Iraq’s
Uncertain Oil And Political Prospects (II)
By Issam Chalabi
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.
Issam
Chalabi is a former minister of oil of Iraq (1987-90) and former
president of Iraq National Oil Company (1981-87). Petroleumworld
not necessarily share these views.
Editor's note: This
commentary was originally published by Middle
East Economic Survey, VOL. L, No 48, 26-November-2007 and
VOL. L,
No 49, 3-December-2007. This
article was first presented in a lecture about Iraq and its oil
by Mr. Chalabi, at Princeton University on November 13th. A second
presentation was made at
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 Iraq’s
Uncertain Oil And Political Prospects (I). Petroleumworld
reprint this article in the interest of our readers.
