Federalism in Iraq Could Be a Gusher for Oil

Hunt Oil is the most intriguing piece in this puzzle. Hunt is an independent oil company based in Texas that has a history of taking risks, with its first foreign success coming in Yemen in 1984.

Its CEO, Ray L. Hunt, has ties to President Bush. According to the Center for Responsive Politics database, Hunt has made significant contributions to both the Republican National Committee and Bush's presidential runs in 2000 and 2004. He was named to the president's Foreign Advisory Board after 9/11.

The logical assumption is that Hunt Oil has not naively rushed into a bad deal. Greg Priddy, an analyst on transnational oil with the Eurasia Group, says the accord "reflects the reality on the ground in Kurdistan." Priddy noted: "There's a 70,000-strong militia force, a stable political environment and opportunities for the smaller players."

The most important point Priddy makes is that the industry no longer feels a "dilemma of offending the central government in Baghdad." This is a good sign for economic development in the north for the Kurds. The environment, however, in Baghdad and southern Iraq preclude the major players. Energy Intelligence analysts Paul Merolli and Ruba Husari say companies such as Chevron(CVX Quote), Conoco(COP Quote) and ExxonMobil(XOM Quote), nevertheless, look to big opportunities in the south. But security remains a big concern for corporations operating in Iraq, and lack of a federal oil law has held up contracts.

Sectarian Head Winds

Other factors also lead to a federalist reality. Sectarian violence forces 100,000 Iraqis from their homes each month. Baghdad has seen incredible population shifts in the last several years. Before the U.S. invasion, the capital was 65% Sunni and was an integrated city of both Sunnis and Shia. But after 4 1/2 years of violence, 75% of Baghdad's population are Shia. A recent analysis by the National Intelligence Estimate suggests the recent downtick in violence reflects the reality of this trend and segregated neighborhoods. Some reports suggest violence hasn't been reduced in Iraq.