[Dialogue] Commentary: Iraq's wealth in the balance

Fri Aug 3 11:22:56 EDT 2007

Commentary: Iraq's wealth in the balance

The present draft Iraq oil law is virtually guaranteed to betray the vital
interests of Iraqis, writes Hussein Abdallah*
<http://weekly.ahram.org.eg/print/2007/856/re2.htm#1#1>  

  _____  

The US administration considers the ratification of the hydrocarbon law in
Iraq as one of the major targets of the US occupation. Therefore, it has
been pressing Iraq's government to pass the law, ostensibly as part of
efforts to promote "reconciliation" among the country's religious and ethnic
groups. Moreover, since oil provides 95 per cent of Iraq's national income,
the recovery of the country's oil sector would reduce the US economic and
military burden in Iraq. 

Recent US government reports, however, show that much-awaited approval of
this law designed to govern the granting of exploration rights to foreign
companies would be just the beginning in addressing the Iraq oil problem.
This law would provide only a broad framework for handling the Iraqi oil
industry, leaving many devilish details to be worked out later. Another part
of the law -- the distribution of revenue based on regional population --
will require a politically sensitive census to be undertaken, which is a
difficult task under conditions of war.

Given that the law has been passed by the Iraqi cabinet and will be debated
in parliament, it is vital to shed light on the nature of the law that
already elicits fierce controversy. Overall, the law should be put on hold
for several reasons, the most important of which are as follows.

First, the draft law is expected to clearly assign roles, decentralise the
development of oil and gas fields, centralise control of revenues, and grant
regions and regional oil companies the right to draw up contracts with
foreign companies for exploration and development of new oil fields.
Therefore, the law refers to several laws to be legislated later on,
examples of which are the Iraq national oil company (INOC) law, the Oil
Ministry law, and the appendices that design the contract models to be
negotiated with foreign companies, being a service contract or a production
sharing agreement (PSA). Since these laws represent integral parts of the
main hydrocarbon law, it would be wiser to work out the whole integrated
legal matrix and debate it in one go later on.

According to a recent report by the US Government Accountability Office,
leaked in May 2007, a great deal of corruption has dogged Iraq's oil
industry. Between 100,000- 300,000 barrels of oil per day are stolen and oil
production has dwindled from 3.5 million barrels per day to less than two
million barrels per day. The market value of such smuggling ranges between
$5 and $15 million a day, with the aggregate value of corruption in the oil
sector estimated by the Iraqi Auditor General at $24 billion over the past
four years. Since local corruption could not flourish without a foreign
partner, who must market the stolen oil or pass bribes or launder funds, it
would be better not to expand foreign participation in Iraq's oil industry,
and surely not under the aegis of occupying powers.

Considering the lack of measuring gauges that identify the volume and
quality of crude oil and gas at production points as well as at loading
facilities and shipping ports, it is all the more important to put things on
hold. Even such equipment as exists is faulty. It is imperative to
immediately repair or install adequate measuring equipment, whether the
hydrocarbon law is passed or postponed.

Contracts that sell the national wealth of an occupied country are illegal
under international law and can be cancelled once the occupied country is
liberated. Therefore, the Iraqi governments should not expect to receive
offers from well-established and respectable oil companies. Even if some
American companies offer to develop Iraqi oil and gas, they have to keep in
mind the possibility of their being disqualified once American troops leave.
In such a case, any investment will aim at making as much money as possible
in the shortest possible time before abandoning Iraq. In the oil industry,
this is the most wasteful type of investment. The industry is, by nature,
based on far-sighted projections and requisite long-term infrastructure that
the speculation-driven investor would be hesitant to undertake.

Second, besides several loopholes and ambiguities, the draft law is flawed
by several shortcomings and matters overlooked. Most important is the lack
of parliamentary sanction over concession contracts or agreements to be
concluded with international oil companies (IOCs). Parliamentary oversight
is an established rule in almost all oil producing countries. The fact that
such oversight is entrusted to the Federal Council for Oil and Gas (FCOG)
does not furnish guarantees that the most will be made of the country's
vital wealth. The FCOG is only part of the executive authority because it is
formed by the cabinet; concession contracts and agreements negotiated and
prepared by the executive authority should be sanctioned, or not, by
parliament.

Article 5 of the draft law provides that parliament shall approve all
petroleum treaties that Iraq signs with other countries. Yet this article
does not apply to concession contracts and agreements, which are negotiated
and concluded with IOCs and should be approved by parliament as well. 

Article 2 excludes from the scope of the draft law several major oil and gas
activities -- for example, the refining of petroleum, its industrial
utilisation, as well as the storage, transport and distribution of petroleum
products. The wisdom of this shortcoming is not apparent because all such
activities are interrelated and the exclusion of some may leave loopholes
open for possible corruption. If these interrelated activities cannot be
included in the draft oil law, they should be organised and legislated in a
separate law. 

Article 6 establishes the Iraq National Oil Company (INOC) as a holding
company fully owned by the Iraqi government, its scope of operations
defined. One aspect is for the company to carry out exploration and
production operations in new areas on a competitive basis with foreign
companies. Article 6 clearly leaves out a long-established clause which is
usually embedded in hydrocarbon laws and gives priority to the national oil
company in case of equal competitive standing with foreign companies. 

We now come to the most crucial condition guaranteeing healthy management of
the oil and gas sector: the free and independent decision of those Iraqi
officials who are to negotiate and contract with IOCs. The model contract
that will be approved by the law is designed in such a way that leaves many
blank spaces to be filled later. In fact, these blanks are the most crucial
clauses because they cover such vital matters as production bonuses, the
amount of investment to be spent on operations, the periods of each
exploration and production phase, the amount of oil produced to be allocated
to the foreign company for cost recovery, the period over which such costs
will be recovered, the portion of total production to be obtained by the
foreign company as profit (known as equity oil), the basis of sharing
natural gas as well as the pricing of portions needed for domestic
consumption out of the foreign company's share, and the amount of oil that
is to be obtained by the Iraq government in compensation for the depletion
of its national wealth (known as royalties), becoming due regardless of loss
and profit after production. 

There are countless such crucial matters that are left to the discretion and
integrity of Iraqi negotiators, including, at the beginning, the selection
of those IOCs that are to be included in a shortlist and exclusively allowed
to apply for exploration and production rights.

Article 10 sets up the mechanisms of negotiation and contracting for
granting rights to explore and produce oil and gas. These responsibilities
are distributed among several bodies of the executive authority, on both
national and regional levels. Once initial procedures are complete, the
contract must be submitted to the FCOG within 30 days from the day of
signing. The FCOG, if it so decides, would then submit the contract to the
"Panel of Independent Advisors" for analysis on the extent of its compliance
with model contracts approved by the FCOG. If the executive body that
negotiated the initial contract, being the Oil Ministry, INOC or regional
authority, does not receive an objection from the FCOG within 60 days of
receipt of the initial contract, the contract remains valid. This mechanism
clearly assumes that the initial contract is valid unless the FCOG expresses
its objection within 60 days by two-thirds majority, which may be difficult
to secure in many cases.

This is a very rigid and inefficient way of handling the contracting
process. The time allowed is too tight, squeezing the whole decision-making
process into 90 days. In practice, it often takes much longer. Contract
compliance with approved models is only a formal step -- clearly inadequate
given the vital items that have to be negotiated. Such hastily concluded
contracts can only give rise to problems, leaving real power in the hands of
select Iraqi negotiators and IOCs, with increased possibility for
corruption.

The fragmentation of the contracting process between federal and regional
authorities, which is strongly favoured by the Kurdistan regional
government, is an inefficient system. It allows IOCs to manoeuvre and play
Iraqi regions against each other. The most recent experience in this regard
proved a complete failure -- Sudan. Like Iraq, there was disagreement
between the north and south over the distribution of Sudan's oil wealth, 80
per cent of which lies in the south. This prompted the government of
southern Sudan to contract the UK White Nile Company to operate in a certain
area that was also contracted by the national government to the French
company Total. Conflicting claims were not resolved until the National
Petroleum Commission was established in June 2007, representing Khartoum and
Juba equally, ordering the White Nile Company to halt its activities and
leave Sudan.

In light of the above, it is almost impossible for an Iraqi civil servant to
freely and impartially select the best IOCs to deal with and get fair and
just contractual terms for Iraq. It is now common knowledge that nothing of
importance is done in Iraq without the approval of the US as an occupying
power. The bottom line is, therefore, that the mere presence of US troops on
Iraqi soil almost guarantees that this law will be a bad one.

* The writer is a consultant on energy and petroleum economics. 

Al-Ahram Weekly Online : Located at:
http://weekly.ahram.org.eg/2007/856/re2.htm 

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