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IRAQ - Focusing On The Non-Oil Sector - Part 10 - Iraq/Oil Law.

With Iraq torn by violence, its politicians are split along ethnic and sectarian lines in negotiations to resolve the final sticking point in a draft of the national oil law. The issue involves the division of powers between the central government and regional governments in negotiating oil contracts. The Oil Minister, Hussein al-Shahristani, was on Dec. 14 quoted as saying he believed the parties could work through their differences, which would allow them to unveil the draft soon.

The law would be the first step to opening the door to foreign investment in Iraq's oil sector by setting rules for how Iraq would handle bids on contracts. Shahristani said 60 oilfields would be offered for development in various rounds of bidding. It is unclear whether foreign oil companies would tolerate the risks and security costs of operating in Iraq, especially if the violence worsens.

American and Iraqi officials consider passage of the oil law to be a crucial step in the process of national reconciliation because the law would lay out guidelines for the distribution of the country's oil wealth.

An Iraqi committee has reached agreement on critical principles in the draft, most importantly on a measure that would allow the central government to collect current and future oil revenues and redistribute them to the provinces or regions by population. Sunni Arabs, who are leading the insurgency, have been opposed to the idea of regional autonomy because they believe they would not get a fair share of the country's oil wealth, which is concentrated in the Shiite south and Kurdish north. So putting oil revenue collection and distribution in the hands of the central government - and giving the money to regional governments based on population - would placate the Sunni Arabs to a degree.

Sunni Arabs fear their parts of Iraq have limited oil reserves. But in reality there is a huge oilfield just east of Baghdad and a complex oilfield in west Baghdad. The western province of Anbar is potentially rich in natural gas. Parts of Salahuddin and Mosul provinces are rich in oil. Most of Iraq's Sunni Arab Triangle has been under-explored for oil and gas, through the region is rich in phosphate and other minerals.

Representatives of the main Sunni Arab, Shi'ite and Kurdish political blocs are still at odds over the issue of contracts. A 11-member committee made up of those representatives is reviewing and revising a draft of the oil law written by the Oil Ministry. If the committee reaches agreement, then the law would go to the cabinet and parliament for approval.

The Sunni Arabs want the process of negotiating and signing exploration and development contracts to be put entirely in the hands of the central government, says Shahristani, a conservative Shi'ite. The committee's Sunni representatives, who are members of a political bloc called the Iraqi Consensus Front, are proposing that the Oil Ministry negotiate and approve all contracts. At the other extreme are the Kurds, who want regional governments to negotiate the contracts and have final say over them.

Under the Kurdish proposal, a central body called the Federal Oil and Gas Council, set up to make policy, would simply review the contracts to make sure they conform to a standard set of criteria. The Kurds recently discovered two oilfields in the north after signing contracts with a Norwegian company and a Turkish company. The committee's Shi'ite Arab representatives, who are members of the United Iraqi Alliance (UIA), the main Shi'ite coalition, fall in between the Sunni Arab and Kurdish camps. They argue that the regions should have the right to negotiate the contracts but that the contracts must be approved by a two-thirds vote of the federal council.

Shahristani said if the committee members could resolve their differences on the contracting issue, then the final draft would be finished quickly. The top American officials have been putting increasing pressure on the Iraqis to present a draft and even approve the law by end-2006.

In its report released on Dec. 6, the US bipartisan Iraq Study Group (ISG) says a fair distribution of oil was necessary for national reconciliation and recommends that the central government retain full control of revenues and oilfields, much to the chagrin of the Kurds who have enjoyed autonomy since the American military established a no-fly zone in the north in 1991. Once the oil law is approved, the federal council will announce a round of bids for development of discovered fields.

The Iraq National Oil Co. (INOC), which was founded in 1964 but was shut down by Saddam in 1987, is expected to be re-established by the law. It would be able to compete with foreign companies in making bids. The Iraqi officials assigned to choose the oilfields to be offered in the first round of bids would try to come up with a geographically equitable list, so regions would not feel ignored. Iraq has 80 discovered fields. Twenty are already producing oil and will be assigned to INOC.

Oil contracts signed with foreign companies by Saddam's Ba'thist government would be reviewed by the federal council to see whether they should be honoured or scrapped. For example, a Saddam-era contract the Iraqi government had signed with LUKoil, the largest oil company in Russia, and another with a Syrian company would be revisited.

As for revenue distribution, Shahristani said the various parties had agreed that the money will be divvied out to the regions through the central government's budget process. That means the central government would be able to divert money to finance its needs before giving the rest out to the regions.

Earlier in the negotiations, the Kurds had insisted that the money, if collected by the central government, should not be funneLled into the central government's budget process, but must be split up and given out to the regions automatically. The Kurds raised two other issues for discussion, Shahristani said. They are demanding that any contracts the Kurds have signed so far in the north should be honoured. They also want assurance that the contested oil-city of Kirkuk will be included in Iraqi Kurdistan if people in the province vote for it to join the Kurdish north in a referendum scheduled for 2007.

Deputy Prime Minister Barham Saleh, a prominent ethnic Kurd who heads the Oil Committee, on Dec. 13 was quoted as saying: "There is one outstanding issue [over the contracts within the regions and with the central government] and it needs a political agreement. We are trying to reach a compromise formula". The contracts issue is vital to Iraq's future as a solution favouring the regions would devolve power over its most valuable resources to the majority Shi'ites and the Kurds, weakening the central government. Oil Ministry spokesman Asem Jihad was on Dec. 13 quoted as saying: "The law now awaits more talks between the Iraqi government and the Kurdish region".

The industry desperately needs foreign investment to revive the shattered economy, which relies heavily on oil export revenues. Iraq sits on the world's third largest crude oil reserves.

The Oil Committee, which includes the oil minister, has agreed on more than 90% of the law. Saleh, who said talks would resume in a few days, was hopeful the Iraqi officials would overcome their differences. He said the committee had agreed on oil revenue sharing and on restructuring of the industry, which he called key issues.

A major remaining stumbling block concerns the issuing of contracts for exploration and developing future oilfields. The Kurds are insisting that the regions reserve final approval over such contracts, fearing that if that power were given to a Shi'ite-dominated central government, it could ignore proposed contracts in the Kurdish north while permitting them in the Shi'ite south.

On the drafting committee, Sunni Arabs have allied with the Shi'ites against the Kurds, who have sought to maintain as much regional control as possible over the oil industry in their autonomous northern enclave. Gen. George W. Casey Jr., the senior American commander in Iraq, and US Ambassador Zalmay Khalilzad have urged Iraqi politicians to put the oil law at the top of their agendas, saying it must be passed before the year's end.

Saleh was on Dec. 9 quoted as saying: "Revenue sharing is an accepted principle by all the constituent elements of the Iraqi government, including the Kurds, and that is the unifying element that we're all hoping for in the oil law". An American official involved in the drafting process was quoted as saying the Kurds were willing to make concessions because a national oil law could attract more foreign oil companies to exploration and development in Kurdistan. A large international oil company (IOC) would have more confidence in signing a contract with the Kurds if it were to operate under the law of a sovereign country rather than just the law of an autonomous region.

Kurdish leaders believe the concessions are a worthwhile price to pay for having a stake in the much larger revenue pool of the country's oil industry. The southern fields accounted for 85% of total Iraqi crude oil production in 2005, partly because northern production was hampered by insurgent sabotage. The south has an estimated 65% of the country's 115 billion barrels of proven oil reserves. But the Kurds are still holding out on the issue of oil contracts, arguing that the constitution guarantees the regions absolute rights in those matters.

Saleh said: "There are those among us who say we cannot go back to the former days of centralisation, which were not conducive to good business practice and to the idea of federalism that is enshrined in the constitution". In its recommendations, however, the ISG took the opposite tack. Its says "no formula that gives control over revenues from future fields to the regions or gives control of oilfields to the regions is compatible with national reconciliation".

Though the Kurds have ceded their position on the issue of future revenues, they are fighting for control over the development of future fields. The drafting committee met on Dec. 7 to try to resolve the contract issue, but could not reach an agreement. Distributing revenues by population could be a difficult matter without a reliable census, which Iraq lacks. Sunni Arabs often claim they are at least 60% of the population, not the 20% which is commonly cited. The Shi'ites are generally estimated to be 60% of the population, and the Kurds 20%. A national census expected to be taken next year should determine the share of revenue that goes to each province or region. If doing a census next year is too politically fraught, or if security conditions prevent it, then revenues could be distributed to provincial or regional governments according to the household counts used by Saddam's Ba'thist government to distribute rations in the 1990s.

The Kurds have insisted that revenues collected by the central government should be put into an account which automatically redistributes the money into sub-accounts dedicated to the provinces or regions. This approach could be written into the national oil law or into a separate law.

NIOC would operate using a business model and not through a government budget process. Iraqi and American officials say that would make management of oil production more efficient and separate it from the Oil Ministry, which has been rife with corruption. The North, Central and South Oil Companies, which currently manage production in their regions, would fall under the umbrella of INOC. Any exports would still be sold through the State Oil Marketing Organisation (SOMO). The law sets production thresholds for creating new regional companies. A province or region, for example, might have to show it can produce 100,000 b/d or more before a company can be created there. Officials in Maysan Province in the south have said they want to start a company of their own.
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Publication:APS Diplomat Operations in Oil Diplomacy
Date:Dec 18, 2006
Previous Article:IRAQ - Over 600,000 Killed.
Next Article:IRAQ - The ISG Input.

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