Iraq's oil | That long-awaited share-out | Economist.com

Iraq's oil
That long-awaited share-out

Mar 1st 2007 | BAGHDAD
From The Economist print edition
A deal has been done, but there are still some worrying ambiguities

A NEW oil law, apparently agreed upon at last by Iraq's politicians, should prompt a gush of much-needed foreign investment to reach the country with the world's second-biggest petroleum reserves. The law's passage was delayed for over half a year by a row between Iraq's federal government in Baghdad and the Kurdistan Regional Government, which runs much of the north-east, including some of Iraq's richest oilfields. Yet the law is still not quite complete.
AP So who gets the cash?

For instance, regulations for the distribution of revenues must still be drafted. Then the entire package has to go to parliament. Nonetheless, for all Iraq's main factions to have endorsed a detailed document governing an industry that produces oil worth $70m a day is a big step forward. “This is the first time since 2003 that all major Iraqi communities have come together on a defining piece of legislation,” says America's ambassador, Zalmay Khalilzad.

The government's main factions all agree that they need such a law to get the wells pumping again. Poor management and 12 years of UN economic sanctions had left the industry decrepit, even before the American invasion. Since then it has been hit by sabotage, corruption and administrative chaos. At the last count, in December, Iraq was producing only 2.1m barrels a day; the pre-war peak was 2.5m.
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But political agreements in Iraq tend to contain a lot of vague language that opens the door to future disputes. The delay in passing the oil law is largely caused by the new constitution of 2005, because it fudged the division of authority between the federal government and regional governments, crucially that of the Kurds.

The constitution gives the federal government control over fields already in production, and says that all powers not given to the federal government should go to the regions. But it does not specify who should control the exploration and development of new oilfields. Officials of the oil ministry in Baghdad say it is they who should handle all exploration. The Kurds interpret the constitution differently. They are willing to concede the management of new fields, but claim the right to negotiate contracts of their own with firms willing to exploit new fields in their territory.

In theory, that should not affect the division of earnings. Everyone seems to agree that the central government should run the existing fields (including those around the disputed city of Kirkuk, now controlled by the Kurds) and distribute the revenue evenly across Iraq. The Kurds accept that oil from fields in their area will flow into federally-run pipelines and will be sold by federal marketing bodies, with the ensuing revenue shared by all Iraqis.

But the Kurds insist that the central government should not be able to veto contracts. One reason they give is that Baghdad's ministries are so lethargic that plans to develop new fields would take too long to bear fruit. They complain that the central government already owes them several hundred million dollars of revenue. What they almost certainly think is that a locally-run oil industry would be vital if the Kurds ever won full independence.

The oil-law draft is not yet public, but the two sides appear to have compromised by letting an international panel of experts look at contracts and reject any that do not meet certain standards. In exchange, say the Kurds, they will be guaranteed a share of pooled revenue proportionate to their population. Both sides have grumbled about the compromise.

But at least the politicians seem to have sorted out some bits of the law that had stirred much debate abroad: the drawing up and regulation of the production-sharing agreements that international exploration and production firms love. Foreign drillers will, in certain fields, be able to keep a share of the oil they find, and not just be paid for their services. Some say this is fairly rare in countries with oilfields as big as Iraq's, and have accused Iraq's government of “giving away the store”.

Iraqi officials are at pains to say that the big fields will stay fully state-owned; production-sharing agreements will be dangled only as incentives to explore areas where oil is hard to find or exploit. The oil minister, Hussein al-Shahristani, says the law must be as flexible as possible to let the ministry do what is best for the country as a whole. Though Iraqi oil has been extracted for more than 70 years, parts of the country are still remarkably unexplored.

In some areas oil may exist but will be hard to extract: for instance in the western desert province of Anbar, in the oil-poor Sunni heartland. If it could be found and fully exploited there, the Sunni Arabs' bitter opposition to a federal Iraq, favoured by Kurds and many Shias, might fade.
No, we're all patriots for now

Iraqi officials say they hope a final version of the law can be passed by the end of May: a big challenge. Drafting the annexes, which include allocating specific fields to the Kurdish regional government, the central oil ministry and the national oil company, will be contentious. So will drafting a law to distribute revenue. The Kurds say the oil law is incomplete because deadlines were foisted on them. The American ambassador insisted that a new law be written and even, say the Kurds, took part in the bargaining on Baghdad's side.

This sort of pressure also helped produce Iraq's constitution, which is why the final wording was fudged and the federal issue flared up again. Were it not for such flawed agreements made under outside pressure, Iraqi politicians might produce no agreements at all. Yet if there is too much vagueness, the rows will revive all over again. It is unclear yet whether Iraq's emerging oil law will do the trick.

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