SPEAKING
FREELY The rise and fall of Iraq's oil
law By Justin Dargin
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The draft Iraqi
petroleum law, which is meant to create the
framework for nationwide distribution of the
country's immense oil wealth and structure foreign
investment, is bringing divisiveness instead of
reconciliation.
This agreement, which
included all major ethnic and
sectarian
power blocs, initially
revealed an unprecedented level of cooperation,
particularly with regard to governance of Iraq's
oil reserves. However, soon after the initial
enthusiasm, the legislation got bogged down in a
morass of mutual recrimination on the Iraqi and US
sides.
The bill would allow an amount of
centralization, because the oil revenue would go
to Baghdad, which would then distribute the wealth
based on population demographics to all 18
provinces. This law could act as a salve for
Sunnis, who fear that they will be left out of any
oil plan by the politically dominant (and
oil-rich) Shi'ites and Kurds. However, Parliament
went into summer recess without passing the law,
and the success of the project could be in
doubt.
Features of the draft
code The draft law vests regions with
negotiating power to conclude exploration and
development agreements with international oil
companies (IOCs), subject to review and approval
by the central authorities in Baghdad. A
controversial aspect of the code is that it will
allow regions to enter production-sharing
agreements (PSA) with IOCs, a feature that some
Iraqis feel conceals a tacit bid by foreigners to
gain control over the country's petroleum
resources.
To mitigate such fears, Iraqi
officials have insisted that all contracts be
subject to a transparent bidding process. Many
foreign delegates contend that changes in bidding
protocols will do little to stem the corruption
they believe is rife in the upper echelons of
government, or diminish the fear among
non-Americans (Iraqis and the international
community) that US companies will be favored.
However, what is apparent is that Iraqi politics
is in a period of disarray that it has not been in
since the initial phase of the 2003 invasion.
Some oil-industry experts respond that
there is little to fear, since foreigners have
little incentive to invest in Iraq, because the
law not only fails to adequately protect investors
adequately, but remains vague and uncertain.
Further, in spite of the much-touted "troop
surge", the security situation looks as bad as
ever, which again diminishes the prospects for
bids by Western IOCs.
However, Eastern and
smaller independent oil companies appear willing
to invest if the legal and political risks are
mitigated. Parliament must approve the draft law
before it can take effect, if at all. Bitter
sectarian feuds that impeded its drafting may also
impede its enactment.
Many proponents of
the draft law believe that it deals equitably with
all parties. The Kurdistan Regional Government's
minister for natural resources, Ashti Hawrami,
noted on the KRG's website that the draft-law
provision calling for equitable distribution
according to demographic numbers is in line with
the needs of all Iraqis.
Hawrami further
argued that the provisions that grant the regional
governments power to sign contracts for oil and
gas development, subject to final approval of the
central government, are acceptable to the Kurdish
authorities as well. The five such development
contracts already signed by the KRG and foreign
investors will be reviewed by an independent group
of experts appointed by the Oil and Gas Council to
ensure that they comply with the draft law.
In regard to the disputed status of
oil-rich Kirkuk, Hawrami reaffirmed that the Iraqi
National Oil Co (INOC) will continue to manage
field production until a planned referendum on
Kirkuk's status (as lying within or without Iraqi
Kurdistan) takes place. In regard to the KRG
Region Petroleum Act, Hawrami stressed that the
act will be amended to conform to the draft
federal law and presented to the Kurdish National
Assembly for preliminary ratification.
The
Kurdish Parliament will vote on it around the same
time that the draft law is presented to the Iraqi
National Assembly. However, with the current
debate, it is unclear when the law will be
presented in a final form for Parliament.
Even though the draft law has garnered
widespread support, there are plenty of detractors
in a multitude of corners. The General Union of
Oil Employees in the port city of Basra is against
the draft law, saying it represents US interests.
The union believes that the PSAs represent a
subtle effort for foreign (primarily US) companies
to exert considerable control over Iraqi natural
resources. The union feels that the lion's share
of power for developing a national oil policy
should fall under the jurisdiction of INOC.
On the religious side, an influential
Sunni clerics group, the Muslim Scholars
Association, accused the Iraqi government of
fomenting sectarianism by the draft law and
characterizing the legislation as "invalid" and
"illegitimate". The association is highly
influential among the country's sizable
disaffected Sunni minority, and thus its criticism
adds a new dimension to a debate previously
limited to academic and political circles.
Other detractors criticize the draft law
on grounds that the central government will have
diminished control over the resources. Moreover,
they argue that the draft law is designed to
preserve sectarian divisions of the government,
and to develop a situation in which adherence to
sectarian and regional allegiance will forestall a
coherent national policy.
Potential
problems Even though the draft law allows
revenue to be divided according to population
demographics, and has done much to placate Sunni
worries, accurate population figures are elusive.
Iraqi census counts have always been politically
driven. The draft law attempts a delicate
balancing act between the powers of the regions
and those of the central authorities.
The
law could placate Sunnis if it allows more
petroleum exploration on their territory. The
Iraqi government recently paid upward of tens of
millions of dollars to IOCs to review old seismic
data across the country, and to retrain Iraqi
petroleum personnel.
The issue of revenue
splitting was agreed on fairly early in the draft
negotiations. The main point of contention with
regard to oil contracts was whether authority to
sign would be vested in the regions or the central
authorities. The Kurds forcefully argued for
expansive regional powers, while Sunni Arabs
sought a more centralized system. The draft law
sought to balance the interests of these two often
adversarial groups with compromises that declared:
Regions may enter contracts with IOCs subject
to overview of a powerful new committee termed the
Federal Oil and Gas Council.
INOC will be resurrected with a legal status
separate from the Oil Ministry, and will be run
according to a profit model.
Any region that produces more than 150,000
barrels a day can incorporate its own regional
operating company.
Harsh criticism has
been leveled at the proposed draft law because
there is no mechanism for dispute resolution
between the regions and the federal government.
Some allegedly aggrieved parties contend that the
compromise was pushed through with significant
political pressure by Washington.
The
Iraqi Parliament may enact the draft law, but only
time will tell whether it can bring the
desperately sought blessings of stability and
prosperity. Passage of this law forms a crux of
the US benchmarks for the administration of Prime
Minister Nuri al-Maliki. However, it may be that
it has brought down more ire on the US role in the
country rather that convinced the international
community that it in Iraq's best interests.
Justin Dargin is the author of
numerous articles published in leading energy
journals such as the Middle East Economic Survey,
The Energy Journal, and Oxford Institute for
Energy Studies. He is the author of Emerging
State Centralism in the Russian Energy Sector:
Precedents from the Gulf? He is currently
researching Middle Eastern gas issues at the
Oxford Institute for Energy Studies. His article
reflects his own research, and is not connected
with a past or current employer.
(Copyright 2007 Asia Times Online Ltd.
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Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
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