Why Iraqis Cannot Agree on an Oil Law

Why Iraqis Cannot Agree on an Oil Law

The division of Iraq’s oil wealth is an important obstacle to a power-sharing deal. At issue is whether revenues should be regionally or centrally controlled.

Last updated February 22, 2008 7:00 am (EST)

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Disagreements over oil production, exploration, and revenue sharing threaten to unravel hopes for a political breakthrough and national reconciliation in Iraq. A draft oil law (PDF) has drawn criticism from Iraq’s Sunnis, who prefer a stronger role for the central government, and from Kurds, who prefer a stronger management role for the regional authorities. The majority Shiites have sought to mollify the Sunnis by keeping control of Iraq’s oil sector primarily in Baghdad, not the regional governorates. The role of outside investors, as well as the classification of old versus new oil fields, also divides Iraqi politicians. Oil, of course, is the country’s most vital resource, and revenue generated by it accounted for the government’s entire $41 billion budget (PDF) in 2007. Yet output has fallen short of Baghdad’s production targets, mostly due to corruption, poor security, and lack of investment. Unable or unwilling to wait for a compromise, the Kurdistan Regional Government passed its own oil law (PDF) in mid-2007. The Kurdish government has also entered into dozens of production-sharing contracts with international companies, further straining relations between Kurds and the central government. 

The Hydrocarbon Legislation*

The bill drafted in February 2007 gives exploration and production planning responsibilities to a newly created federal oil and gas council. The bill, approved by the Iraqi Cabinet but currently stalled in parliament, also spells out exploration responsibilities of the Iraq National Oil Company (INOC), a state-run company with origins tracing to pre-Saddam Hussein Iraq. The hydrocarbon law does not, however, offer specifics on how the currently inactive INOC would manage Iraq’s national reserves. Those plans are contained in a separate bill that, like the hydrocarbon bill, has stalled amid Iraq’s divided political system. Two other pieces of legislation—one that would reorganize the Ministry of Oil, and another that details how oil revenues would be collected and redistributed—have also faltered.

The Issues That Divide

Iraq’s Kurds and Sunni Arabs oppose the draft law for different reasons. The Kurds say it would cede too much control to Baghdad’s oil ministry, and eventually, the national oil company. The Kurds want more regional autonomy to develop existing and new fields on their territory, as well as those near the northern city of Kirkuk, which is under de facto Kurdish control. Moreover, they prefer greater authority to bypass Baghdad and sign contracts with foreign companies; the Kurdish government has already executed fifteen exploration contracts with twenty small international companies. “Kurdish dissatisfaction stems from its objection to a state-run, relatively unaccountable oil company that’s given almost all of Iraq’s proven reserves,” says Jonathan Morrow, legal adviser to the Kurdistan Regional Government’s natural resources minister. Yet most observers say that without federal legislation, major oil companies will stay out of Iraq, including Kurdish territory. “Big companies are not going to take the risk of damaging their relationship with the central government” by signing deals with the Kurds, says Rochdi Younsi, a Middle East analyst with the Eurasia Group.

“Kurdish dissatisfaction stems from its objection to a state-run, relatively unaccountable oil company that’s given almost all of Iraq’s proven reserves.”
— Jonathan Morrow, legal advisor to Kurdish government

The Sunnis, meanwhile, who reside mainly in regions lacking in major oil reserves, favor a hydrocarbon law that would give the central government greater managerial control over contracts and infrastructure development. Tariq Shafiq, who helped draft an early version of the oil law, told United Press International (UPI) the regions don’t have the “necessary institutions” or “required expertise” to manage their oil fields without the assistance of the central government and will become overly reliant on foreign companies. The central government appears to agree; the oil ministry has already cut off exports to some international firms in Austria and South Korean in protest of their dealing with the Kurdish government. Ben Lando, editor of the Iraq Oil Report blog and head of UPI’s energy resources desk, summarizes the sectarian disagreement this way: “The overall debate goes back to the ‘new Iraq’ and the status of federalism; what [style of] government would be the best to strategically develop the oil sector?”

Points of Contention

Legislative delays notwithstanding, criticism of the draft laws runs deep. The hydrocarbon bill, for instance, would give representatives from regional authorities the opportunity to sit on the oil and gas council, as well as on the national oil company’s board. But the move is viewed by the Kurds as a misguided attempt to give the central government too much control over local resources. Another point of contention is the creation of four so-called oil annexes by the Iraqi oil minister, Hussein al-Shahristani, a Shiite, as another means of ceding greater management control to the national oil company. The Kurds argue these annexes—in essence a list of current and potential oil fields—were drafted without their input and violate the constitution. The annex provision states that Baghdad, together with regional authorities, will determine the management of untapped fields, wording the Kurdish government opposes. Other issues holding up passage of oil legislation:

Revenue sharing: The draft hydrocarbon law does not delve into specifics of revenue sharing, though a companion bill that does also is stalled within parliament. What’s more, observers say the constitution is vague on the subject of distribution; Article 111 states simply that “oil and gas are the ownership of all the people of Iraq,” while Article 112 calls for a distribution of revenues “in a fair manner in proportion to the population,” taking into account regions deprived by Saddam’s regime that would be first in line for payments. Article 112 also requires the Iraqi parliament to pass a law regulating revenue distribution—the one currently mired in sectarian rancor.

The classification of new versus old oil fields: Kurds maintain that under the Iraqi constitution, new production will be under the control of regional authorities, while Sunnis and Shiites envision a partnership between federal and regional powers. Yet some say the definition of “new” varies from region to region. Lando says a principal disagreement rooted in the constitution is over the definition of “present fields,” a classification he says leaves much to interpretation, including whether “present” includes a proven field or only a producing one. A January 2008 Kurd-supported legal opinion (PDF) adds that the constitutional wording says nothing about “non-producing and future fields.” It remains unclear how these disputes will be settled.

The role of foreign companies: Iraqis disagree over whether to allow foreign companies to develop their country’s untapped oil fields. Sunnis in particular are worried that doing so would erode Iraqi sovereignty and redistribute oil revenues away from Iraqis and into foreign hands. But many experts, including those inside the Iraqi oil ministry, say outside investors are needed to stimulate development of Iraq’s dilapidated oil infrastructure.

Oil to Fight For

In 2001 Iraq’s proven oil reserves were estimated to be around 115 billion barrels, making them the world’s third largest after Saudi Arabia’s and Canada’s. The bulk of Iraq’s known oil reserves (PDF) lie primarily in the Kurdish-controlled north near Kirkuk and Shiite-controlled south around Basra. But Frank A. Verrastro, director of the energy program at the Center for Strategic and International Studies, estimates that because of sanctions, neglect under Saddam, and lack of investment, less than 20 percent of the country has been fully explored. Verrastro estimates undiscovered reserves could be anywhere from 45 billion to 110 billion barrels, a conclusion supported by the U.S. Energy Information Administration. “Iraq’s western desert” (PDF)—which is Sunni controlled—“is considered to be highly prolific but has yet to be explored,” writes Amy Myers Jaffe, an energy expert at Rice University’s James A. Baker III Institute for Public Policy.

Stalled Production

In the run-up to the April 2003 war in Iraq, the Bush administration predicted that within five years Iraq would be producing 6 billion barrels of oil per day, more than enough to pay for its reconstruction. Verrastro says U.S. engineers evaluated the pumps and pipes, but until Shell and BP were commissioned to do so, below-ground analysis to assess the reservoirs and damage caused by Iraqi management practices had not been conducted. He estimates that Iraqi oil production, currently around 2.5 million barrels per day, will not reach 4 million barrels per day until after 2010.

“Many [Iraqi politicians] think this is not a priority because of the security situation.”
— Rochdi Younsi, the Eurasia Group

Experts say production shortages over the past few years are mostly due to poor maintenance, corruption within the oil ministry, and a lack of security that has fueled smuggling and sabotage. Baghdad has gone so far as to blame Iran for “illegally pumping Iraqi crude oil,” according to the U.S. State Department’s Iraq Weekly Status Report (PDF). What’s more, there has been virtually no development of new fields since the April 2003 invasion of Iraq, according to Jaffe. Many experts say the problem dates back to the onset of severe UN sanctions in 1991. Even during the oil-for-food program, which started in the late 1990s, Iraq’s oil infrastructure was badly neglected. The Brookings Institution’s Iraq Index estimates over 460 insurgent attacks have targeted Iraqi oil infrastructure since 2003, though strikes have declined dramatically since August 2007.

Another problem is the flight of trained technicians needed for Iraq’s oil industry. Jaffe points to “a looming gap in technical and managerial expertise,” combined with the “intimidation of key experts.” Many of the industry’s most capable technocrats under Saddam either fled Iraq or are of retirement age, says Verrastro. 

The Future of Iraq’s Oil Laws

Despite Iraq’s economic reliance on oil, few experts are optimistic a political compromise is forthcoming. U.S. officials have made an oil law one of their main benchmarks to gauge political progress in Iraq. International oil companies, for their part, continue to cheer Iraq’s politicians on from the sidelines. As of February 2008, over 70 firms had registered (Reuters) with the oil ministry to compete for future extraction and service contracts. Yet many observers say they see no indication from parliament that hydrocarbon legislation is forthcoming. “No one has even dared schedule anything,” Younsi of the Eurasia Group says of Iraq’s leaders in Baghdad.  “Many [Iraqi politicians] think this is not a priority because of the security situation.” Oil companies, Younsi adds, “are not going to come” if security doesn’t improve.

* A previous version of this Backgrounder incorrectly characterized some aspects of the disagreement between Iraq’s ethnic factions, including how draft legislation before parliament would collect and distribute oil revenues, and reorganize the country’s oil ministry and national oil company. 

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