IRAQ - Towards A Petro-Democracy.

Iraqi Deputy Prime Minister Barham Saleh, in charge of the country's economy, on Sept. 10 called for partnerships with IOCs to expand Iraq's oil industry, saying Iraq's emergence as a "secure petro-democracy" could quell rampant sectarian violence. Saleh, a Kurd who once served as prime minister is the eastern part of Kurdistan, conceded that disputes between local officials and the central government over who controlled oil proceeds were one of many obstacles to making improvements. But he said he was hopeful oil would be a "unifying force for Iraqis rather than a resource to fight over".

Saleh spoke of Iraq emerging as a "secure petro-democracy" with the strength to put an end to the violence which threatens to tear the country apart. "I don't under-estimate the gravity of the situation in Iraq", Saleh said during a UN- and US-sponsored Iraq donor conference in Abu Dhabi.

Iraq's proven oil reserves stand at about 115 bn barrels, the world's third largest after Saudi Arabia and Iran. But this is a conservative estimate based on fields already discovered in Iraq, most of which being in the Cretaceous, and prominent ICO geologists support the claim in Baghdad that the country's oil reserves could eventually exceed 325 bn barrels.

Saleh said the long-awaited law could usher in huge investments by IOCs and eventually rescue Iraq from more chaos, adding: "This will open Iraq's oil sector for investment. We know what it takes. It takes partnerships with international oil companies".

IOCs, with their huge investment clout and technology, are best placed to quickly modernise Iraq's oil sector and meet the country's goal of raising the production capacity to more than 6m b/d by 2010. Shahristani says the ultimate goal is 8m b/d.

The absence of a legal framework governing E&P investments and ownership has hampered foreign investment in this sector. Iraq's oil infrastructure has been under repeated attacks from insurgents. The industry also suffered during the 1990s when the country under Saddam Hussein's Ba'thist dictatorship did not have access to state-of-the-art technology. US Deputy Treasury Secretary Robert Kimmitt told the Abu Dhabi conference big IOCs had told the American government they were willing to send crews to Iraq to explore and pump oil as long as there were legal ground rules for their participation.

Currently, Iraq's oil production is overseen by the Oil Ministry and two state-run oil firms, a centralised management system left over from the regime of Saddam which Saleh said "has proven to be a disaster". Saleh said: "Iraq needs investment. Iraq needs to send a strong signal to the international community about investment in oil. We need to push liberalisation and open our markets".

Saleh acknowledged that "differences remain" among those negotiating a petroleum law, particularly on determining whether the resource is controlled by regional governments or Baghdad. Kurds in the north and some Shi'ites in southern Iraq want regional control over oil production and revenues. But Iraq's Sunni Arabs and much of the Baghdad government want to maintain national control over Iraq's petroleum resources.

The central government, based on a federal system, has long held that contracts signed without its approval should be declared void. Shahristani has said all the country's oil exploration, production and export contracts should be handled by his ministry in Baghdad. There has been talk of blacklisting companies which work in Kurdistan.

To date mostly small, independent explorers have invested in the north - the Kurdistan Regional Government (KRG) territory. The KRG has signed production sharing agreements (PSAs) with companies including Det Norske Oljeselskap (DNO) of Norway, which is already drilling for oil and will begin producing in 2007, PetOil and Genel Enerji of Turkey, Western Oil Sands of Canada, and Swiss-based Addax. It has signed an MoU with Woodside Petroleum and Heritage Oil of Australia and the UK's Sterling Energy.

Despite the risk that the federal government may not recognise their contracts in the future, these small companies are attracted by the region's greater security than the rest of Iraq, which is also reflected in its greater political stability. Unlike the rest of Iraq, Kurdistan is not fractured into separate parts each with desires to go their own way. And since last year Kurdistan has had one unified government - the KRG - making it easier to do business in the more stable north.

Political delays over proposals to amend the country's new constitution and the formation of a central government until last May following the Dec. 15 elections have slowed the whole process. The bigger IOCs have feared being blacklisted and being unable to bid for the more lucrative possibilities in the rest of Iraq if they signed PSAs in Kurdistan.

Minister Shahristani on Sept. 13 reiterated that he expected the new federal petroleum law to be submitted to parliament shortly. He added that several IOCs were ready to start negotiations with Baghdad to develop fields even before the law was passed.