24 August 2005
Iraq’s new draft constitution, which is awaiting a final vote by the National Assembly, offers significant power to the country’s many regions in determining how to manage Iraq’s oil wealth. The draft copy of the constitution, however, remains vague on major issues regarding oil policy and future investments, opening the way to different interpretations and possibly disputes which could delay the opening up of Iraq to international oil companies.
The National Assembly received a draft copy of the constitution Monday night, but last minute horse trading among the different political parties failed to resolve some key differences and overcome the objections of mainly the Sunni factions who are still opposed to the main premises of the proposed constitution.
The Assembly decided to give politicians until Thursday to try and reach a consensus, failing which the draft would be adopted “as is” and submitted to a referendum in mid-October.
The Kurds are the biggest winners in the proposed draft. The Kurds have been promoting international investments in oil fields in the northern governorates since 1991 and have now legalized their independent pursuit to develop those fields by having it enshrined in the constitution.
While Article 109 of the draft constitution states that oil and gas reserves are the ownership of the entire Iraqi people in all regions and governorates, Article 110 imposes limitations on the role of the federal government in managing those resources. It maintains that “the federal government manages the oil and gas in the current producing fields together with the regional governments and producing governorates and distributes their oil revenues equitably in proportion to the population.” It further states that “the federal government, together with the regional governments and producing governorates, defines the strategic policy to develop the oil and gas wealth in a way that ensures the best benefit to the people using the latest market principles and promotes investments.”
“It’s like having two captains in one ship,” said one veteran Iraqi oil expert. “The federal government in Baghdad and the governments in the regions and the governorates have to decide together on oil policy which implies that in case of differences of opinion the decisions will be delayed,” he added.
According to the draft constitution, regions made up of one or more governorates have the right to exercise legislative, executive and legal power, except where they are the preserve of the federal government. However, where a dispute arises, Article 111 of the draft constitution states that the laws of the region take precedence.
The implication for international oil companies eager to invest in Iraq’s oil fields is not straightforward.
“It’s all open to interpretation. The draft constitution does not say who carries out negotiations of oil contracts or whether that’s considered part of the drawing up of the policy or part of carrying it out. Nor is it explicit on who are the contracting parties: the federal government or the regional government,” the expert said.
By limiting the joint management of the federal government together with the regions and governorates to currently producing fields, the draft constitution excludes fields not in production and fields to be discovered from the joint management, but it does not say who will manage them.
The Kurdish government in the Kurdistan region concluded at least three production sharing agreements with Turkish and Norwegian companies in the last few years that cover several fields in the Kurdish areas. Those deals were done independent of the Iraqi oil ministry. At the time, Baghdad did not recognize those agreements and warned companies against signing such agreements. With the new draft constitution, such agreements would now become legal.
“The formulation where current producing fields are distinguished from other fields has been introduced and insisted upon by the Kurds. It was agreed by the politicians of the Kurdish parties and the Iraqi Coalition in the last-minute negotiations and not by the constitutional drafting committee,” one member of the 71-member committee told International Oil Daily.
The Iraqi Coalition is the major Shiite block that won the majority of seats in the Iraqi parliament in January.
While turning a de facto situation in Kurdistan into a legitimate state, the implications for the rest of Iraq are more significant. Iraqi oil experts warn that while the role of the federal government in oil matters has been marginalized, the powers of the Shiite oil producing region in the south are more likely to grow.
At the moment there are two producing governorates in the south, Basrah and Missan. However, other governorates have non-exploited oil fields such as Nassiriyah, which contains the Gharraf oil field. According to the draft constitution those governorates can set up regions and become semiautonomous like the region of Kurdistan.
The draft also allows for more than one region to merge and set up even a bigger region. In recent weeks, one Shiite Iraqi politician called for the establishment of such a region of the center and the south of Iraq as opposed to the Kurdish region of the north.
The distinction of producing fields in Article 110 also has implications when it comes to the distribution of oil revenues. The draft states that revenues of currently producing fields would be distributed equitably but it remains silent on the revenues of currently nonproducing fields which would become producers at a later stage. The absence of a clear text could be interpreted by the regions as a license to benefit exclusively from any fields brought on stream in the future. Most of the discovered but not developed oil fields lie in southern Iraq.
Despite its shortcomings, some Iraqis still consider the constitution the best deal in the current circumstances of the country.
“It’s not the best but it is the reflection of the new reality in Iraq. We have to deal with the facts and the facts are that there are two powers in Iraq today, the Kurds and the Shiites,” said one member of the National Assembly.
Optimists say in the longer term, the decentralized government could lead to a faster development of Iraq’s oil and gas fields.
However, Sunni dissatisfaction with the outcome of the draft constitution could agitate the insurgency further and keep foreign investments at bay. In that case, only the Kurdish region which has been spared the security inferno of the rest of Iraq would be able to attract foreign companies to invest in developing its oil and gas fields.
By Ruba Husari, London
(Published in International Oil Daily Aug.24, 2005)