Middle East Economic Survey
VOL. XLIX
No 19
7-May
IRAQ
Some Comments On The Proposed Draft Iraqi Oil Law
By Ali Hussain
The following article was written for MEES by Dr Hussain, Oil Consultant and former OPEC Officer.
[ahussain@emirates.net.ae]
The Iraqi government is in the process of submitting a draft oil law to the Iraqi Parliament to regulate investments in the upstream sector of the oil industry. In order for it to achieve its goals of maximizing and securing benefits to the Iraqi economy and its oil industry, the following basic elements must be taken into consideration:
1. Iraqi oil must be owned by the entire Iraqi nation.
2. Final decisions on oil concessions must be centralized.
3. Oil revenues from all regions must go to a government fund.
4. Oil revenues must be distributed fairly according to population.
5. Provinces must be given the right to participate in oil investments in their territories.
6. Iraq exercises full sovereignty over its oil resources even when concessions are granted to foreign oil companies.
7. Provinces are allowed to negotiate with foreign companies according to certain principals and conditions laid down by the central government to secure Iraqi interests and unify policy.
8. Tendering should be used to grant foreign concessions.
One of the suggested proposals, by some Iraqi oil experts, is that the proposed Iraq National Oil Company (INOC) must play a major role in developing the oil industry by exploiting all producing and discovered oil fields (ie covering at least 80% of oil activities in the country). However, before assigning such a big task to INOC certain factors must be taken into consideration:
1. Its staff and manpower must be professional.
2. It needs enough capital to do the job.
3. It must obtain the required technology.
4. It must have the necessary facilities.
5. It must coordinate and cooperate with the provinces.
6. Its board of directors must include representatives from all provinces.
7. It must eliminate corruption.
8. The time needed to establish INOC and start operating must be borne in mind.
All the above factors must be studied thoroughly to make sure that INOC can carry out this task better than international oil companies (IOCs) to secure Iraqi interests. Unless INOC is properly established and able to do its work efficiently, allocating so many giant oil fields to a badly organized entity will be a great mistake.
Choice Of Contracts
With regard to the kind of contracts (such as production-sharing agreements, service contracts, buybacks, etc) signed by Iraq with IOCs, the Iraqi oil authorities must decide which kind is suitable for each oil field in order to maximize the benefits. However, according to some Iraqi oil experts, production-sharing agreements (PSA) must be excluded. This is wrong. A PSA is simply an agreement between two parties in which each party can insert its required terms and conditions. If Iraq is able to achieve its desired goals from such agreements, why should it reject them? Furthermore, Iraq can always hire international companies specializing in the financial and legal aspects of international oil contracts to assist in attaining the right concessions within these agreements with IOCs and thereby secure Iraqi interests.
Some Iraqi oil experts argue that the government should not rush to issue and implement the Iraqi oil law because the country is under occupation and it suffers from violence. This argument can not be accepted for the following reasons:
1. If the oil law achieves Iraqi interests and develops its oil industry under the present circumstances then why should the implementation of such a law be delayed?
2. The Iraqi economy and infrastructure are in ruins and they require significant investments to be developed.
3. Iraq’s unemployment rate is more than 50% and leaving this workforce idle is not beneficial for the economy.
4. Oil revenues are the only source of income in foreign currencies which can help Iraq to import capital and consumer goods and services necessary for its development.
5. There is a strong correlation between oil revenues and economic growth in Iraq if these revenues are invested properly.
6. Iraq must benefit from present oil market conditions and relatively high oil prices.
7. Iraq, with its large oil reserves, must prepare itself to benefit from the future increase in the global demand for oil which the IEA estimates to reach 120mn b/d in 2030 compared with 85mn b/d now.
Developing Downstream
Parallel with issuing and implementing the proposed oil law, Iraq must not concentrate its efforts exclusively on developing its upstream operations. It must also have a policy for its downstream operations in the fields of refineries and petrochemicals. It is wrong for Iraq to continue producing and exporting crude oil. Iraq has a comparative advantage in oil and gas resources with production costs the lowest globally. Therefore it must formulate a long-term policy to construct refineries and petrochemical industries, using domestic and foreign investments, not only to meet domestic consumption but also for exports. Iraq must add value to the exploitation of its oil and gas industries. At the same time the expansion of the downstream operations will expand Iraq’s industrial base and generate many secondary industries.
In addition to attracting foreign investments to downstream operations, the Iraqi oil authorities must also spend a lot of effort to help and encourage the private oil sector to participate fully in the development of the oil and gas industries. This will generate employment and technology transfer to Iraq. The authorities can offer the Iraq private sector training, information and low-interest capital, and give it priority over foreign companies if they offer similar technology, quality and prices.
In both upstream and downstream operations, Iraq must make use of international consulting companies to help obtain the latest technology in designing and implementing projects at the lowest possible costs.
Finally I do hope that differences which separate Iraqis on this law disappear. All Iraqis must realize that only through cooperation and good will can the country stand on its own and maximize benefits from the oil industry. Keeping oil underground is not in the best interest of the country. We must utilize the oil sector efficiently to build the new Iraq for the benefit of every single Iraqi.