2 March 2007
Iraq’s draft petroleum law, approved by the cabinet this week, claims to be fair, clear, transparent and efficient. It’s anything but. The bill, which has to be approved by parliament before coming into force, emerged after a series of compromises — and US pressure — aimed at overcoming Kurdish opposition to any form of centralized power. The result is to enhance the country’s division along ethnic lines and dilute central authority in favor of oil provinces given the autonomy and authority to create their own oil havens. And as most of Iraq remains off-limits to foreign companies, with no quick fixes for the civil strife wracking the country, the only beneficiaries are Kurds in the northern region of Kurdistan.
A member of the committee that drafted the bill says the goal was to respond to the complex internal situation in Iraq and launch an accelerated process of contracting for oil field development. But this short-term vision is unlikely to meet Big Oil’s expectations, as long-term investment requires a minimum of stability and durability in the legal framework governing those investments. Furthermore, the draft law creates layers of authority whose sometimes contradictory powers could paralyze the decision-making process.
The oil ministry’s powers have been diluted and transferred to a federal oil and gas council that will include representatives of ethnic groups and political parties in a way that mirrors the government setup. The ministry will have a regulatory and supervisory role in addition to representing Iraq at Opec and other international bodies. The draft states the ministry will be in charge of drawing up federal oil policy, though it also gives the council the same task. The council will also be in charge of drawing up exploration and development plans, reviewing and approving upstream awards, setting out guidelines for negotiations with international oil firms, and drawing up different model contracts for the various categories of field and exploration area.
The council will be led by the prime minister, and include the ministers of oil, planning, finance and development cooperation, the head of the central bank, a minister from each region and a representative of each oil producing governorate, the heads of the future Iraq National Oil Co. (INOC) and State Oil Marketing Organization, and up to three experts. A producing governorate is defined as one with sustainable and commercial oil and gas output of at least 150,000 barrels per day. Three qualify — Basrah in the south, Kirkuk in the north and Missan in the east. For now, Kurdistan is the only region.
Fearful of a Shiite majority hold on the council, Kurds insisted on the creation of an “independent advisory panel” with the task of “facilitating the council’s mission in reviewing and agreeing exploration and development contract and field development plans,” as the Feb. 15 draft states. The panel will be made up of oil and gas experts, from Iraq and abroad, to advise and make recommendations on all issues on which the council seeks its input. “The Kurdish view is that a professional body will ensure the council’s decisions are not politicized. That was one of the many compromises worked out to ensure their support of the draft,” the drafting committee member tells Energy Compass. Parliament will have no say beyond endorsing the law.
The draft divides Iraq’s 78 oil fields into three categories. Producing fields listed in Annex-1 will be operated by the new INOC, which will act as a holding company for the existing North Oil Co. and South Oil Co. It will also develop and operate discovered fields close to its production infrastructure listed in Annex-2 that have not yet been developed and bid for exploration contracts. A third category comprising fewer than 30 discovered but not developed fields listed in Annex-3 will be open for international oil company operatorship.
The law entrusts the oil ministry and regional authorities with upstream awards, with contracts based on models defined by the federal council that can be adapted to specific areas and fields. Assuming more regions are set up in the future — particularly in the south, as some Shiite clerics advocate — the upshot would be a variety of deals with no unified set of legal or fiscal terms. The draft states that model contracts “could be based either on a service contract, development and production or risk contract.”
Oil majors accustomed to dealing with one authority in most countries will have a set of authorities to lobby in Iraq. Contracts can only be initialled by the minister, INOC or the regional authority, but to become valid have to be approved by the federal council and possibly even the panel of experts, especially if there is disagreement on the council.
Oil revenue distribution has still to be resolved, despite several months of haggling. The US compromise has been to legislate on revenues separately from the petroleum law, based on what’s stated in the constitution — itself a compromise to enable passage. But the draft does state that oil revenues should go to a state oil trust, in line with the Kurdistan Regional Government’s draft petroleum act, awaiting approval by the Kurdish parliament.
By Ruba Husari, Dubai
(Published in Energy Compass March 2, 2007)