Iraq Oil Law Necessary But Not Sufficient
Oxford Analytica 03.07.07, 6:00 AM ET

Iraq’s Council of Ministers has set the end of May as the target for parliamentary approval of the draft hydrocarbons framework law. Endorsement by the cross-factional cabinet means the draft oil law is more likely to receive parliamentary approval.

The draft hydrocarbons framework law represents a compromise between the centralizing instincts of Iraq’s Arab factions and efforts by the Kurdish parties to retain near-autonomy. The draft law establishes three principles:

1. Centralized Control Of Revenues. The central government will control and distribute oil receipts.

2. Partly Decentralized Development. The draft law envisages an era of unprecedented decentralization in the development oil and gas fields. Key institutional reforms include:

–Ministry Of Oil. The ministry will become a largely administrative body focused on the promotion of hydrocarbons development, development of federal policy and negotiation of agreements with other states.

–Iraqi National Oil Company. INOC will be established as a holding vehicle that will manage and operate existing production fields.

3. Foreign Involvement In Upstream. The law grants regions and regional oil companies the right to draw up contracts with foreign companies for exploration and development of new oil fields. It does not specify what kinds of contracts are allowed, thus making room for production sharing agreements (PSAs).

As well as approving contracts and amending their length and terms, the Federal Oil and Gas Council will determine federal petroleum policies, exploration plans, field development and pipeline plans inside Iraq. The council will rule on the unitization of fields shared by different regions:

–One of its first tasks could be the consideration of the five PSAs signed by the Kurdistan Regional Government and foreign companies, as well as six outstanding PSA contracts between the Saddam regime and companies.

–In particular, the council would seek to bring the internal rate of return on these deals in line with a lower nationally set benchmark for such deals.

The council is a forum for factions to resolve differences over their interpretations of the hydrocarbons law. Throughout the three drafts, the composition of the council has been massaged to reflect this role. The body may be too large to be an efficient decision-making forum.

Furthermore, seats will be divided between key factions according to an agreed formula, suggesting that candidates may be selected along factional lines rather than technical capability.

The key stakeholders likely to be involved in Iraq’s hydrocarbons sector have welcomed cabinet approval of the draft law. Each has interests reflected in the compromise law:

–Iraqi government. For the government of Prime Minister Nuri al-Maliki, the endorsement of the law by the multi-factional Council of Ministers is a notable success.

–United Iraqi Alliance. The main Shia bloc views the draft law as a means to strengthen Baghdad’s hold over the highly autonomous Southern Oil Company and block moves by Basra’s provincial leadership to claim an estimated 60% of proven oil reserves.

–Kurdish parties. The current draft reflects alterations to meet the demands of Kurdish leaders. Future disputes may arise from the Federal Oil and Gas Council’s interpretation of the law.

–IOCs. The draft law is a key precursor to international involvement in Iraq’s hydrocarbons sector, and many aspects of the law will be attractive to international oil companies (IOCs). Yet, a national framework for contracts and regulation is not sufficient to attract IOCs in the near term.

The next step will be the creation of a revenue-sharing law and other pieces of legislation dealing with institutional reform. These will need to be approved by the cabinet and thereafter parliament. Key difficulties include:

–Census. The per capita distribution of funds will require a politically sensitive census to be undertaken.

–Politicization. The Federal Oil and Gas Council could be disrupted by broader factional disputes.

–Brain Drain. The Ministry of Oil and INOC will struggle to recruit skilled hydrocarbons sector technocrats.

Cabinet endorsement of the draft hydrocarbons law represents a success for central governance in Iraq. The legislation is necessary, but not sufficient, to attract the near-term involvement of international oil companies, and many hurdles remain in the effort to develop Iraq’s hydrocarbons industry.

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