Middle East Economic Survey
VOL. L
No 49
3-Decem
Iraq’s Uncertain Oil And Political Prospects (Part 2 Of 2)
By Issam Chalabi
Issam Chalabi, former minister of oil of Iraq (1987-90) and former president of Iraq National Oil Company (1981-87) recently made two presentations covering Iraqi oil and politics. The first was at Princeton University on 13 November and the second in Columbia University on 14 November. The presentations covered a number of related issues that Mr Chalabi decided later to elaborate in the form of a two-part article for MEES. The first part was published last week.
Upstream Development Plans
For nearly 30 years, there were plans on the table to develop crude oil production capacity to 5.5-6.0mn b/d. The plans have been interrupted by three wars and 13 years of sanctions, followed by chaos, lawlessness and anarchy since March 2003. In 1979, Iraq issued tender documents to develop five super-giant fields, Majnoon, Nahr 'Umar, West Qurna, Halfaiya and East Baghdad. The tender documents were prepared jointly with international and national oil companies, on an EPC basis. Contracts were signed for drilling hundreds of wells in West Qurna with Technoexport of Moscow, and expansion of the al-Bakr terminal (now Basra Oil Terminal) with the US Brown & Root (now KBR). These plans were put on hold when the Iraq-Iran war broke out in September 1980.
The same plans were revived in March 1990, with the aim of IOCs and NOCs participating under a model that resembled the buyback agreements signed by Iran in later years. Production-sharing and ED&P models were not adopted at that time. Again, there was a good response, but the plan was frozen when Iraq invaded Kuwait in August 1990. In May 1991, a few months, after the second Gulf War, Iraq called on Total and Elf of France to discuss plans to develop Majnoon and Nahr 'Umar fields on a production-sharing basis. Although discussions reached almost a final draft by 2000, no contract was signed.
Iraq continued discussions throughout the 1990s with many other companies of different nationalities which resulted in a number of contracts, as with Lukoil of Russia in March 1997 for the second phase of West Qurna and al-Waha-CNPC of China in June 1997 for al-Ahdab and over 10 other contracts and agreements, including ONGC of India, Pertamina, Sonatrach and Petrovietnam; but none of these contracts and agreements has been implemented. The signing was purely for political reasons, under the pretext of persuading foreign countries through such lucrative deals to break sanctions; but that did not happen. Iraq terminated the contract with Lukoil in December 2002. France refused to sign a deal. All those deals are being kept on hold and it is expected that they will be renegotiated at a later stage by Iraq.
For the plan to upgrade production to its pre-1990 level of around 3.5mn b/d, there has been very limited progress. Despite the fact that the oil ministry issued a few tender documents in 2004 on an engineering and procurement basis to develop a number of small fields, none of the projects is expected to be completed before 2009.
The Constitution And Federal Oil Law
Even before the invasion of March 2003, there had been many reports prepared or encouraged by certain US authorities or affiliated think-tanks on the privatization of Iraq’s oil industry. The most significant was one by US officials and submitted to a committee formed a few months before the war – one out of 15 committees that had been established by the US Administration. It comprised only a few Iraqis, some with no direct experience in the oil industry. After the invasion these ideas were presented, but were not welcomed by the vast majority of Iraqi oil professionals inside and outside the country. Phil Caroll of Conoco and later Shell, appointed to oversee the oil industry, gave up on that. Yet efforts to prepare a new oil law continued, through US institutions, private consultants and committees formed for that purpose. The first real draft to be heard off was that of a mixed Iraqi and American committee of experts who were asked to prepare such a draft in mid-2004 as well as drafts for re-establishing Iraq National Oil Company (INOC) and restructuring the oil ministry, plus certain other related laws.
Attempts were later postponed, pending the drafting and adoption of a permanent constitution, which was hurriedly adopted, followed by elections of a new parliament amid cries of forgery and ballot rigging. It was only adopted after commitments were made and embedded in the constitution that it would be revised within a period of four months after the elections of a parliament (in early 2006). Until today, the constitution has not been amended, a move requiring a referendum. The related oil and gas articles embedded in the said constitution were not those drafted by the committee of the then National Council but by top political leaders under pressure from the US and Kurdish authorities:
Article 111
Oil and gas is the property of all the Iraqi people in all the regions and provinces.
Article 112
First - The federal government will administer oil and gas extracted from current fields in cooperation with the governments of the producing regions and provinces on condition that the revenues will be distributed fairly in a manner compatible with the demographical distribution all over the country. A quota should be defined for a specified time for (affected) regions that were deprived in an unfair way by the former regime later on, in a way to ensure balanced development in different parts of the country. This should be regulated by law.
Second - The federal government and the governments of the producing regions and provinces together will draw up the necessary strategic policies to develop oil and gas wealth to bring the greatest benefit for the Iraqi people, relying on the most modern techniques of market principles and encouraging investment.
Article 115
All that is not written in the exclusive powers of the federal authorities is within the authority of the regions. In other powers shared between the federal government and the regions, the priority will be given to the region's law in case of dispute.
The above mentioned oil articles in the constitution were subject to different interpretations that later caused the controversy over the draft law, creating an anomaly that can only bring havoc to the industry and abort its development. To avoid any misconception the wording should have been made to allow for oil policies to be clearly decided by the central government with consultations with the regions and provinces.
After the formation of the Maliki government in May 2006, it was apparent that one of its major tasks, at the US’s behest, was to issue a new oil law. A US consulting group named BearingPoint was appointed to assist the oil ministry in that task. Husain al-Shahristani, the current oil minister, asked three Iraqi oil professionals (Tariq Shafiq, Faruq Kassim and Thamir Ghadhban) to review and prepare a draft of an oil law. But soon after that, in August 2006, the Kurdistan Regional Government (KRG) released its own draft based on its interpretation of the constitution, giving itself full rights, authorities and ownership of oil and gas resources in the region, and the right to explore, develop and market them.
The oil ministry, upon completing the drafts by its own committee later in the year, managed to convince the KRG to delay the adoption of its version until the adoption of a federal law. By 26 February 2007 an official draft was agreed upon after months of secret negotiations and after direct intervention by senior US officials. That draft was not released, but its text became available to oil unions and professionals who considered it a sell-out to foreign oil companies and an advanced attempt to the disintegration of the country by the distribution of oil resources among the regions and provinces. This was in line with a law passed earlier by the parliament (with a single vote majority) that prepares the way for establishing other regions in the country. The oil unions held a number of meetings and issued declarations denouncing the said draft law as soon as the cabinet adopted it on 26 February. On 17 February, a meeting had been convened by over leading 60 Iraqi oil experts in ΄Amman who issued a declaration. It sent an open letter to the Iraqi parliament on 3 March. It said the ΄Amman meeting “noticed the existence of many loopholes and ambiguities that should be paid attention to and remedied by your esteemed council for the purpose of enforcing this law in a way that leads to its successful implementation transparently and efficiently and to achieve the highest national interest. At the same time that we wished that public opinion and the non-governmental organizations were allowed to review the draft of the law, as well as the oil cadres that are specialized in this aspects, to study and enrich it before it is submitted to your esteemed council to discuss its enacting, we would like to emphasize our opinion that there was a rush in its issuance under the present complicated circumstances prevalent in our dear country.”
The Iraqi government then called for a gathering in Dubai last April to show support, but were surprised by a number of major obstacles: two of three professionals who had worked on the first draft of 2006, declared their disassociation from the draft; and KRG minister Ashti Hawrami declared his government’s disapproval of the four annexes and the role to be given to INOC.
Also, the leaderships of all five of Iraq’s trade union federations made a joint statement on the future of Iraq’s oil, saying: “We strongly reject the privatization of our oil wealth, as well as production-sharing agreements, and there is no room for discussion on this matter. This is the demand of the Iraqi street, and the privatization of oil is a red line that may not be crossed.”
A 26 February cabinet decision set a 31 May deadline for the oil law plus four annexes categorizing the oil fields and contract models, the Revenue Distribution Law, INOC law and oil ministry law to be submitted to the parliament and adopted. But none has been passed up to now. The cabinet waited for the comments of the highest legal body (Majlis al-Shura) which re-wrote the draft in legal language, but also indicated 13 major issues most of which were already pointed by the Iraqi oil experts in their first Open Letter. Yet the government ignored them and sent the second draft to Parliament on 3 July, omitting the annexes and thereby giving authority to the Federal Oil and Gas Council to decide on who and how those fields are to be administrated.
The cabinet sent another draft reinstating the annexes as was the case in the draft of 10 July. As if the third draft was not enough, they sent word to await yet another draft to be based on the results of the ongoing negotiations with the KRG. At a meeting of parliament’s oil and gas committee on 23 September, a new draft was submitted, with the issue of the allocation of discovered oil fields, supposed to be the responsibility of INOC, deleted after KRG objections. The said committee has yet to start its discussions.
Despite strong objections of oil professionals and oil workers’ unions and efforts of many Iraqi MPs, NGOs, media and others, the government is still dictating the theme of the law, advancing the ideas of possibly awarding foreign oil companies contracts on a production-sharing for fields discovered throughout the past decades and the distribution of responsibilities among INOC, regions and provinces. The oil professionals then issued their second letter, on 16 July, this time with 108 signatories, confirming their original stance on the oil law. In the meantime, the oil minister issued orders considering the oil unions as illegal and barred the oil establishments from dealing with them simply because the unions continued their fierce campaigns against the oil law. A third letter, signed by 60 Iraqi oil experts, was sent to parliament on 26 November (see following item for details).
The Revenue Sharing Law
Of the 43 articles of the draft oil law, only one (Article 11) deals with revenues. It states only that a separate law on revenue distribution will be presented to the Council of Representatives, and that two bank accounts will be established for receiving the revenues. The cabinet announced last August that the draft would be submitted to parliament within few days. So far, the final draft has not been completed due to major differences with the KRG which demands that it receives its 17% share automatically from the oil revenues, without any link to the central government.
This law, if and when submitted to parliament for approval, will have to be a part of a package, including the draft oil law, which will have to be passed as a whole according to the demands of the KRG. But to avoid major conflicts, they could have been separated and submitted to parliament as required. Hence the passage of the much awaited Revenue Sharing Law will also face many hurdles.
The KRG Oil And Gas Law
The Iraq Kurdish parliament approved on 6 August the autonomous region’s oil law, signaling that the Kurds are moving forward with their own petroleum policy as Iraq’s federal oil plans remain undecided in Baghdad. This was clear evidence of the KRG’s efforts to exert its powers independently. This attitude, that has angered many in parliament and the government, is interpreted as another separatist move.
KRG Prime Minister Nechirvan Barzani signed the law and it became effective on 8 August. Mr Barzani said the region’s oil law “will be the foundation of our economic development.” It gives the regional government the right to administer its oil wealth in the three northern governorates – Irbil, Sulaimaniya and Dohouk – as well as what it called “disputed territories”, referring to Kirkuk, one of Iraq’s largest crude production hubs. While the Kurds view their petroleum law as a mark of their self-governing powers, other Iraqi observers say the Kurdish parliament’s actions could further inflame tensions with other ethnic groups. It seems the Kurds want to annex Kirkuk as well as vast areas of Ninewa, Salah al-Din, Diyala and Kut provinces to their own autonomous region. Mr Barzani claimed that Baghdad had made some unacceptable changes to the draft of February and this had caused a serious delay in the process of issuing a federal law.
The passage of the KRG law does not change the fact that most big international oil companies are unlikely to initiate business with the Kurds at the moment. Companies like ExxonMobil, Chevron, BP and others have their eyes set on Iraq’s big oil reserves in the south, and do not want to upset their chances of doing business in greater Iraq by entering into deals with the Kurds before the federal oil law is in place. In June, the KRG said it was planning to offer 40 new oil blocks to foreign companies. Soon afterwards the KRG announced that it had signed five production-sharing agreements with a number of small foreign companies. But the only noticeable one was that with Hunt Oil of Dallas, Texas that caused an uproar in the US including calls for investigation by a number of senators and congressmen. Normally, the KRG defines the areas and blocks allocated in PSAs; but details were missing in the case of Hunt Oil. It was later discovered that the reason was that the contracted blocks (6, 7 and 8) were outside the KRG’s three known governorates and lie inside Ninewa Governorate (Mosul). The blocks include four known structures Jabal Kand, Ain Sifni, Narjis and Noor. Despite being confronted with these reports, neither the KRG nor Hunt Oil would comment. That added a new element into the already existing complexity and will certainly have a major impact on any future discussion of the oil law in the Iraqi parliament. Oil is politics in Iraq and I think this will add fuel to the fire and upset more people in Baghdad.
On 6 November, the KRG announced that that seven new PSAs had been signed with various companies including OMV of Austria, Reliance of India and Gulf Keystone of UK and Texas (MEES, 12 November). Mr Hawrami said that with those new PSCs, KRG had 20 companies working in Iraqi Kurdistan. On 12 November KRG announced the signing of five more contracts (MEES, 19 November). The Iraqi central government immediately reiterated, through Dr Shahristani, that all those contracts were considered illegal and that the ministry was considering blacklisting the companies.
Role Of Washington In Promoting The Oil And Gas Law
The role of the US in pushing for an oil law was very clear in various forms, including political pressure on Iraqi groups to finalize it. The last hurdle was only crossed after direct intervention by the US Ambassador to Iraq on 24 February 2007. In early March, the White House announced that “Iraq's Council of Ministers approved a national hydrocarbon law that provides for an equitable distribution of oil revenues throughout the country”. In fact, the law did nothing of the sort. As explained above, a revenue-sharing law is still being drafted and has nothing to do with the oil law which is supposed to set up a framework for the upstream oil sector and for foreign investment in the oil and gas sector.
As early as 2002, a member of the US State Department’s Future of Iraq working group on oil and energy, the first forum in which a restructured Iraqi oil industry was planned, said “everybody keeps coming back to production-sharing agreements and long-term contracts under which multinational companies would provide investment in return for operating and managing the oilfields and taking a share of revenue and more importantly of the reserves.” Such ideas have featured in official thinking on oil policy ever since. President Bush says the war is not about oil but his actions contradict that claim. As reported by investigative journalist Greg Palast, the oil law now proposed by the Iraqi Council of Ministers is a virtual photocopy of a plan first drafted by US oil industry executives and consultants in Houston long before Iraq was invaded and occupied.
The last draft of September 2007 deletes reference to the fields allocated to INOC and would leave that decision to the Oil and Gas Council, without the involvement of the legislative body. Earlier drafts specified that already developed and producing fields, as well as all the discovered fields close to production facilities, would be exclusively for INOC, with the rest being divided among the regions with the intention of them being developed by the multinationals under contracts of up to 30 years. The practice in Iraq – as in other countries with giant reserves – has been for control of oil production to rest with public sector oil companies. The role of foreign companies is limited to service contracts whereby a company is contracted to provide a stated service for a limited period: build a refinery, lay a pipeline, drill a field. Decisions on development, distribution, and flow of profits remain with the government. Kuwait, Saudi Arabia and Iran run their industries this way.
Status Of Oil Law As Of November 2007
According to Mahmud Mashhadani, Speaker of Parliament and Mehdi Hafidh, member of parliament and former planning minister, speaking on 26 October, parliament has yet to receive the draft oil law for discussions. According to UPI on 26 October, Lawrence Butler, deputy assistant secretary in the Bureau of Near Eastern Affairs, said during a speech at the National Council on US-Arab Relations’ annual Arab-US Policymakers Conference that the US is “disappointed” with Baghdad’s pace of passing legislation such as the oil law: “We agree that Iraq cannot be won by military means alone. Candidly, we have been disappointed with the reconciliation efforts at the national level and the lack of passage of legislation such as de-Ba΄thification laws or the hydrocarbon law package.” The oil law is stuck after more than a year of negotiations between the KRG and central government officials, let alone the other political blocks and oil professionals. The question of the role of regional authorities and foreign oil companies remains uncertain and unclear.
At a Stanford University discussion, retired Gen John Abizaid, the former CENTCOM Commander, said what we all know: “Of course it’s about oil, we can’t really deny that. We’ve treated the Arab world as a collection of big gas stations.” Alan Greenspan wrote in his coming book: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” General Sanchez who led the US (or as they call it Multi-National Forces) said recently in a TV interview that the war on Iraq had turned into a nightmare. Similarly with the previous Chief-of Staff of the British Forces who ridiculed Tony Blair and the British government for their role and lack of vision. Many others can be quoted too.
Almost a century ago, Iraq was at the center of post-WW1 politics because of its oil resources. Now Iraq seems to be once again at the center of turmoil, with its destiny to be decided by foreign powers.