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Iraq Struggles to Finish Oil Law
24.1.2007 |
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Forging
an Agreement Requires Balancing Sharply Divided
Interests, Ethnic Groups
January 24, 2007
Four months ago, about 80 oil company executives and
consultants packed an office on St. James's Square
in London for a briefing on exploration prospects in
Iraq's Kurdish region and a Kurdish draft of an
Iraqi national petroleum law.
Despite the immense risks of working in Iraq --
pipeline explosions, kidnappings, insurgency,
political infighting -- the oil company executives
were lured by the potential rewards, which are
immense, too. Outside Saudi Arabia, no country has
proven oil reserves as big as Iraq's. And the oil
there is high quality, easy and cheap to produce,
and bottled up in reservoirs that many major oil
companies were familiar with three decades ago
before wars and sanctions drove them out.
"Exxon Mobil has more seismic data on Iraq than on
Houston real estate," says Fadel Gheit, an oil
analyst at Oppenheimer & Co. who used to work for
Mobil. "If Exxon had security on the ground, the
following day it would have crews there," Gheit
said. "And money would be no object."
Gheit estimated that Iraq could easily produce 6
million barrels a day, more than three times its
current output and enough to help keep a lid on
world prices.
Four months after the London meeting, however,
security remains elusive and so does the national
petroleum law. Barham Saleh, Iraq's deputy prime
minister, said in a recent telephone interview that
a compromise was "very, very close."
The proposed law has taken on significance beyond
oil. While Iraq and foreign oil companies are eager
to tap new revenue, the Bush administration and many
Iraqis also hope that the law can be a model for
resolving disputes and can bind Iraq's warring
factions together.
Agreement has been reached on sharing oil revenue on
a per-capita basis, a benefit for Sunnis who live
mostly in areas with less production. A deal also
has been struck that recognizes the power of
regional authorities, such as the Kurdish Regional
Government, to award oil contracts, but establishes
a national petroleum commission with the power to
review contracts within 60 days. A "revamped"
national oil company would continue to manage
existing production while new regional affiliates
would participate in new exploration and production.
"We need to close the deal on one or two small
issues," Saleh said. "A number of the major issues
have been resolved."
But an adviser to the Kurdish authorities said those
"small issues" included some significant details. On
Friday, the Kurdistan Regional Government posted an
item on its Web site denying news reports that a
deal was complete. The "important annexes to the law
are still pending," it said.
Outstanding issues include how much oil revenue will
go to the central government; a charter for the new
national oil company; the role of the oil ministry;
and the principles upon which the new commission
could reject regionally negotiated contracts. Also
unsettled is whether the commission will require a
simple majority vote or a two-thirds vote to reject
a contract's terms. Those provisions must all be
part of one package with the petroleum law, Kurdish
leaders said.
If the Shia-dominated Iraqi central government
spends heavily on its own projects, it could deny
the Kurds and other regional authorities significant
shares of oil revenue.
Even if negotiators agree on a draft, it must win
approval from Iraq's cabinet and fractious
parliament, which hasn't met in weeks.
The United States has been pressing Iraq to complete
the law. "As awful as the Saddam Hussein government
was, it did have a record of dealing with foreign
investors that wasn't that bad," said James A.
Placke, an expert at Cambridge Energy Research
Associates. "That's gone and hasn't been replaced."
Now, forging a petroleum law requires a balancing of
sharply divided interest and ethnic groups, not just
the word of a dictator.
"This is not a regular piece of Iraqi legislation
being signed off on," said Jonathan Morrow, an
adviser to the Kurdistan Regional Government. If
successful, he said, "it . . . might show the way
forward in Iraq."
Saleh suggested that a deal might discourage attacks
on oil installations and reduce corruption. "Since
we all agree on revenue sharing, all elements of
Iraqi society will have an interest in maximizing
revenues and best business practices," he said.
For now, however, the oil sector is a mess. Since
the first attack on a pipeline on June 1, 2003, it
has been a struggle to keep oil flowing. Basic
production equipment has been looted or destroyed.
Many wells still are not working properly. And last
year, the U.S. special inspector general for Iraq
reconstruction complained that Iraq's oil ministry
was not reporting on its budget and had spent "only
a fraction" of money set aside for capital costs.
While the Bush administration once thought that
Iraqi oil revenue would cover occupation and
reconstruction costs, the Iraq government still
relies heavily on U.S. technical and financial aid.
Placke estimated that Iraq produced 1.85 million
barrels a day last year, less than the year before,
less than the prewar output and well below the U.S.
target of 3 million barrels a day.
Placke, who was part of the Iraq Study Group,
estimated that 200,000 barrels a day is siphoned
from the main export line through southern Iraq, put
on barges, and loaded onto tankers waiting in the
Persian Gulf. What's left after discounts and bribes
goes to militias or insurgent groups, he said.
In the south, some local Shia militia, clan or
clerical groups are trying to claim the rights to
some Iraqi fields and a voice in negotiating access
for foreign companies. A stake in a billion-barrel
field could be more important than a stake in the
parliament or cabinet. Some experts worry that, as
in Sudan, oil could contribute more to tearing the
country apart than to uniting it.
A senior Iraqi government official involved in the
petroleum-law talks said that if militias and clans
were to cut separate deals with foreign companies,
it would be a "recipe for disaster and civil war."
He warned foreign companies against signing such
deals. "We are very interested in credible
investment in the oil sector," he said. "We cannot
afford to have these cowboys running around trying
to manipulate the situation in Iraq."
The national petroleum law remains a touchy subject
in part because of widespread suspicion that the
U.S. invasion in 2003 was motivated by designs on
Iraq's oil riches.
The Iraq Study Group report contained three pages of
recommendations for the sector, including
suggestions that international oil companies invest
in the country and the government fight corruption
on contracts.
"Before embarking on controversial measures such as
this law favoring foreign oil firms, the Iraqi
parliament and government must prove that they are
capable of protecting the country's sovereignty,"
Kamil Mahdi, a senior lecturer in Middle East
economics at the University of Exeter in England,
wrote in the Guardian newspaper.
"A government that is failing to protect the lives
of its citizens must not embark on controversial
legislation that ties the hands of future Iraqi
leaders, and which threatens to squander the Iraqis'
precious, exhaustible resource in an orgy of waste,
corruption and theft."
In a telephone interview, Mahdi said, "My main worry
is that if I were an official in the ministry of oil
negotiating a contract and living under the kind of
threats that people in Iraq are daily experiencing,
I would probably be in a very weak negotiating
position."
While the debate continues, the Kurdistan Regional
Government is pushing ahead. In 2002, at the
suggestion of Jalal Talabani, the Kurdish leader who
is now Iraq's president, the Turkish conglomerate
Cukurova Group set up an oil unit called Genel
Enerji to look for oil in Kurdistan.
Genel signed a production-sharing agreement in July
2002 and took over the Taq Taq oil field in February
2003 on the eve of the U.S-led invasion. It signed
another exploration contract in July 2005. A
Norwegian firm, DNO, and a Canadian firm, Heritage
Oil, also struck exploration and production deals in
the Kurdish region.
Tariq Shafiq, a former executive of Iraq National
Oil and director of the consulting firm Petrolog &
Associates, has drawn up three contracts -- service,
buyback and production-sharing -- that the
government will use in its new petroleum law.
He said the Kurdish production-sharing contracts
give away too much to the foreign companies; he said
that after paying for capital and operations costs,
as much as 55 percent of the oil goes to the foreign
firms. "These, in the eye of many, are illegal and
would have to undergo review to bring them in line
with this law," he said.
But Kurdish authorities said they have no intention
of submitting existing contracts for review. Duran
said Genel's contract was renegotiated last November
and falls within the 20 percent share production
that would be the ceiling under the new law.
"The commercial terms of the PSA are in conformity
with internationally acceptable PSA terms," Duran
said in an e-mail response to questions. "Therefore,
our PSA is not generous at all."
Major U.S. oil companies haven't signed any
contracts in Kurdistan yet. Some of them have tried
to build goodwill with the central government.
Chevron, for example, helped clear mines from the
coastline. Others have collected seismic data or
trained Iraqi oil company technicians in Dubai.
Some major companies from other nations -- Russia's
Lukoil, a Chinese state company, France's Total --
are hoping to get their big Hussein-era concessions
back. Their prospects remain uncertain.
washingtonpost com
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