Why Iraq's Oil Law Remains Deadlocked Three Years On

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Engineers are seen at the Naher al-Umran gas refinery, in the el-Dir district, some 40 kms north of the southern city of Basra.

Among the key "benchmarks" for progress in Iraq set by President George W. Bush in January of 2007 was the passage of a new Iraqi oil law. But almost three years on, the controversial legislation setting terms for foreign investment in the country's oil sector, and for distributing its revenues, remains stalled in the legislature. And Iraqi politicians admit it's unlikely to pass before the current parliament is replaced following Iraq's general elections next January.

"I hope these four laws are passed during this parliamentary session but I don't think so," Ali Hussein Belo, the Kurdish legislator who heads the Iraqi parliament's oil and gas committee, told the Iraq Oil Report website last month.

The stakes are enormous: To rebuild and develop its economy, Iraq desperately needs the tens of billions of dollars in foreign investment its oil sector could attract. But the terms on which oil investment and revenues are managed could determine whether Iraq ultimately remains intact.

Nowhere are the political stakes in oil policy more obvious than in northern Iraq, where the three semi-autonomous Kurdish provinces are at loggerheads with the Oil Ministry in Baghdad over control of investment in and revenues from the oil fields in their territory. The Kurdistan Regional Government has signed numerous deals with foreign oil companies, ignoring repeated warnings by Prime Minister Nouri Al-Maliki and Oil Minister Hussein Al-Shahrastani that Baghdad deems such contracts illegal. Nor have those warnings deterred Turkish, Chinese, Norwegian and Canadian companies from racing to lock in oil concessions in Iraqi Kurdistan. But executives of the Norwegian DNO company, whose first rig in Kurdistan was visited by TIME IN 2006, last week announced a halt to its oil exports from Iraq until the country has resolved its dispute over oil. And Baghdad has upped the ante, last week barring China's Sinopec Group from bidding for rights to develop eight new Iraqi oil fields in the country after the Chinese corporation began acquiring Swiss oil operator Addax Petroleum, which operates in Kurdistan.

Opposition to Baghdad's draft oil law isn't confined to Kurdistan, however. In southern Iraq, nationalist oil workers' unions have threatened to strike if the law is passed, warning that it would cede control of Iraq's natural wealth to foreign companies. Similar sentiments have been expressed by Iraqi oil-field managers.

In theory, Iraq's oil reserves are so massive that the economy should thrive for decades, no matter what terms it sets for foreign investment. Its proven oil reserves of about 115 billion barrels are the world's third largest, and some geologists believe even more oil could lie undiscovered beneath Iraq's Western Desert. But the country's oil industry has been in steady decline since it was nationalized by Saddam Hussein in 1972, and it was left virtually crippled by the sanctions of the 1990s, when little was spent on maintenance and upgrades. Iraq's current output of about 2 million barrels a day is far below its potential, and the government hopes to triple that figure by 2015. But getting there will require giant investments, probably by the major Western companies that are best placed to undertake the required drastic overhaul of obsolete oil facilities.

A number of factors will give foreign investors pause, however, among them the decrepit state of Iraq's infrastructure and the shortage of skilled local personnel; the security risk from insurgents to foreign oil workers and to pipelines; and the massive and deeply entrenched underground economy based on smuggling Iraqi oil across the borders.

Dozens of major Western companies withdrew their bids at the last minute during Iraq's first auction for new oil contracts last June, after Baghdad refused to offer more than $2 for every barrel pumped. Only one contract was signed, by a consortium led by BP and China's National Petroleum Corp. to pump about 2.8 million barrels a day from the giant Rumaila field in southern Iraq. Most companies had demanded $4 a barrel, citing the security and political risks inherent in investing in Iraq's oil industry. "You have a wide popular understanding [among Iraqis] that they should not allow foreign companies to get involved in the oil industry because they will steal the money from the Iraqis," says Samuel Ciszuk, Middle East energy analyst for the risk consultancy IHS Global Insight in London. "And we're talking huge investment needs."

Still, more than 40 companies, including Western energy giants and companies from Asia and Africa, have signed up for a second auction scheduled for mid-December. Despite the risk, their operating assumption appears to be that it is safer to move now to secure a stake in the world's largest oil prospect currently up for grabs than to wait for a new Iraqi oil law whose passage remains uncertain. "It indicates that [for these companies] the oil law is not a make or break thing," says Alex Munton, Middle East energy analyst for the consultancy firm Wood Mackenzie in Edinburgh. But even if they move now to stake their claim, actually plowing in the investment and pumping the oil may have to wait for political calm — and the passage of that elusive oil law.