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Tuesday, June 26, 2007

Situation not ripe for a new oil law in Iraq

This is an interesting analysis of the draft oil law in Iraq. I am not sure how privatizing would necessarily mean accountability as opposed to govt. ownership but much of his article makes many good points.

Situation Not Ripe for a New Oil Law in Iraq
Khalil Zahr Al-Hayat - 20/06/07//

Any one who is following up on the ongoing debate among Iraqi oil officials and experts of different walks over the country's oil law cannot help but feel upbeat on the future of the country despite the current bloody situation because of the spirit of objectivity and affirmativeness that dominates the attitudes of a majority of those involved in drafting the oil law and their unmistakable keenness to uphold the unity of Iraq and its higher national interests.

What is hard to grasp, however, is the fact that efforts to study the particularities of this law and the demands for its passing come amid a set of highly unfavorable and oppressive conditions that drastically reduces the chances for arriving at the best model for a law that takes the interests of Iraq into account and allows for the establishment of a successful future oil industry that is able to push the wheel of economic and social development.

The deteriorating security conditions in Iraq that cost many Iraqis their lives, and push many others into destitution have also worsened the exodus of Iraq's qualified cadres, and undermined the country's social fabric and its human resources, which is the most important, if not the only sustainable, of all Iraq's resources.

Therefore, higher priority should be set to reaching the political settlement needed to put an end to the violence and give Iraqis the security and the stability that allows them to think clearly of their other issues, and since it would be difficult to work on developing Iraq's oil resources in light of the current circumstances, there should be no harm in waiting.

Furthermore, debating Iraq's oil law under a foreign military occupation might make the law vulnerable to domestic or international legal challenges in the future, since it would be sanctioned in the presence of a military occupation, by countries that have clear interests that stand to be affected by the wording and the essence of the law being drafted.

Accordingly, it would be normal to expect these country to resort to pressure as means of serving their political and economic strategic interests, as they are certainly anything but neutral, and constitute a main pressure front that influences the ongoing deliberations over the law, particularly in the direction of sanctioning a certain formula during this stage that might not be completely inline with Iraq's national interest as seen by many within and without the country.

The timing of the discussion of the law, coming ahead of a key development taking place in the Kurdish region of Iraq, namely the referendum on the final status of this region, is among the most intriguing factors surrounding the debating of the law, especially since Kurdish politicians constitute the critical mass for the drive to increase the regional and provincial bargaining powers in the debate over the distribution of the exploration, development and oil production operations between the provincial authorities and the central authority in Baghdad.

Since whatever the decision to be taken with this regard is expected to apply to all of Iraq's provinces, and in light of the autonomous nature, which lies at the cornerstone of the attitude that shapes the stance of the Kurdish province, and which sets this province part from the rest of Iraq; the law being drafted would probably lead to the sharing of oil wealth between the central and the provincial governments.

However, any participation by the provincial authorities in the development of Iraq's oil resources would almost certainly guarantee international oil companies a foothold in operations to develop Iraq's oil resources and oil production operations as partners under 'production sharing' contracts as nascent regional oil bodies are seen as lacking the ability to meet the technical, and self-financing requirements needed for the development of the oil field expected to be allocated to it.

It is also wroth taking into account that direct foreign investment in the Iraqi oil sector will not be an advantage to Iraq if national Iraqi oil companies possess these capabilities, especially since Iraq's oil is easily produced and is considered among the cheapest oils to produce world wide.

For these critical technical and funding capabilities to be available, national Iraqi oil companies must be of a certain caliber in terms of their financial assets and production capabilities, which are qualities only available to regional companies as the size of the Iraq oil reserves does not justify the presence of a large number of oil companies, each possessing the needed capabilities.

When it comes to the technical services sector expected to be needed by the Iraqi oil sector, for example in the field of rehabilitating production operations of oilfields that were damaged by the military operations; expert oil companies could be contracted under service contracts that do not entail granting these companies any concessions over Iraq's natural resources or undermining the national sovereignty of Iraq over these companies

Keeping the oil sector completely under the control of a single, central authority does not necessarily entail allowing national oil company to monopolize the oil and gas sectors on the intermediate or the long runs, nor the absence of transparency, which are constitute legitimate concerns by a majority of Iraqi oil experts; leading some to call for a decentralized approach in managing the oil sector.

This is because transparency can be achieved by running the national oil company on commercial basis or completely privatizing it under the appropriate regulatory restrictions.

Moreover, more then one, technically and financial competent national oil companies can be established to ensure competitiveness, high production and transparency levels, since taking into account the amount of confirmed reserve, the Iraqi oil industry might be able to accommodate three or four national oil companies competing in all of the country's regions.

At the same time, the federal oil and gas council proposed by the draft law is largely seen as a suitable framework governing the partnership between the central and provincial authorities in regulating and administering the oil and gas sector. The council also gives provincial authorities, if given the needed powers, the possibility of monitoring and auditing the central administration of the oil sector.

It is also worth mentioning that privatizing the national oil company or companies does not necessarily entail sacrificing the sovereignty of the state over its oil resources, or abandoning the national strategy aimed at developing these resources, since the government - in the event national oil companies were privatized in the future, and in contrast to production sharing contracts - can always maintain shares with a golden cover that allow it to maintain majority control over this critical sector.

When it comes to spending oil-generated revenues, the agreement reached to fairly distribute these revenues among the provinces according to the size of the population is acceptable in principal since it reflects keenness to preserve the unity of the Iraqi people.

The practical implantation of this principal might lie in a methodology for economic and social development that aims at the eliminating the differences between the Iraqi provinces in income distribution and human development in line with the UN report for human development, as such methodology would direct all the central revenues, not just oil revenues toward achieving this critical goal.

Oil revenues might also be streamlined in the initial phase into the process of restructuring, rehabilitating and upgrading the country's infrastructure and basic utilities as demanded by a number of Iraq experts and subject matter specialists.

The bigger part of these revenues, however, should be invested in diversifying the Iraqi economy's productivity base and getting ready to the post-oil era. In this context, Iraq would need massive direct foreign investments, particularly in the field of advanced technologies and the development of high value-added industries.

All this, however, would remain within the realm of wishful thinking or theories if peace and stability could not be maintained throughout the whole of Iraq.

* Mr. Khalil Zahr is an Environmental Affairs Consultant from Lebanon.



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