Troubles for the Iraq Oil Deal

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Anthony Suau for TIME

Workers drill for oil on a new oil drilling platform in Iraq.

Barely two days have passed since Iraq's Prime Minister Nouri al-Maliki hailed the country's new petroleum law as a "solid base for unity of all Iraqis" — a rare boast these days. President Bush has also trumpeted it as proof that Iraq has a viable future. But parliamentarians and Iraq's oil unions have already begun mobilizing against the draft legislation, arguing that it is a desperate attempt by al-Maliki's government to satisfy Western demands, which could damage Iraq's economic future and speed the country's ultimate disintegration.

The law is a dramatic break from the past. Foreign oil companies will have a stake in Iraq's vast oil wealth for the first time since 1972, when Iraq nationalized the oil industry. In theory, that could finally fix Iraq's shambolic oil sector, whose infrastructure has been crippled by decades of wars and sanctions. Production these days hovers around 2 million barrels a day, a big drop from Iraq's prewar peak of more than 3 million barrels a day.

But political infighting could yet scuttle the deal once it goes to a vote in parliament, perhaps in early March, say the law's detractors. "The feeling is that the law is focused very much on sectarianism," says Saleh al-Mutlaq, who heads the National Dialogue Front, a small secular party with 11 seats in parliament. "It divides the country and the wealth into groups — Kurds, Sunnis, Shi'ites," he said on the phone from Amman on Tuesday.

Some Sunni groups fear that their less oil-rich areas could lose out when Iraq's potentially huge wealth is distributed. The ability of regions to sign their own contracts was bitterly argued for months by negotiators from Kurdistan, where there is deep distrust of Baghdad's politicians. Under the law, companies can deal with both the central Ministry of Oil, as well as regional entities. But that concession has provoked intense anxiety that Iraq could break apart, if some regions — or perhaps even powerful Shi'ite clans in southern Iraq — calculate that they can finance autonomous states from their massive oil deposits.

Billions of dollars — and Iraq's future — are at stake. Virtually all the revenues Iraq has to rebuild its shattered economy will come from its mammoth energy deposits — some of the world's biggest untapped reserves — of about 115 billion barrels of oil and about 110 trillion cubic feet of natural gas. In addition, Iraq's major creditors have made clear they expect a working oil industry, as a precondition for forgiving billions of dollars in Iraqi debt incurred largely by Saddam Hussein's wars against Iran and Kuwait and by his mega-splurging at home.

Under the new law, agreed on Monday by Iraq's cabinet, foreign oil companies will be allowed to cut long-term exploration and development deals with the government for 20 years, renewable for a further five years. Companies willing to operate in a country with high physical risks — insurgents regularly blow up pipelines and kill contractors — will be allowed to export their oil after paying the government a minimum 12.5% royalty, although there are usually also cash signing bonuses to the government, and most "profit oil," extracted after operating costs are met, would likely go to Baghdad. Regional governments — only Kurdistan has one right now — can sign their own contracts under the law, a dizzying change from decades when Saddam dictated the terms and stifled oil production in Kurdistan. A Baghdad-based Federal Council on Oil & Gas will be formed; it will have 60 days to appoint a team to arbitrate a contract, if it has strong concerns.

Despite the grumbling from politicians, it is still unclear whether opposition to the law is strong enough to kill it. Among the parliamentarians arguing against the law are Moqtada al-Sadr's bloc, which fears that foreign oil companies will move into Iraq in force, and stay long after U.S. soldiers have left. But logistically they will have to race back to Baghdad to vote against it. Many parliamentarians, like al-Mutlaq, spend much of their time outside Iraq — al-Sadr himself is frequently in Iran. "I'm going back for this very reason," al-Mutlaq says. "We cannot yet figure out how many people will stand against it." He says he is certain he will find allies among his colleagues, who he says believe that the law is geared to the needs of Western oil companies rather than Iraqis. There has been no public hearing on the draft, whose details have largely been kept secret. Iraqi lawmakers fumed last July when U.S. Energy Secretary Samuel Bodman discussed the draft during a trip to the region, "when hardly a single parliamentarian had seen it," says Kamil Mahdi, an Iraqi who is senior lecturer in Middle East economics at the University of Exeter in Britain, and who spent Tuesday discussing the law by phone with several parliamentarians. He said several believe that the government should wait until the war ends before locking Iraq into long-term deals with foreigners, he says. "This draft is totally out of synch with any notion of the interests of Iraq," he says.

The rumblings of opposition go beyond parliament to the oil fields themselves. Iraq's biggest oil unions, which could potentially disrupt production, have been among the law's strongest opponents. Hassan Jum'ah Awwad Al-Asadi, head of Iraq's Federation of Oil Unions, the largest union group, says he intends to mobilize his 23,000 or so members against the draft. "We want a new, different law, which will be in the interests of Iraqis," he said by phone from Basra on Wednesday. "If there is no solution we can stop production, stop exports." In a more threatening tone, he told union members at a conference on the law in Basra in early February: "We strongly warn all the foreign companies and foreign capital in the form of American companies against coming into our lands under the guise of production-sharing agreements."

The view inside the negotiating room, through months of wrangling over the law, was starkly different. At least one person who sat through the talks said he was amazed to find that U.S. officials and diplomats appeared to lie low, perhaps because they were overwhelmed by fighting the war. "The U.S. was so afraid to be seen to be meddling in Iraq's oil that they took a backseat," says Jonathan Morrow, legal adviser to the Kurdistan Regional Government and a former senior legal adviser to the U.S. Institute of Peace in Washington. Rather than simply satisfying oil companies, the new law "offers oil companies risk and reward" deals, which are necessary to attract the multibillion-dollar investments needed for companies to create new fields and extract large quantities of oil, Morrow says. "It's very obvious to me that oil companies, including large ones, are following these negotiations closely, looking for a clear legal regime for Iraq." But before they find clarity, they are likely to be looking at some fiery arguments in Iraq's parliament.