Interview, part II of II: Kurdistan still faces investment roadblocks

Interview, part II of II: Kurdistan still faces investment roadblocks

This is the second of a two-part interview with Brady Jewett, Kurdistan Region Project Editor at Invest in Group, a publishing and research consultancy in partnership with the Kurdistan Regional Government to promote investment in the region.

7) The code governing FDI in Kurdistan is a bit unclear, as there seems to be regulations coming from both Baghdad and Erbil. Can you clarify which pieces of legislation and directives apply for investors?

According to Article 121:2 of Iraq’s Constitution, where legal contradictions exist, the Kurdistan Regional Government’s (KRG) laws have supremacy. Therefore, for most investors in Kurdistan, the stipulations of the 2006 Investment Law take precedence.

There are some sectors, for which federal law and regulation takes precedence—primarily sectors for which the companies’ operations have federal implications. For example, the Central Bank of Iraq in Baghdad governs all banks in Iraq, including those based in the Kurdistan Region, and for all mobile operators, the federal Communications and Media Commission carries out licensing and regulation.

8) In the case of an investment-related dispute, what is the stipulated recourse for an investor? Similarly, Iraq does not have too many investment treaties with other nations, and those that do exist are arguably in legal limbo when it comes to investments in Kurdistan. Are there any plans by Erbil or Baghdad to sign more investment accords, and to address this source of possible confusion?

In disputes between multinationals and the KRG, disputes (though there have been very few) tend to be handled outside of Iraq. Dana Gas, a UAE-based energy company, made headlines in late 2013 when it took the KRG to the London Court of International Arbitration over a dispute relating to a Production Sharing Contract (PSC).

Disputes like these, however, are rare. Local commercial courts are available in the Region to address disputes between companies.

Regarding bilateral investment agreements, while I am not aware of any formal agreements in the pipeline, I will note that the Region’s foreign outreach has, in recent years, been aggressive. However, as with most other elements of institutional development in the Region, these initiatives are young and will take time to develop.

9) Kurdistan has recently opened up its first stock exchange in Erbil. Its market capitalization is a paltry $8 million though and it has few participants. What steps is the KRG taking to attract listings on the exchange, as well as to liberalize portfolio investment more broadly?

The Erbil Stock Exchange (ESX) actually has yet to open. It is slated to open in mid-late 2014. But yes, its market cap upon opening will be very small, and its lack of liquidity could potentially provide challenges to investors.

The challenge is one of changing business culture in the Region, to some degree. Most local companies self-finance their projects, and have done so for decades. Banks have, for many reasons, been unable to make loans to many businesses, and acquiring financing through public listings has not been possible until recently.

This is changing, however. The larger, more established Iraq Stock Exchange (ISX) in Baghdad has grown considerably in market cap in recent years, primarily as banks have publicly listed on it. In February 2013, the bourse got a major injection of capital through the IPO of Asiacell, which nearly doubled the ISX’s market cap, adding $5 billion.

In terms of investment, liberalization is not the issue—it is easy enough to walk into a brokerage and set up an account. The challenge is getting the public to understand the benefits of investment. People are hesitant to put money in banks, after war and sanctions wiped out deposits in the early 1990s. Many people hold their savings in gold or cash, which they keep in their homes.

Moving from a culture such as this to equities investment is a big jump. However, if quality companies list on the ESX, and profits begin to be made, I think that it is a shift that will take place in the coming years.

10) Let’s quickly move to the resource sector. Kurdistan is home to quite a few oil and gas multinationals. However, Petroceltic, an Irish oil and gas explorer, has just announced it is abandoning a key portion of one of its wells in Kurdistan because of a limited find. Does this point to perhaps overstated reserves, especially in comparison to Iraq’s large offshore fields in the Persian Gulf?

Oil exploration and production is inherently speculative—not every well is going to produce. The Petroceltic/Hess exploration well is only one of 125 wells in the Region, many of which are already producing; its failure alone is clearly not enough to say whether or not reserves are overstated.

Estimated reserves in the Kurdistan Region are high, at 45 billion barrels—more than Nigeria, and just less than Libya. Until the reserves are proven, however, they are pretty speculative. In Kurdistan, exploration only really got off the ground in the mid-2000s, so the sector is, for the most part, in very early stages of development. It will take a long time to know for sure what the actual reserves are.

It is also worth noting, however, that the Region’s PSCs address the speculative nature of exploration in the Region by sharing risk and reward. Reserves in southern Iraq are huge and proven. But as such, the technical service agreements (TSAs) offered to international oil companies (IOCs) by the federal government offer companies stable production, but very little upside, relative to the potential in Kurdistan.

11) The KRG recently opened a newly constructed pipeline to the Cehan terminal in Turkey, which finally gives it the ability to bypass the other main northern pipeline controlled by Baghdad. Nevertheless, Ankara has refused to sell the crude yet, fearing repercussions from Baghdad. The Iraqi central government has even retaliated by withholding some revenues due to Kurdistan. How close is this situation to being resolved, given that this is probably the biggest red light that oil and gas investors face?

This is indeed a major challenge. Negotiations regarding the KRG’s right to independent energy export have been ongoing for a long time, and the pipeline certainly adds weight to the dispute. Everything is further amplified by the April 30th federal election. Neither side wants to appear weak or make concessions ahead of the elections. This largely explains the withholding of public sector salaries, an issue that has since been resolved, but which was politically expedient for the federal government.

Kurdish parliamentarians have in the past played a significant role in making or breaking governing coalitions. Due to this influence, there is a chance that, following the elections, an agreement will be made regarding the pipeline—probably in the KRG’s favor. In the longer term, I think that it will go in the KRG’s favor regardless. Turkey’s energy needs—currently caught between Russian and Iranian gas—will compel it to work with the KRG to import gas and power its growth, and those negotiations will mean exporting KRG oil through Cehan.

12) The previous question is part of a larger simmering issue, one that is arguably an even bigger threat to Iraq’s territorial integrity and security: the division of power and revenue between the Iraqi central government and the KRG. What are the prospects of the parties reaching a comprehensive settlement, especially as it pertains to the status of oil-rich and ethnically restive Kirkuk (currently claimed by both sides) as well as the passage of an Iraqi hydrocarbons bill?

The federal government and the KRG have, in principle, agreed upon the issue of oil revenue sharing. All oil proceeds are supposed to go through the federal government, and then be redistributed to the governorates. Regions are entitled to a percentage of total oil revenues based on their populations. The KRG is therefore entitled to 17%. In practice, the KRG has only been receiving around 10% of total revenues. Independent exports from the KRG are, to a large degree, a response to this.

The KRG has also committed to sending all excess earnings back to the federal government. This system would also allow the KRG to pay IOCs the fees they are contractually due—an issue to which the federal government takes issue, as they do not approve of the KRG’s independent signing of PSCs with IOCs. In effect, this would decrease political risk for the IOCs that operate in the Region. This is a second-best solution to the passing of a comprehensive Iraqi hydrocarbons bill that would respect the KRG’s PSCs and share revenue as previously agreed upon. However, at this point, the KRG’s go-it-alone approach seems more likely to happen, at least in the short-term.

The Kirkuk question is more complex, as a politically charged mix of history, identity, and ethnicity mix with significant oil reserves. A comprehensive hydrocarbons bill would relieve some pressure, but not all. A permanent solution to the dispute is probably still some years off.


Brady Jewett is Kurdistan Region Project Editor at Invest in Group, a publishing and research consultancy focused on frontier markets. The views expressed here are his own, and do not necessarily reflect the views of Invest in Group.

About Author

Kevin Amirehsani

Kevin is a Denver-based policy and public engagement consultant. He was previously the head of operations for a solar energy startup in Lagos, researcher for the US Commercial Service in Cape Town and the Institute for Democratic Governance in Accra, and Peace Corps volunteer in Cameroon. He holds an MSc. in International Political Economy from LSE along with a B.S. and B.A. in Industrial Engineering and Political Science from UC Berkeley.