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IRAQ - The Draft Law.

The legislation tabled for Iraq's parliament to debate from this month has been left partly vague, avoiding key issues, because of the suspicions of the nationalists. According to a highly placed APS source in Baghdad, key areas have been kept "grey until they are finally whitened or blackened" by parliament.

In its current form, the draft law does not clarify two matters crucial to Iraq's future: how to attract foreign investment into the petroleum sector and how to distribute the revenue resulting from new investment. But the source says these two issues have been left for the legislators to work out after proper debate on the whole draft. He says: "Such crucial details need to be worked out after a thorough debate and consultations with experts in these particular fields".

Bush officials and Iraqi politicians have hailed the draft as a milestone in Iraq's return to the map of the world's petroleum resources. By allowing foreign investment into a politically charged petroleum sector, officials hope to start rebuilding a war-torn industry. They hope new oil revenue, distributed fairly to the country's fractious regional, ethnic and religious groups, will underpin Baghdad's shaky central government.

IOC executives say the draft is too ambiguous to trigger any meaningful negotiations between companies and government officials. If and when this is amended properly and passed, the initiative would allow foreign participation. That in itself would be a big step, because the country's petroleum wealth has long been a "sacred cow".

The nationalisation of the petroleum industry in 1972 under Saddam's dictatorship was a hugely popular move, and many Iraqis are still wary of foreigners exploiting their oilfields. For now the draft bets on crucial questions for IOCs weighing a move into Iraq, including: Who can negotiate contracts on behalf of the government? What investment terms can be expected? How will taxes and royalties be collected? And which fields will be open to foreign development?

Government officials hope these and other details can be addressed in parliament, as well as in subsequent rule-making. They argue that such details are too complicated, or for some too controversial, for them to be included in the draft.

Civil strife across Iraq will keep out most IOCs until stability returns. Since the March 2003 US invasion, the country has splintered along regional, ethnic and sectarian lines. Violence and killing, including suicide bombings by Neo-Salafis, remain a daily occurrence. And there is even the danger of a part of Iraq becoming a base for al-Qaeda (see fap3-Iraq-QaedaBaseMar12-07).

The Kurdish-dominated north and the mostly Shi'ite south now produce most of Iraq's crude oil. But the central and western provinces, dominated by Sunnis, are not significant oil-producing regions, stoking fear among Sunni politicians that their people could be left behind by any new development.

Yet these Sunni areas are likely to become major producers of crude oil and natural gas. These areas already contain super-giant oilfields, such as East Baghdad, which potentially can produce more than 1m b/d. The western desert is believed to be rich in natural gas and reservoirs of high-quality oil.

Historically, Iraq's Sunni Arab Triangle has been under-explored. This has been mainly because oil was easily found and produced in the north and south of the country - first by a BP-led concessionaire, Iraq Petroleum Company (IPC) and its northern and southern subsidiaries, and later by Iraqis under Saddam's dictatorship.

During months of negotiations over the draft, Kurdish officials have insisted on retaining the right to hammer out deals with oil companies in their autonomous northern enclave. They have already signed several E&P contracts, and some oil companies have started work there. Some have already found oil.

In February, the Baghdad cabinet brokered a compromise, agreeing to a complex scheme whereby regional governments can negotiate E&P contracts with some measure of federal oversight. But many MPs are still unclear as to how that system would work in practice, and whether other regional or local governments - for instance, a bloc of southern Shi'ite provinces - could negotiate contracts on their own as well.

MP Omar Abdul Sattar from the Iraqi Islamic Party (IIP), a major Sunni group, was recently quoted as saying: "Until now, we don't know how much authority is reserved for the regions and how much for the central government".

Several annexes to the draft list specific fields which could be open to foreign companies. For now, the choicest ones - those already producing, or partly developed fields - are set aside for a new state-run petroleum company to be called Iraq National Oil Co. (INOC) which could develop the fields on its own or enter into joint ventures.

It will take time, however, for Baghdad to put together a new NIOC - the old NIOC was dissolved in the 1980s by Saddam's dictatorship. This is because a mass exodus by the country's petroleum technocrats has drained the sector of talent.

It is still unclear how the legislation would handle the revenue from any new development which someday may flow from foreign participation. The draft only states that Iraq's oil wealth belongs to all of its citizens. But an agreement has been reached to dole out revenue to regions according to population numbers, although the legislation does not detail any specific mechanism for doing this.

Important clauses will be left for future debate. Ashti Hawrami, the Kurdish region's petroleum minister, says the Kurdish Regional Government (KRG) has agreed to pool all of its petroleum revenue to be shared with other regions. But Kurdish officials have fought hard to retain their ability to negotiate with oil companies, and they are not likely to give up all say in how revenue from those deals is spent.

One "expert familiar with the draft" was recently quoted as saying: "It is the most important point, but if you see the draft, it does not clearly lay it out. An outsider looking at it would be puzzled".

The details of petroleum revenue sharing are to be addressed in a separate law. This is yet to be drafted an approved by the Baghdad government.

Rampant corruption throughout the Iraqi government and the petroleum industry will be a big hurdle in working out how to spread around money. In Nigeria, a revenue-sharing system between the federal and regional governments long ago collapsed under the weight of large-scale graft, theft and corruption.

The draft is expected to face sharp opposition from Sunni MPs, who already are pressing for a stronger federal role in negotiations. Several former Iraqi oil-ministry officials have criticised the bill as hastily put together. And recently, MPs from the Shi'ite al-Fadhila al-Islamiya party, which is influential in southern Iraq's oil-rich governorates, have said they oppose the initiative because it could favour foreign oil companies over local ones.

The Association of Muslim Scholars (AMS), the top Sunni clerical group in Iraq, on March 6 warned parliament not to approve the law, claiming it will deprive Iraqis from its oil wealth. It said: "We caution the parliament that it is faced with a historical responsibility and it will have to choose between siding by the people in preserving its right and the right of its future generations from squandering and exploitation by the pharaohs of the age, and siding by the occupier and its conspiracies to seize this great national wealth".

The AMS, which calls "the highest Sunni authority in Iraq", urged for any law governing Iraq's vast oil and gas reserves to preserve nationalisation and limit foreign ownership. The AMS statement said such a law should not be passed while the country is occupied by foreign forces or while it is in the midst of war. It said: "What is the logic of passing such a law in such circumstances?...We caution them that the Iraqi people is watching all these scenes and will not allow anyone to trade in its resources".

There have been rumours that US and British oil corporations and the IMF had been involved in the drafting process since early 2006. The UK government has recently denied that it had been involved in the drafting of the law.

The draft law provides for "exploration risk contracts" allowing foreign companies control of oil exploration, development and production for up to 30 years. Earlier drafts used the more commonly known term "production-sharing agreements" (PSAs), but these sparked enormous opposition in Iraq, particularly from its unions.

Greg Muttitt, co-director of Platform, a British group critical of the PSA and the IOCs, recently said: The new draft "sets up the same thing with a different name [for the PSA]". In addition, he claimed, the draft allowed the government to sign contracts without parliament's approval, warning: If the law is adopted as it is, "basically, control of the Iraqi oil industry will shift from the public sector, where it's been since the 1970s, into the hands of the multinational oil companies, especially British and American, which is a very radical change".

Muttitt noted that Iraqis were "passionate" about keeping petroleum in Iraqi hands, adding: "It will be very difficult to overcome public sentiment".

Salam Ali, of the Iraqi Communist Party's International Relations Committee, says: "We are against PSAs" regardless of what they are called, stressing that national ownership of petroleum was a "very sensitive" issue for Iraqis. He added: "Whoever drafted this version has made sure it will not seem as controversial as had been expected. There was some massaging". But he said privatisation was a "subtext" of the draft.

With this draft law, Muttitt said, Iraq would be "completely breaking away from normal procedure" used by all major oil producing states; none of the major oil states in the Persian Gulf allows such foreign control.

In Saudi Arabia, with the world's biggest oil reserves, oil is fully owned and controlled by the national oil company - Saudi Aramco. The same is true for Kuwait. The UAE and Iran allow some foreign investment but maintain national control. Russia offers a striking lesson. With the world's seventh biggest reserves, Russia is the largest country to have signed PSAs. Muttitt said Russia signed three PSAs in the mid-1990s, but they became so controversial that none has been signed since and "there is no chance of more".

Like Iraq now, Muttitt noted, Russia in the 1990s was in a period of political and economic chaos. "A few years later, the Russians woke up" and saw these deals were a big mistake, "but it was too late". Now, he said, the same thing could happen to Iraq.

Experts note that Iraq has fallen behind on technical expertise after a dozen years of US-imposed economic sanctions, followed by the war. What would help Iraq, they say, is "technical service contracts" like those used by Iraq's neighbours. These are standard business contracts which countries' national oil companies (NOCs) sign with IOCs to bring in expertise. They are for limited time periods, for specific services and fees, not contracts which hand IOCs exclusive rights to develop the oil for their own interests and take a large share of the revenue.

Ali of the Iraqi Communist party says service agreements, with transfer of technology to Iraq, would establish "equitable" relations from which Iraqis would benefit.

Muttitt said since July 2006, drafts of the petroleum law had been reviewed by US officials, IOCs and the IMF, but not the Iraqi public, news media or parliament. This charge has been denied by Iraqi Oil Ministry officials.

The US bipartisan Iraq Study Group (ISG) report in December 2006 listed action on petroleum among its key recommendations, saying: "The United States should encourage investment in Iraq's oil sector by the international community and by international energy companies...[and] should assist Iraqi leaders to reorganize the national oil industry as a commercial enterprise". The ISG's co-chairman, former US secretary of state James Baker, is one of the American advocates of privatising Iraq's petroleum sector.

Some in Iraq and elsewhere divert attention from the key issue by focusing on how oil revenues will be distributed, although the draft addresses that, allocating revenues to provinces based on population.

Ali of the Communist Party said: "They don't talk much about the importance of Iraq's oil to the oil monopolies. They dress it up as...addressing fears of the Sunni population. The reality of the matter is the oil law has much more to do with control of the oil sector".

Muttitt claimed that a reason why the US and Britain were pushing so hard on the petroleum law was the growing pressure on them to pull out troops, adding: "As long as the two countries have major troop presence they have a lot of influence. They would like to see this happen before any significant troop withdrawal".

UK Reaction: UK Foreign Office Minister Kim Howells on March 8 denied Britain had intervened to influence the shaping of Iraq's petroleum law. An al-Jazeera English TV documentary report had claimed that British government officials had been reviewing the draft law, commenting on it and trying to influence it. But Dr Howells described criticism of British government involvement as "paranoia gone completely loopy".

Dr Howells told a programme, "Iraq: Mixing Oil and Blood', "it's a shameful lie" to suggest the British government is not interested in the welfare of the Iraqi people. He said critics were only interested in "grandising their own conspiracy theories". He strongly defended the Foreign Office's role in arranging meetings between Iraqi ministry officials and IOC.

In the programme, Muttitt claimed he had uncovered evidence under the Freedom of Information Act that "British diplomats and officials in Whitehall have been reviewing drafts of the law, commenting on it and trying to influence it". In the documentary, Iraqi former oil minister Isam al-Chalabi said the law was "ambiguous and unclear". He added: "If it's accepted in its present form certainly it will not be a new beginning to the betterment of the people. On the contrary, it is only adding fuel to the fire".

OMV Interested: Dow Jones on March 7 quoted OMV Chief Executive Wolfgang Ruttenstorfer as saying OMV of Austria, central Europe's biggest oil and gas company, "started discussions about two months ago with the central [Iraqi] government and the Kurdish authorities". Ruttenstorfer said the talks were about exploring for oil and natural gas in Iraq.

Ruttenstorfer said Iraqi gas could supply the giant Nabucco pipeline to Europe once foreign investment was injected into Iraq's energy sector. The proposed pipeline will wheel gas from the relatively under-explored Caspian and Black Sea regions to Europe, which wants to reduce its reliance on Russian imports. Ruttenstorfer said: "Some years down the road [Iraq] could be a supplier to Nabucco". Nabucco is to have a capacity of 31 BCM/year by 2020, about 4-5% of total European gas demand by that date. This is to start up by 2011-2012.

Each of OMV, Hungary's MOL, Turkish state-run Botas, Bulgaria's Bulgargas and Romania's Transgaz Medias has 20% in the Nabucco group. French oil giant Total and state companies in Azerbaijan and Ukraine have recently expressed interest in joining the consortium. Russia and Iran are in negotiations with the consortium about supplying gas to the pipeline.
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Publication:APS Diplomat Operations in Oil Diplomacy
Geographic Code:7IRAQ
Date:Mar 19, 2007
Previous Article:IRAQ - Why Nationalists' Suspicions.
Next Article:IRAQ - Awaiting Passage.

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