Dispute over Iraqi gas licences

The companies that won recent licences to develop gasfields in Iraq could have their contracts declared null and void.

Al Iraqiya, the political bloc that won the most seats in Iraq's national election, believes the country's recently awarded gas development contracts are "illegal", suggesting it may cancel the deals if it forms the next government.

The statement highlights the potential pitfalls faced by the companies that last Wednesday won licences to develop gas fields in Iraq in an auction held by the country's oil ministry.

While most international oil companies stayed away from the bidding round, the rights to pump gas for 20 years from three fields that between them contain more than 11 trillion cubic feet of reserves went to teams of companies from South Korea, Turkey, Kazakhstan and Kuwait.

The four companies involved in various combinations in the winning consortiums are the state-controlled Korea Gas Corporation, Turkish Petroleum Corporation, KazMunaiGaz and the privately held Kuwait Energy Company. All are newcomers to Iraq and none except the five-year-old Kuwait Energy has any notable experience of Middle East oil and gas projects.

In rejecting the gas auction sponsored by the government of the Iraqi prime minister Nouri al Maliki, the Sunni-backed al Iraqiyaalliance led by Mr al Maliki's chief political rival, the former prime minister Ayad Allawi, has added further uncertainty to the deals and to Iraq's immediate prospects for developing its most important source of fuel for domestic power generation. On Sunday, the bloc issued a statement saying it "strongly condemns the outgoing government's actions to offer licence rounds with long-term contracts" and accused the government of "overstepping its constitutional mandates".

The oil ministry's actions were "illegal in light of the current constitutional and political vacuum engulfing the country, which exposes the oil ministry and all parties concerned to legal questioning and which may also lead to the cancellation of these contracts", it alleged.

Al Iraqiyaalso claimed that the licences did not comply with existing Iraqi laws, dating from the era of Saddam Hussein, and required parliamentary approval for oil and gas contracts.

The same claims have been applied to the oil development contracts Iraq's oil ministry previously awarded in a move to boost the country's crude exports.

The oil contracts, however, are less controversial due to their extremely tough terms and because whoever forms Iraq's next government will need strong oil revenues to finance the country's reconstruction.

Moreover, the biggest Iraqi oil projects have lured the world's largest international petroleum groups, such as ExxonMobil, Royal Dutch Shell and BP, bringing access to advanced oil field technology. Less is immediately at stake if the gas contracts fall through, since no gas could be produced without significant infrastructure upgrades first. Such investment might be pointless until security in Iraq improves substantially.

The gas deals have angered many Iraqis who oppose any gas exports until the country's chronic electricity woes have been fixed.

Foreign firms, however, were unwilling to bid on gas projects without export potential.

Al Iraqiya'sstrongly worded objections to last week's deals come as Mr Allawi mounts a new push to form a government against fierce resistance from an alliance between Mr al Maliki's State of Law Coalition with conservative Shiite groups.

On Wednesday, the bloc announced it had formed a new axis of 130 members of parliament to compete with the 132-member alliance currently backing Mr al Malikiand his allies.

Mr Allawi has since held talks with Kurdish members of Iraq's parliament and has proposed an alliance between al Iraqiyaand the Kurds.

Iraq's March 7 parliamentary elections produced no clear winner and the main political blocs have been unable to form a government in the ensuing seven and a half months.