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Time to Move on: Iraq's Oil and Gas Impasse Explained

Posted: 20/12/11 13:35

The furore over the contract signed by US oil giant Exxon with Iraqi Kurdistan is another sign that Iraq urgently needs a new oil and gas law. As this primer explains, the lack of this law could well be a sign that the dream of united Iraq is over.

It's been years in the making and the latest row about Iraq's much-debated, much-delayed and mired-in-controversy national oil and gas law only indicates once again that issues around the legislation should have been resolved by now. The resolution of issues around the oil and gas law, which has never been passed in parliament, is essential to not only Iraq's future but also to the stability of the region and it is way overdue.

The International Energy Agency forecast that Iraq would be the single most important source of new oil production between now and 2035, making the development of the country's energy industry critical to international oil markets.

The latest drama focuses on the tensions between the federal government in Baghdad and the semi-autonomous state of Iraqi Kurdistan. In mid-October American oil giant ExxonMobil signed a deal with the government of the semi-autonomous region of Iraqi Kurdistan, which is using a form of oil and gas law that they formulated themsleves and which has not been approved by Iraq's federal authorities, who are still using an older version. The contract signed by Exxon, which has been described as a "landmark deal" authorizes the firm to develop oil and gas in six blocks in the northern region. In doing so, ExxonMobil became the first major oil company to sign such a deal.

This was a huge public relations coup for Iraqi Kurdistan and for the policy makers in its capital, Erbil. It is certain to have an effect when Iraqi Kurdistan starts negotiations with Baghdad again on oil policy and oil legislation. As the Financial Times wrote last week "conventional wisdom says that the interests of US "Big Oil" and Washington go hand-in-hand. Thus, many see ExxonMobil, the largest US oil company, as an extension of the US State Department". And some analysts believe the deal must have been OK-ed by the US State Department in an attempt to undermine the current Iraqi government, led by Prime Minister Nouri al-Maliki, after acrimonious talks about the nature of the upcoming US troop withdrawal. It seemed very unlikely that Exxon could have acted without being given the green light by Washington.

However at a media briefing, officials from the State Department denied that they had known anything about the Exxon deal. "The United States has advised all of our companies, including ExxonMobil, that want to invest in the Iraqi [energy] sector that they run significant political and legal risks if they sign contracts with any parties in Iraq before there has been a national agreement to work out the complex issues having to do with oil revenue distribution within Iraq," an official from the State Department said. The State Department makes it clear that it does not differentiate between north and south by saying "any parties in Iraq", indicating as much disapproval of the Exxon deal in Kurdistan as any deal done in the south.

Meanwhile the Iraqi government is threatening to impose sanctions on any oil company that enters into a separate agreement with Iraqi Kurdistan. Most recently they announced that ExxonMobil would be excluded from the next round of bidding for further contracts. Despite the strong language though, the Iraqi government probably realize the risks of confronting one of the boggest companies in the world whose annual profits are larger that the entire Iraqi budget.

Then again, none of this is new. Baghdad and Erbil have been quarrelling about who controls oil and hydrocarbon policy in Iraq for a long time.

The first attempt at drafting legislation on the main, and possibly only, source of national income for Iraq was made in 2006 and 2007. The draft laws looked promising and were well formulated. However after much tampering and political negotiation - annexing, adding, removing and amending important sections - the law became unworkable and the first attempt to legislate the sector failed. As such, it reflected the dysfunctional nature of Iraqi politics. And amid all the political infighting, a frustrated Iraqi Kurdistan decided to introduce its own oil and gas law.

After the troubled introduction of the first draft of the Oil and Gas Bill in 2007, tensions between Baghdad and Iraqi Kurdistan have escalated. At one stage, all oil exports from out of Iraqi Kurdistan stopped. Baghdad said that it refused to acknowledge any contracts made by Iraqi Kurdistan on its own while the administration in Iraqi Kurdistan said that its right to grant contracts was guaranteed by Iraq's national constitution, which had also given the region its autonomy.

Over the past few years another two further versions of a draft oil and gas law have appeared. And at a recent conference on the subject held in Erbil, comments made by the Minister of Natural Resources in Iraqi Kurdistan, Ashti Hawrami, indicated that there might even be a fourth version (based on 2007's version) sometime soon.

Which is why it is hardly surprising that many ordinary Iraqis are baffled by this issue. There have been many analyses of the various versions and the legal jargon, lack of transparency and different variations of law have confused both legal experts and ordinary people. But it seems clear that it is increasingly important that ordinary Iraqis understand the basic points of the oil and gas debate that there is such fierce political disagreement on.

Simplifying the complexities of this law does not fully explain it but the major items of contention can be narrowed down to the following points.

The Federal Oil and Gas Council

In the 2007 draft of the oil and gas law, legislation specified the creation of a new body: the Federal Oil and Gas Council. One of the issues that Erbil and Baghdad disagree upon is what kinds of powers this council should have.

Before we go any further here, it is also worth discussing the two main players debating this issue in Iraqi politics. The Parliamentary Committee on the Oil and Gas Law (PCOGL) is chaired by Adnan al-Janabi, a member of the Iraqiya bloc, led by former Prime Minister Ayed Allawi that claims to be secular and which is the main opposition to current Prime Minister Nouri al-Maliki's ruling State of Law political bloc. This committee is supported by Kurdish politicians.

The second bloc in the Iraqi Parliament concerned with the oil and gas law is the committee on this issue within the Iraqi cabinet - somewhat confusingly it is also known as the committee on oil and gas law (COGL), except in this case, the committee members are made up from out of council of ministers, or Cabinet, who run the country.

The two parties are divided on what the entirely new body - the Federal Oil and Gas Council - would and would not be able to do.

Without going into major detail, the parliamentary committee wants to give the federal council more teeth, allowing it to have the final say on contracting, that is, which oil companies qualify for work in Iraq. It also wants the federal council's members to include members from itself, the parliamentary committee. The parliamentary committee wants to ensure that the executive branch of the government does not get to make the final decision on oil and gas policy. It wants the federal council to be the most powerful body in this area and this would leave Iraq's Ministry of Oil in a much weaker position.

The cabinet-based committee meanwhile, has quite different ideas and wants the federal council to have more limited powers.

What the parliamentary committee's desires add up to is a much more political process. The wrangling will continue and unless there is always some unanimous decision among the biggest groups, no decisions will be made. That is, business as usual. It's worth noting that this way of legislating currently suits the Kurdish politicians, who are seen as king makers in Iraq. The two major political groups are almost equal in terms of seats in the Iraqi parliament and whoever can bring the Kurds on side wins on the day.

One thing that the parliamentary committee does not mention though is which authority the federal council would be answerable to. Which is why it seems likely that, if they get their way, then a lot of the decision making would take place behind closed doors, debated by the three main political blocs in private.

Interestingly both versions of the oil and gas law appear to try and minimise the Iraqi Parliament's role in the oil sector. This means that a lot of the decision making in this area will be done behind closed doors.

The Ministry of Oil

The draft of Iraq's oil and gas law that the parliamentary committee supports would strip away much of the Ministry of Oil's powers and turn it into a regulatory body, rather than a decision maker. It would still be in charge of important processes - such as auditing, regulations, representation within OPEC (the Organization of the Petroleum Exporting Countries) - but its work would have to be approved by the Federal Oil and Gas Council.

Meanwhile the cabinet-based committee aims to strengthen the Ministry of Oil's power. The cabinet committee is currently the most powerful body in Iraq when it comes to oil policy - it has given itself the responsibility of drafting oil and gas laws and forwarding them to Parliament for debate. And the contention is that the Ministry of Oil is actually just an extension of the Iraqi Cabinet.

The rationale behind reducing the Ministry's power is to keep on decentralising power over the oil and gas sector, which would mean less interference from the federal government in related regional industry. This is something Iraqi Kurdistan is obviously already keen on, as they have their own oil and gas law already.

Additionally, although Kurdish politicians are represented on the Iraqi Cabinet, they don't have enough seats to challenge decisions. If the Federal Oil and Gas Council becomes the most powerful body in Iraq, then the Kurdish politicians would be better represented on it and would have more real power over decisions.

Regional Power

The parliamentary committee, supported by Kurdish politicians, would like to give the oil producing areas of Iraq more power. In the draft law being advocated by the parliamentary committee, regions may grant licenses for oil exploration as well as hold licensing rounds and supervise oil companies working in their own regions. Iraqi Kurdistan is currently the only semi-autonomous oil producing region in the country.

Meanwhile the cabinet-based committee says that licensing should be done by the central government, from Baghdad. Regions can participate but they cannot hold independent licensing rounds - which is what Iraqi Kurdistan has been doing, and what they did with the Exxon contract. This section of the draft oil and gas law is crucial to the Kurdish government.

Another big sticking point here: In order to be defined as an oil producing region and to get a say in decisions, a region must produce a certain amount of barrels of oil per day. The parliamentary committee backed by Kurdish politicians wants an oil producing region to come up with 150,000 barrels per day. The cabinet-based committee wants to reduce this to 100,000 barrels per day. If the cabinet-based committee gets their way then there would be more members eligible to be on any decision making body - such as the federal council - which means they have more chance of outvoting the Kurdish bloc.

Existing Oil and Gas Contracts

The parliamentary committee has said that all the oil and gas contracts granted before the enactment of any new law would need to be reviewed by a new three man commission. This would be made up of the Minister of Natural Resources from Iraqi Kurdistan, the Minister of Oil for Iraq and the head of the parliamentary committee itself.

The aforementioned federal council (which doesn't exist yet) would be given the power to review earlier contracts. However the Kurdish politicians are bound to make sure they are well represented on that council and more than likely, they would veto any decision that renders the earlier contracts illegal.

Sharing Revenues

The method for sharing out the revenues from oil production is currently enshrined in Iraq's constitution. Article 112 of the constitution requires the Iraqi government to distribute revenues to all the peoples of Iraq "in a fair manner" with consideration given to areas that the previous regime led by Saddam Hussein may have neglected or damaged.

At the moment, Iraqi Kurdistan gets 17% of the Iraqi budget. It is possible that a new law on revenue sharing may be introduced. However, trying to do this through the Cabinet committee would not go down very well with the Kurdish bloc because they are happy with the current arrangement and don't want their 17% share reduced.

Transparency and Contracts

The draft laws advocated by the parliamentary committee requires Iraqi and international entities to comply with measures aimed at reducing corruption. However there is not much mention of transparency. Meanwhile the cabinet committee's suggested law shies away from mentioning transparency.

The parliamentary committee doesn't go into much detail about standardised oil and gas contracts and uses relatively unclear language, which could lead to further debate and different interpretations of the law later. Meanwhile the cabinet-based committee tries to limit contracts to services rather than production sharing contracts. The latter are often used by countries that lack expertise or equipment to exploit their own oil resources - they involve the oil company taking on more risk and spending more but there is also more chance of profit for the companies involved.

Most of the contracts already signed in Iraqi Kurdistan were production sharing contracts.

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The main issue in all of this is trust. Or, at least, the distinct lack of it.

The Kurdish demands are clear: they want a decentralised oil industry within a federal Iraq. And the views of the federal government, headed by al-Maliki and represented by the Deputy Prime Minister for Energy Hussain al-Shahristani, are also clear: a centralised oil sector with the central government more powerful in related decisions. Iraq's federal government keeps trying to centralise power but Iraqi Kurdistan, which has been semi-independent for over 20 years, will not play along.

It's also a complex and fraught political issue. Al-Maliki's major opposition, the Iraqiya bloc, is sitting on the fence due to its very mixed composition - it represents both Sunni and Shiite Muslim interests as well as those of secular politicians and ultra-nationalists.

Meanwhile Kurdish politicians currently support al-Maliki's ruling coalition and are part of the ruling alliance, holding a number of important positions. However in the case of oil and gas law, they're working with the Iraqiya bloc. And that is despite deep ideological differences. The Iraqiya bloc is also happy to work with them, as they're pleased for any opportunity to weaken the current Iraqi Prime Minister's position.

In conclusion then, it is obvious that a forced marriage between all partners will simply not work. And that a decentralised Iraq is much better than a dysfunctional Iraq. There are many politicians in Iraq who believed in the utopian vision of a united nation. But this seems an impossible dream.

The Prime Minister of Iraqi Kurdistan, Barham Salih, said as much during the recent oil and gas conference in Erbil. To those who are still clinging to that vision, Salih said "it is time to move on".

This article first appeared on Niqash

 

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