Iraq: Splits Dog Oil Law

9 March 2007

Having waited so long for a law offering the framework necessary to regularize and legitimize future investments in Iraq’s vast oil resources, international firms itching to get their hands on the biggest Mideast opportunity in decades now find consensus — perhaps the most important ingredient of all — lacking. Iraqis are divided over the legitimacy of signing contracts while the country is wracked by chaos, and some even dispute the government’s right to decide the fate of Iraq’s oil riches. Unless they are willing to replicate the experience of, say, war-torn Sudan, what the draft offers in terms of contract rules becomes purely theoretical.

The government of Nuri al-Maliki came under intense US pressure to adopt the law which, like the constitution — which some Iraqis also argue is flawed — has been applauded as a major Iraqi, and no less American, achievement. Iraqis involved in drafting the bill and negotiating its compromises say the country needs big investments now. The current draft, which has yet to be approved by parliament, offers the legal minimum required to make an influx of investment, technology and much-needed know-how possible, and start reversing a decline in oil production. Backers argue that solving some day-to-day economic problems could reduce tensions.

Not everyone agrees. An Iraqi Sunni group this week warned the government not to sign contracts with any foreign firm. The Sunnis, feeling marginalized with the Shiite-majority south and Kurdish-majority north controlling the bulk of Iraq’s 115 billion barrels of reserves, are not in a position to prevent the government or parliament from adopting the law, but they can wreak the kind of havoc that would make oil firms think twice about putting money or people into Iraq.

Iraqi oil experts, including dozens of oil ministry veterans, have also written to parliament criticizing both the timing of the law and the envisaged establishment of a federal oil and gas council on ethnic and political lines, saying the council and its independent advisors are inefficient and lacking in transparency.

Still, some oil companies believe the draft takes them a step nearer negotiating deals or providing a framework for the informal negotiations that several, including majors such as BP, Chevron and Royal Dutch Shell, have held.

So what does the law offer international firms? It lists 65 exploration blocks, ranging from Erbil and Mosul in the north, to Basrah, Nassiriyah and Amara in the south, and the Western Desert along the western border. Iraqi sources involved in drafting the bill say the blocks will most likely be offered under risk contracts. Iraq’s National Oil Co. (INOC) would also be able to bid, and the draft says the government could obtain an equity stake at any stage of development.

Exploration and development contracts offer an initial exploration phase of up to four years, which can be extended for two phases of two years each. With an oil discovery, the contractor is given two years to appraise the find, or four years with a gas discovery. The development phase runs for 20 years from approval of the plan, but can be extended for five years. The draft sets royalties at 12.5%.

But international firms eyeing the giant oil fields that were close to entering production or considered easy to produce will find the draft puts most of them under INOC control, making it a national giant with powers to enlist foreign help. These include the Majnoon and Nahr bin Umar fields for which Total stopped short of signing a production sharing contract in the late 1990s; Halfaya, for which Shell has been negotiating for the past three years; as well as West Qurna, Suba, Luhais and Tuba, which are listed among 27 producing fields. Fields such as Himrin, Rattawi and Kor Mor, which were open to foreign firms under Saddam Hussein, are now on the list of 25 nonproducing fields to be transferred to INOC.

Open to foreign operatorship are 26 fields that need significant development and infrastructure before coming on stream. Some, including al-Ahdab, Kifl, Gharraf, Akkaz and Rafidain, were the subject of negotiations with foreign firms under Saddam. China National Petroleum Corp., which signed a production sharing agreement (PSA) for Al-Ahdab in 1997, was quick to resume negotiations in Baghdad this week. Al-Ahdab is estimated to have 1 billion bbl of reserves and development costs were put at $700 million 10 years ago.

According to the draft law, the oil ministry has to review all five contracts signed by the previous regime, including deals with Petrovietnam, Indonesian Pertamina and India’s ONGC, to bring them in line with the legislation. A source close to the government says there is disagreement over whether the same applies to Lukoil’s PSA for West Qurna, which was canceled before the US-led invasion in 2003 but which the Russian company contested.

The draft law and the cabinet resolution approving it list a series of time lines that Iraqi observers say are too ambitious. The review of old contracts is to be completed within three months of the law’s adoption. The cabinet said the draft and its appendices, including model contracts and the oil revenue management law, should be presented to parliament by Mar. 15, and all sides should refrain from signing new contracts until parliament approves the law.

By the end of May, the government has to finalize arrangements for setting up the various entities stipulated in the draft, including the oil and gas council, its advisers and INOC. If the deadline slips, the Iraqi prime minister together with the president of the Kurdish region of northern Iraq can either extend it or give the go-ahead for the signing of new contracts. That should be enough to turn Kurdistan into Iraq’s only functioning — if small — oil province, while the rest of the country continues to battle it out.

By Ruba Husari, Dubai

(Published in Energy Compass March 9, 2007)

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