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.
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.