Political and Legal Risk in Kurdistan: Business As Usual?

Companies investing and operating in developing countries are accustomed to dealing with the risks associated with uncertain and sometimes arbitrary political and legal systems. This is true across all industry sectors, but perhaps none more so than in the international mining and upstream oil and gas sectors. In recent years, increases in commodity prices have led to several high-profile illustrations of these risks as countries such as Russia, Venezuela and the Democratic Republic of Congo have sought to renegotiate or impose terms with or on companies to improve their share of the rents from exploitation of their national resources. Perhaps nowhere are such political and legal risks so evident as in the Kurdistan Region of Iraq. Here, according to the Kurdistan Regional Government (KRG), some 38 companies from 17 countries are parties to Production Sharing Contracts (PSCs) with the KRG, notwithstanding that the federal government of Iraq has been outspoken in branding these PSCs as invalid. Is this just "business as usual" for companies and their investors used to operating in high-risk jurisdictions? Or does Kurdistan represent a qualitatively different gamble?

At the time of writing, Iraq's main political groups continue to strive towards the formation of a new government following the national elections on March 7th. As they do so, there is little prospect of progress being made in resolving the legal uncertainties relating to Iraq's hydrocarbon sector. The 2007 package of draft federal laws relating to the institutional and operational framework governing the sector and the sharing of oil and gas sales revenue remains unsettled and in limbo. The well-publicized dispute between the Iraqi federal government and the KRG over the validity of PSCs entered into by the KRG has been ongoing since early 2007, and it shows little outward sign of resolution despite conciliatory statements made in early 2010 by Iraqi Prime Minister Nouri al-Maliki and the KRG's Minister for Natural Resources, Ashti Hawrami.

The dispute between the KRG and the federal government over the PSCs encapsulates the three principal strands of the debate in Iraq over the future organization of the hydrocarbon sector and the monetization of Iraq's hydrocarbon resources. First, the dispute over the PSCs is an illustration of the struggle for power between the federal government and Kurdistan, the as-yet only formally recognized region. Second, the dispute highlights the...