Introduction

Disagreements over oil and revenue sharing threaten to unravel hopes for a political breakthrough and national reconciliation in Iraq. A draft oil law has drawn criticisms from Iraq’s Sunnis, who prefer a stronger role for the central government, and from Kurds, who prefer a stronger role for the regional authorities. The majority Shiites have sought to mollify the Sunnis by keeping control of Iraq’s oil sector in Baghdad, not the provinces. 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, accounting for 95 percent of government revenue. Yet output has fallen well short of Baghdad’s production targets, mostly due to corruption, poor security, and lack of investment.

What is contained in the draft oil bill?

The bill drafted in February gives overall planning responsibilities to the federal oil and gas council and the Iraq National Oil Company (INOC), a state-run company to be established once the bill is passed. Representatives from regional authorities can be part of the council and sit on INOC’s board. The bill also divvies up revenue from both existing and future oil fields based on regional population. However, four annexes introduced in recent weeks by the Iraqi oil minister, Hussein al-Shahristani, a Shiite, cede greater control of management of current oil fields and existing contracts to INOC.

The Kurds argue these annexes were drafted without their input and violate the constitution, which states that Baghdad, together with regional authorities, will determine the management of untapped fields. According to the annexes, 93 percent of Iraq’s proven petroleum reserves will be under the purview of INOC, leaving just 7 percent to regional authorities. “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. The draft bill is supposed to be signed into law no later than May 31, but experts doubt the Iraqi government will meet that deadline. “Unless these annexes that describe the distribution of revenue and role of ministry of oil and INOC are resolved, the hydrocarbon law in and of itself will not change anything,” says Frank Verrastro, director of the energy program at the Center for Strategic and International Studies.

Why has it been so difficult to draft an oil law?

Iraq’s Kurds and Sunni Arabs oppose the draft law for different reasons. The Kurds say it cedes too much control to Baghdad’s oil ministry and INOC. The Kurds want more regional autonomy to develop and pocket the revenues from 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 Sunnis, who reside mainly in regions lacking in major oil reserves, favor a hydrocarbon law that distributes revenue more evenly and according to need. Tariq Shafiq, one of the draft oil law’s principal authors, told United Press International 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.

What are the main points of contention?

Revenue sharing. The precise distribution of revenues from Iraq’s oil production remains undecided and, according to Morrow, there has been “not one single negotiation for revenue sharing in Iraq.” The constitution is vague on the subject; 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.

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. But Verrastro says the definition of “new” varies from region to region. Kurds, he says, would classify a new well in an old field as “new,” as well as any incremental exploration of existing fields.

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 it would erode Iraqi sovereignty and redistribute oil revenues away from Iraqis and into foreign hands. But many experts say outside investors are needed to stimulate development of Iraq’s dilapidated oil infrastructure. “There’s a question if the [Iraq National Oil] Company has enough heft without foreign help,” Verrastro says.  

How much oil does Iraq have?

Iraq"s proven oil reserves are 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 lie primarily in the Kurdish-controlled north and Shiite-controlled south around Basra. But because of sanctions, neglect under Saddam, and lack of investment, Verrastro reckons less than 20 percent of the country has been fully explored. He estimates undiscovered reserves could be anywhere from 45 billion to 110 billion barrels. “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. The bulk of Iraq’s known reserves lie around Basra in the south and Kirkuk in the north.

Why has oil production stalled?

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 American engineers evaluated the pumps and pipes, but, until Shell and British Petroleum were recently commissioned to do so, had not conducted a below-ground analysis to assess the reservoirs and damage caused by Iraqis" management practices. He estimates that Iraqi oil production, currently around 2 million barrels per day, will not reach 4 million barrels per day until after 2010.

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. 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 about four hundred insurgent attacks have targeted Iraqi oil infrastructure since 2003.

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.

What is the likelihood of the oil law passing parliament soon?

It depends on whether Iraq’s various factions are willing to make difficult political compromises. “I’m less confident now,” says Kenneth Katzman, a Middle East expert with the Congressional Research Service. “The Kurds have always had problems with the law but what I’m worried about really is the Sunni threat to pull out of the parliament entirely.” Most experts believe the Iraqis will not meet the May 31 ultimatum. “We’ve seen deadlines pass before so I don’t see what’s so magical about May 31,” says Verrastro. Morrow says it is possible for the oil bill to be passed without the annexes (which are voted on as a bloc, not individually) by summer, thus requiring more rounds of talks before parliament signs off on the revenue-sharing bill and other provisions. U.S. officials have made an oil law one of their main benchmarks to gauge political progress in Iraq.

(Author:  Lionel Beehner, Staff Writer)

PIN/CFR.ORG