EVENT: Second and third rounds of oil licensing will commence in late 2008, but production-sharing deals will not be on offer.
SIGNIFICANCE: There is a dichotomy between the Iraqi government's stated need to increase oil production and growing resource nationalism that seeks to slow down and limit international involvement in the oil sector.
ANALYSIS: Since the formal transfer of sovereignty to Iraq in June 2004, the chances of sweeping or rapid reform of Iraq's hydrocarbon industry have steadily declined. The draft hydrocarbons law of February, 2007, was arguably the last chance to resolve comprehensively the key questions facing the industry. The HCL comprised a framework law, a revenue-sharing law, and one or more laws on the status of an Iraqi National Oil Company vis-a-vis the federal Ministry of Oil.
The prospects for passing such a comprehensive package now seem dim:
The lame duck administration of U.S. President George Bush is no longer strongly pushing for such legislation.
Iraq's Oil Minister Hussein al-Shahristani has stated that extant 1960s and 1970s oil legislation provides the government with the necessary legal authority to muddle through the early stages of oil industry development.
In the longer term, Iraq still needs to resolve fundamental debates about the structure of its oil industry, the diffusion of decision-making authority within the structure, and the speed of development and the resultant trade-offs that this choice will entail regarding foreign involvement in Iraq's oil and gas sectors.
Industry structure. In 2003-07, many modernizers hoped to reinstate a version of INOC that would differ from the powerful National Oil Companies that had emerged since the 1970s. Under this model, the Ministry of Oil would be a regulator and the INOC an independent holding company that loosely co-ordinated the operators, namely the Southern Oil Company, Northern Oil Company and other subsidiary service companies. This idea was embodied in the draft hydrocarbons law of 2007, which appears to have terminally stalled. Since 2007, the Ministry of Oil has managed to absorb many of the roles that the INOC would have played. In keeping with other aspects of Iraqi politics, recentralization rather than decentralization guides current federal government thinking on the structure of the oil industry.
Decision-making authority. The 2005 constitution articulates some basic principles about ownership and revenue-sharing of Iraqi oil and establishes the intent that all levels of government – federal, regional and provincial – will have an input into oil policy. The lack of clear-cut legislation on decision-making authority in Iraq's hydrocarbons sector tends to advantage senior executive officials such as the prime minister and the oil minister. This is because risk-adverse Iraqi officials are still in the habit of pushing decisions further up the chain of command if they are uncertain of their authority, as most are due to shortfalls in legislation and ordnances. Unambiguous authority exists only at the cabinet level.
Even the draft hydrocarbons law encapsulated the systemic bias favouring top-tier federal decision makers. The hydrocarbons law called for oil and gas strategy to be framed by the Federal Oil and Gas Council, a cumbersome committee of 30-40 members from all levels of the government, but thereafter every major executive decision would require the ultimate approval and final signing authority of the cabinet and the parliament. Indeed, Mr. Shahristani currently interprets the constitution to mean that regions and provinces can enter into negotiations with oil companies only as long as they use model contracts developed by the Ministry of Oil. With the draft hydrocarbons law languishing, the ministry is seeking to monopolize the role of the only authority capable of pushing deals through the cabinet sign-off.
Sub-federal challenges. Two sets of sub-federal actors have sought to challenge the Ministry of Oil by proactively interpreting the constitution in their favour:
1. KRG. The Kurdistan Regional Government made bold use of the constitution to craft a legal position justifying its signing of production-sharing agreements that are much more generous than the model risk exploration contracts later developed by the Ministry of Oil. The federal government's unwillingness to ratify these deals stands a good chance of forcing the Kurds eventually to modify their contracts to meet Ministry of Oil requirements. Geography and the political interests of Iraq's neighbours favour the federal government, and the Kurds are financially dependent on Baghdad and unable legally to export their oil. Yet while the Kurds may not achieve their ultimate goal of becoming economically self-sufficient, they have little to lose in trying and have secured important secondary benefits such as improved domestic access to refined oil and gas products and related industrial development.
2. South. Provincial-level actors in southern Iraq have demonstrated their willingness to act autonomously, whether by withholding electricity from the national grid or striking deals with neighbouring states. Basra's provincial council and the SOC hold over 60 per cent of Iraq's proven oil and gas together with Iraq's only coastal export terminals. Though a branch of the federal Ministry of Oil, the SOC has consistently aligned itself more closely with the provincial council than with Baghdad. Furthermore, the provincial council and key organs such as the Oil Protection Force in Basra are strongly influenced by the Fadhila Party, a factional rival of Prime Minister Nuri al-Maliki that has demanded the formation of a Basra-led multi-province regional government to mirror the KRG. For these reasons, the federal government has been quick to garrison Basra, begin a slow-burning reform of the OPF, and to replace as many of the senior leaders of SOC and its subsidiaries as possible.
Speed of industry development. A fundamental schism in the Iraqi oil industry centres on the speed at which Iraqi production should be increased. The Ministry of Oil and foreign states want production ramped up as quickly as possible, necessitating rapid deal-making with major international oil companies such as Shell, BP, ExxonMobil and Total. A very significant constituency within the Iraqi Ministry of Oil and political system take the opposite view, arguing that Iraq currently has more money than it can spend and that there is no need to rush into deals.
This latter group contends that the multiple licensing rounds being planned will severely overstretch the Ministry of Oil's ability to undertake multiple simultaneous high-quality contract negotiations and may involve IOCs to an unnecessary degree. No-bid deals, such as the Chinese service contract to develop Ahdab field and the aborted Technical Service Agreements, have also been singled out for criticism as unnecessarily rushed. The effort to maximize local content and slow down the sector's development is riding on a growing wave of resource nationalism in Iraq, and is likely to intensify before, during and after the national elections scheduled for December, 2009, with potentially negative implications for contract negotiations.
The only area in which foreign participation is broadly welcomed is that of natural gas development, which requires foreign technologies and can produce very substantial near-term benefits in comparison to oil. The Shell joint venture with the Southern Gas Company is a model that will likely be replicated across Iraq in the coming years, winning over Iraqi government partners with promises of power generation, industrial development, reduced environmental impact and revenue generation.
CONCLUSION: Iraq's hydrocarbons sector is resistant to internal reforms, a difficult negotiating partner, and highly selective about its foreign relationships. These tendencies are likely to become more pronounced during the run-up to the next national elections in 2009.
From the Oxford Analytica Daily Brief
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