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    Middle East
     May 24, 2007
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Fighting overshadows Iraq's oil law
By Adam Wolfe

Iraq's national oil law has been touted as a major step toward the political reconciliation of the country's major sects. The US military "surge" in Baghdad is, in part, designed to provide the sectarian-defined political groups breathing room to pass this and other measures that would give every group a greater stake in the political and economic future of a unified Iraq. Yet as negotiations over the oil law drag on, and grow increasingly bitter, such

reconciliation seems less and less likely.

It now appears impossible for the Iraqi Parliament to pass the national oil law by the government-imposed deadline of May 31. The immediate cost of this failure will be economic - while many of the Western majors will not invest in Iraq because of the remaining security risks, Eastern and smaller oil firms appear willing if the political risks are first removed through legislation.

However, the long-term damage done by the failure to reach a consensus on the oil law will be a hardening of the sectarian fractures in Iraq's political landscape. The debates surrounding the oil law do not center on what is best for the country as a whole, but only on what is best for each sectarian group. By defining the debate as yet another zero-sum competition, Iraq's politicians have made it impossible to emerge from the negotiations without at least one group feeling like the losers. The US Embassy in Iraq has only encouraged this situation by insisting on a greater role for foreign firms in future investments.

As such, reconciliation will never emerge from the passage of an oil law in Iraq. This darkens the prospects of success for the US military "surge".

Background on the oil law
The Iraqi constitution passed in 2005 was deliberately vague on ownership and control of Iraq's oil. The document was written in such a way as to win the approval of the Kurdish and Shi'ite negotiators (Sunni Arab representation at the negotiations was minimal because the Sunni leadership was still largely boycotting the political process at the time). To do so, the text was vague on issues of governance and specific on issues of power politics.

Article 111 of the constitution states that "oil and gas are [under] the ownership of all the people of Iraq", while Article 112 calls for distribution of oil revenues to be allocated "in a fair manner in proportion to the population", with little clarity on either issue. Because the constitution is so vague, and because Sunni Arab leaders remain unsatisfied with large portions of the constitution, a new oil law is needed to clarify issues of control and revenue distribution.

The importance of a comprehensible oil law cannot be understated. The oil sector accounts for 95% of the government's revenues. Iraq's proven reserves are estimated at 115 billion barrels, putting it only behind Saudi Arabia and Canada. Less than 20% of the country has been explored, however, and many believe that Iraq's western regions could almost double Iraq's proven reserves if exploration were to go ahead.

It is vital for the future of Iraq that there is legal certainty in the oil industry to encourage future exploration and acceptable distribution of the country's leading stream of revenue among Iraq's major sectarian groupings.

The Kurdish position
Kurdish opposition to the current draft is based on fear that the central government will have too much control over the oilfields in the relatively peaceful north.

Kurdish leaders claim that the constitution gives them the right to develop the proven reserves in their semi-autonomous region because it grants regional control over existing oil reserves. However, Shi'ite and Sunni leaders interpret the constitution as only granting regional control to operations that were developed before 2005. This would mean that incremental additions to existing operations would also be controlled by the central government. Since the constitution did not define what constitutes a "new" field, the sectarian groups are now pushing for their interpretation to be spelled out in the law.

The Kurds also want decisions about foreign investment to be made at the regional level. In fact, they have already negotiated deals with foreign oil firms to explore and develop the Kurdish semi-autonomous zone. In 2004, the Kurdish Democratic Party reached an agreement with Norway's DNO ASA, which began drilling in December 2005. This month, DNO announced that it had begun pumping oil and will be able to deliver it to the market in June. Under the existing draft of the oil law, the deal reached with DNO and other contracts made by the Kurdistan Regional Government (KRG) would have to be renegotiated.

Kurdish leaders are concerned about granting control to the central government for two main reasons. First, assuming that Kirkuk is brought under control of the KRG, the proven reserves in the semi-autonomous region would provide enough revenues to fund a Kurdish state when Kurdish leaders feel it is time to cross that bridge. Second, they are skeptical about granting control to the ill-defined bodies that would control oil developments and revenues, which the central government would oversee.

The existing draft would create the Iraqi National Oil Co (INOC), a state-run oil firm, to manage new projects. The Federal Oil and Gas Council would regulate the industry, but it is not clear how membership to the council would be granted, or whether it would be limited to Iraqis.

The Kurdish leadership would prefer regional control of all oil reserves, with a defined portion of revenues going to the central government. Ideally, existing oilfields would contribute a lower rate, and newly developed fields (narrowly defined) would contribute to the central fund at a higher rate.

Sunni objections
Opposition to the draft oil law is only part of a larger agenda for Sunni politicians. The Sunni-majority region is oil-poor, and Sunni

Continued 1 2 

Big Oil in, stability out under new Iraqi law (Feb 28, '07)


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