Kurd oil law drives Iraq oil

It will soon be September and there is no sign of the oil benchmark (passing a federal oil law) being met. Perhaps the US sees it as time for regime change again in Iraq. The Kurds are going it alone but most foreign companies will not risk much investment until the federal oil law is passed. However, there was on bid from majors on an existing contract with the Kurds. Refineries are now privatised as well so there could be room for investment there in secure areas. The refinery privatisation bill was mostly ignored by the press when it passed at least in the Western press.

Analysis: Kurd oil law drives Iraq oil


Published: Aug. 22, 2007 at 5:18 PM
By BEN LANDO
UPI Energy Editor
WASHINGTON, Aug. 22 (UPI) -- Iraq’s Kurdistan Regional Government will not wait for a federal oil law before it starts signing more contracts to explore what is thought to be sizeable reserves in its territory. The KRG has already signed a handful of contracts with small oil companies and, now that it has passed a regional law governing any underground oil and natural gas, it will not put development on hold while Baghdad implodes.

“It might take us a little while to sign the next batch of contracts,” KRG Natural Resources Minister Ashti Hawrami told United Press International, “but at least we have now paved the way for that.”

Iraq’s federal oil law has been stuck in negotiations for more than a year. The Kurds had been carefully slowing their own law, hoping the federal law would be completed. Two weeks ago the KRG Parliament unanimously approved the law. The approved version has not been released yet; Hawrami said it’s still being translated into English and Arabic.

He said a version of the federal law the KRG agreed to in February “is in line with our law.”

Whether the new KRG law is the constructive pressure needed to push those debating the federal law is not clear.

“We would like to assume that,” Hawrami said in a telephone interview from Irbil, the KRG capital. Regardless, “we’re not going to wait for the federal law. No. If we were waiting for the federal law, there’s no point in doing our own law.”

Iraq exported about 1.6 million barrels per day last year; that brought in more than $31 billion, making up more than 90 percent of its federal budget. Iraq produced about 2 million barrels per day, far less than its vast reserves can handle.

For much of the last half century, Iraq’s oil sector has been governed from the center, deciding the strategy for one of the founding members of the Organization of Petroleum Exporting Countries. But that included ultimate control in the hands of Saddam Hussein, a legacy the Kurds, especially, aren’t willing to allow again.

Kurdish semi-autonomy, first gained in the early '90s, was enshrined in the 2005 constitution. It is the only official “region” in Iraq, though various factions within the Shiite community in the south -- where 80 percent of Iraq’s 115 billion barrels of proven reserves are located -- are floating various plans. (The Sunnis, which have virtually no oil land, and many Shiites want to keep a strong central control over the oil.)

“In Kurdistan, we have about 0.5 percent of Iraq’s proven reserves, less than one percent,” Hawrami said, adding when fully explored he expects the KRG could produce as much as 1 million bpd. “We’re looking at creating proven reserves, new production, and sharing that with the rest of the Iraqi people.”

Critics, however, say too much control for local governments risks overproduction and lessening the value of Iraq’s oil.

The KRG has already signed contracts with small companies to explore for and develop its oil and gas, a move derided by Baghdad for allegedly overreaching its authority. The Kurds are also keen on breaking the nationalized oil sector open to a free market, a prerogative so controversial it is a major stalling factor of the federal oil law and a move the oil unions have threatened to strike to prevent.

To ensure passage of the constitution, its authors left parts vague. Arguments over the federal oil law are in many ways rooted in the mixed interpretations of the constitutional articles applying to Iraq’s oil, which are the third-largest reserves in the world. It calls for the central government to work with the oil-rich regions and provinces in “the management of oil and gas extracted from present fields” and “formulate the necessary strategic policies to develop the oil and gas wealth in a way that achieves the highest benefit to the Iraqi people.”

But “present fields” isn’t a technical oil industry term, leaving for debate what that covers, which is vital when taking into account the following section of the constitution:

“All powers not stipulated in the exclusive powers of the federal government belong to the authorities of the regions and governorates that are not organized in a region. With regard to other powers shared between the federal government and the regional government, priority shall be given to the law of the regions and governorates not organized in a region in case of dispute.”

The KRG feels it’s been neglected for too long and, after keeping its area relatively safe, creating really the only part of Iraq where any economic development has sprouted, appears empowered to make its own oil moves.

“It’s a milestone for Kurdistan and as well in terms of the development of Iraq’s overall petroleum legal regime,” said J. Jay Park, a partner and chair of the Global Resources Practice Group at the Calgary, Alberta-based law firm Macleod Dixon. “This is one of the key steps required to create that petroleum legal regime.”

Park, who was “active” in helping Somalia draft its new oil law, represented Canada-based Western Oil Sands in its successful bid for an exploration and production sharing agreement with the KRG. He also conducts regular trainings with the Iraqi Oil Ministry.

“The oil and gas companies take decisions on investing based on attractiveness of the geology, attractiveness of the fiscal terms, and then the suitability of the legal regime, and sometimes the political regime related to that legal regime,” Park said. “I’m pretty sure that the absence of an established petroleum legal regime in Iraq has been keeping some investors away from looking at the possibilities of investing there.”

While even the most ardent nationalists agree some measure of foreign investment is needed in Iraq to modernize the sector and fix what Saddam Hussein, a decade of sanctions and war broke, many want the national oil company to stay in charge.

Tariq Shafiq, an Iraqi oil consultant now living in London, said it’s vital to have the oil sector strategy come from the center, regardless of the extent of foreign investment. He was one of three authors of the original oil law last summer. Shafiq said he now opposes the law because it was altered too much.

The Kurds have been one of the biggest proponents of pushing the federal law forward, though its demands on the contents have stalled it as much as any other faction. Shafiq said the KRG fought for local control at the expense of a national strategy.

“The issue of KRG legislating its own petroleum law puts the future of the present draft federal petroleum law and the future relationship with the KRG on a very bumpy route,” Shafiq said. “It is a serious step to fragment the country.”

--

(e-mail: energy@upi.com