Iraq passed two important milestones this summer – oil production finally returned to pre-invasion levels, and two major oil contracts were signed by the government for the first time since the fall of Saddam Hussein. With the passage of a new electoral law and better security than the country has enjoyed for years, Iraq’s oil sector looks ready for a large injection of investment.
Appearances can be deceptive, however. For all the progress it has made on some fronts, the government looks less likely than ever to resolve a stalemate over its proposed new oil law.
Passing this legislation is a matter of increasing urgency: Iraq is preparing to invite 35 prequalified international oil companies to bid for exploration and production rights in nearly 150 blocks. Without the right laws, the country might struggle to issue new licences or convince international oil companies to sign up to agreements. “What oil companies want is a legal basis on which to progress,” says Mehdi Varzi, president of Varzi Energy, an independent energy intelligence company. “They are concerned in case they sign a long-term contract and then the law changes.”
The proposed law, approved by the cabinet in February 2007, has been the subject of furious debate in the country’s parliament for the past 20 months. If passed, it would give regions a stronger say in awarding oil contracts, strip the state-owned Iraq National Oil Company (INOC) of its near monopoly on field development and allow the use of production sharing agreements (PSAs) with foreign oil companies.
“The law is important because we now have no proper law for our oil,” a senior oil ministry official tells Emerging Markets. “Oil is very important for our country, but we can only make contracts now using the old oil law from the previous regime. We want to give more rights to private companies.”
Sharing it out
While the proposed law reflects the ambitions of both the Kurdistan Regional Government and Iraq’s powerful foreign patrons, it has infuriated some nationalists who remember the struggle to take control of their oil revenues back from exploitative foreign companies in the 1960s. It has also angered politicians from poorer provinces who fear their regions will not share in the awaited oil boom.
Although the different parties have agreed in principle on sharing the wealth according to population – with the Kurds’ share about 17% – they differ on how the split should happen. Leaders in Kurdistan, citing the wholesale plunder of their provinces under Saddam, want the right to control the region’s hydrocarbons directly and to take their own share before sending the rest to Baghdad.
The central government wants to take charge of all contracts and assign the money itself. It sees the question as a fundamental issue of sovereignty.
“In the constitution it says oil wealth is for all Iraqis, but the Kurds interpret this differently to central government,” says David Harwell, Middle East and North Africa editor for Jane’s Country Risk. “They are saying it means regions can operate autonomously rather than putting the revenues directly into central government coffers.”
His point was echoed by Nerchirvan Barzani, prime minister of the Kurdistan Regional Government, after signing a production contract negotiated independently with a foreign oil company in defiance of Baghdad’s wishes. “Oil is a gift to all the peoples of Iraq, not just its leadership, and it is time to begin putting this gift to work for all the people of the country,” he said in June.
Forms of agreement
Further hindering the new law, there is little unanimity on whether to allow foreign oil companies upstream access to Iraq’s oil reserves in the form of PSAs, which guarantee a profit and allow the foreign company to book the field under its own reserves portfolio.
Such agreements are seen by many parliamentarians as much too favourable to foreign oil companies. But supporters of the PSAs say they represent the best formula for developing fields quickly – and would increase Iraqi production by about 500,000 b/d within a year. Higher output is a key goal, with the oil ministry targeting a level of 4.5 million b/d by 2012 from a little over 2 million b/d now.
However, many parliamentarians – and the oil ministry – instead want technical service agreements under which a foreign oil company is paid a fee for bringing new production on stream. “A large number of parliamentarians believe that a paragraph should be added to the law to prohibit the use of production sharing contracts,” said oil minister Hussein al-Shahristani in a recent television interview. “We in the oil ministry have announced that we will not conclude production sharing contracts, and, thus, we concur with what the parliament wants.”
Impatient at the slow passage of the new law, the Kurdish government has awarded more than 20 of its own oil contracts as PSAs – attempting to create a fait accompli that Baghdad will later be forced to recognize. These include deals with well-known oil companies, including the US’s Hunt Oil Company, the Sharjah-based Crescent Petroleum, Austria’s OMV and Hungary’s MOL.
The Kurdish government claims its contracts fully comply with Iraq’s federal laws, but the oil ministry rebuts this argument. It says foreign companies that deal directly with the Kurds can be charged under Iraqi law and are barred from taking part in other Iraqi oil bids. It has also promised to block any future exports from Kurdistan.
However, with serious amounts of oil poised to start flowing from Kurdish areas within a couple of years, some analysts believe the central government will be forced to accept the position. “I can’t conceive that in a few years time, when Baghdad sees all this money flowing in, it’s going to call the contracts illegal,” says Varzi. “The central government stands to gain from the revenues.”
There is a hope that elections due next year will help accelerate some sort of compromise. With Sunnis poised to take part in the voting, the next government is likely to be less dominated by Kurds – pushing their political leaders to strike a deal.
“They will look for a compromise allowing them to honour the existing contracts while handing some revenue to Baghdad,” says Jane’s Hartwell. “They know the dynamic will change next year when Sunnis participate in the elections.”
With so much at stake, the oil ministry is trying to claw back some lost revenue by striking agreements under the existing laws. It has agreed a technical services contract with China National Petroleum Company for the al-Ahdab field near the Iranian border and a processing contract with the Royal Dutch/Shell Group for gas now being flared off as a by-product of crude oil output.
“We already have a law in effect that governs the work of the oil ministry and the Iraqi oil policy, which gives the Iraqi government the right to negotiate and sign contracts,” al-Shahristani says.
The two deals are likely to involve several billion dollars of direct investment and will generate far more in energy sales, but all eyes are on the far greater potential prizes still to be won.