30 September 2004
Iraq’s interim Prime Minister Iyad Allawi has taken the unusual step of suggesting that the Iraqi government disengage from running the oil sector, including management of the planned Iraq National Oil Co. (INOC), and that INOC be partly privatized in the future.
Although a formal oil policy is desperately needed in Iraq, the proposals have provoked controversy, given their submission ahead of elections scheduled for January, which should see an elected government take over, as well as the free market orientation suggested for the downstream sector and eventually the upstream branch, and the separation of oil and politics. The latter is considered idealistic by some long-standing observers of the Iraqi oil industry.
Allawi outlined his “guidelines” for drafting an oil policy in a document presented last month to the Supreme Council for Oil Policy — a body initially established in June as the Supreme Oil and Gas Council. The authors were not identified.
Technocrats at the Iraqi oil ministry are believed to have had no input in formulating the guidelines, which are designed to form the basis for a future oil policy to be adopted by the interim government, insiders tell International Oil Daily.
Allawi’s policy guidelines suggest a divorce from the previous oil regime, by declaring an end to the centrally planned and state-dominated Iraqi economy. That statement was welcomed by many who watched for a quarter century as the Iraqi economy and its oil wealth were devoted to financing Saddam Hussein’s military adventures, first with Iran and then in Kuwait — leaving behind a country that lags its Gulf neighbors, even those with less oil reserves.
However, Allawi’s policy proposal also suggested a parting with other models in the region, especially where the revived INOC is concerned.
INOC was first created in the mid-1960s, but was dissolved by Saddam in 1988, as he removed any potential centers of power that could challenge his absolute authority over the country and its economy.
According to Allawi’s guidelines, INOC should now be recreated as soon as possible as an independent corporation, immune from political interference and direct ministerial control, and eventually could be partially privatized through the sale of equity to the Iraqi people by public subscription.
The idea of forming a privatized national oil company — even one that is only partly privatized — echoes proposals aired in some US circles ahead of and immediately following last year’s war. Conservative thinkers in Washington argued that the Iraqi oil sector should be privatized and opened up to international oil companies. Such calls eased as the scale of the challenge in Iraq became clear.
“The US idea behind privatization is to avoid the recurrence of a situation where oil revenue is channeled to finance the military capabilities of Iraq or even just dotting it with a decent army,” said one veteran of the Iraqi oil industry. “But privatizing the oil sector would confirm what many suspected, that the main objective of the war on Iraq is its oil.”
“There’s nothing wrong with running a national oil company according to highly professional standards similar to those applied by international oil companies. But privatizing a national asset, the country’s biggest asset, is a totally different story,” said a former Iraqi oil official.
INOC’s main responsibility, according to Allawi’s proposals, would be to manage and develop Iraq’s producing oil and gas fields, to raise capacity to its pre-1991 Gulf War level of 3.5 million barrels per day within two years. To do that, the prime minister suggested providing INOC with emergency state funds. But he also stressed that as soon as practical, INOC should seek self-sufficiency by financing capital expenditure through commercial borrowing against future incremental production, through partner funding in joint ventures, or through short-term service contracts. The state should not guarantee any INOC borrowing, and the company should be allocated no more than $1.50 for each barrel of oil it produces.
Iraqi oil experts argue that the proposal — by limiting INOC’s funding, instead of letting it deduct operational and investment needs from oil proceeds and channel remaining profits to the state — would create an inherently weak entity.
“Unless INOC has all the decision-making authority and the financing it needs to prevent it from being at the mercy of the finance ministry, there’s no point in recreating it,” the former Iraqi oil official said.
In Allawi’s policy guidelines, the onus lies on international oil companies — “both majors as well as independents” — to develop Iraq’s undeveloped oil and gas fields under long-term production sharing contracts.
While the guidelines do not say who should be in charge of conducting negotiations with international companies, Allawi rejected any debate on what the best terms might be as a waste of time.
He also pre-empted any requests from an elected parliament to debate such issues, which could create a logjam similar to that experienced in Kuwait. Allawi conceded that out of a sense of “national pride,” some will argue that the Iraqi state sector can implement goals for raising production capacity on its own, but he said it would be a “mistake” to believe such “unrealistic claims.”
Local analysts say that in a country as politically heterogeneous as Iraq, stifling debate on issues crucial to the economy is no way to nurture democracy in the country, especially as it prepares to hold its first elections to choose a government to replace Allawi’s caretaker administration, as well as a parliament that is supposed to draft a new constitution.
The privatization thrust of Allawi’s policy guidelines is stronger in the downstream sector, where he suggests that the Iraqi field services industry should be exclusively based in the private sector, that domestic wholesale and retail marketing of petroleum products should be gradually transferred to the private sector, and that major refinery expansions or grassroots refineries should be built by the local and foreign private sectors on a build-operate-transfer basis.
To compensate for the severe limitations of an existing private sector, Allawi proposed beefing it up through the privatization of Iraqi oil service companies, which are currently under the auspices of the oil ministry. Majority Iraqi-owned companies, including those in joint venture with foreign companies, should be given a 5%-10% competitive price advantage up to 2009, and treated preferentially afterwards, Allawi proposed.
As for the marketing of Iraqi crude, Allawi suggested that it remains in the hands of the State Oil Marketing Organization (Somo), but with oversight from the oil minister. Export sales of crude and products produced by private-sector ventures should “be overseen by and/or coordinated with Somo.”
The Supreme Council for Oil Policy is now supposed to draft an official oil policy based on the guidelines. Input from the oil ministry would be crucial, say Iraqi oil analysts.
By Ruba Husari, Dubai
(Published in International Oil Daily Sept. 30, 2004)