government in Baghdad, though it had not yet signed a deal with the capital for oil exploration. In April, the company signed a deal to provide the Iraqi Oil Ministry with training and technology as "the first steps" to being invited by Baghdad, as well as the Irbil-based Kurdish government, for future oil and exploration work.

Iraq, a member of the Organization of the Petroleum Exporting Countries, holds an estimated 115 billion barrels of proven oil reserves, mainly in the south, according to Oil & Gas Journal, an industry publication.

That places Iraq among the top five nations in oil reserves. Iraq could contain significantly more undiscovered oil where energy exploration hasn't occurred, an area that stretches across about 90% of the country, the U.S. Energy Department said.

Iraq exports about 2 million barrels of oil a day, according to the International Energy Agency in Paris.

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Times staff writers Jeffrey Fleishman in Berlin and Nancy Rivera Brooks in Los Angeles contributed to this report.


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