Iraq bill passed to privatise oil refinieries.

This will no doubt please the US administration. Although none of the US benchmarks are near being met at least now there is some opening in the energy sector for foreign investment. A state that is privatising can hardly be a failed state in the jargon of global capitalism.

PETROL POLITICS
Parliament Passes Law to Privatize Refineries
Measures Designed to Boost Iraq's Capacity, End Fuel Shortages
By BEN LANDO Posted 17 hr. 37 min. ago
Essam al-Sudani/AFP/Getty
WASHINGTON, July 25 (UPI) -- Iraq's Parliament has approved a law privatizing the country's oil-refining sector in order to lure investment and stem a fuel shortage.

The law, approved Tuesday, is a step toward relinquishing government involvement in the refining sector and, when poverty is alleviated, moving Iraqi consumers from state-subsidized to market prices for fuel.

Oil Minister Hussain al-Shahristani told United Press International Wednesday from his mobile phone in Baghdad that the government will provide incentives to both domestic and foreign private oil companies whose refinery plans the ministry approves.

"This is a law that will privatize the refining sector in Iraq and allow the private sector, whether it's local or international investments, to be able to invest in refining activities in Iraq, including building refineries," Shahristani said.

The refinery law is not the same as the highly contested oil law, stuck in Parliament, which would govern access to and development of Iraq's vast oil reserves.

Despite its oil wealth, Iraq produces less than 2 million barrels per day -- compared with 2.6 million bpd before the war -- and exports more than three-quarters of it. That income covered more than 90 percent of the 2006 federal budget.

Demand for products such as gasoline, cooking and heating fuel is being met by the maxed-out domestic refineries -- which also suffer from sabotage, fuel smuggling and electrical shortages -- and regular fuel imports.

Earlier this month Iraq put out tenders for 1.3 million gallons of gasoline per day for the second half of this year, as well as tenders for kerosene, gas oil and other cooking and heating fuels. The security situation has caused import problems in the past.

In order to produce more fuel from Iraq's own oil supply, Shahristani said the law allows the ministry to offer private refineries "long-term supply of required crude oil at discount price from the market price on the day of supply." The price will be 1 percent below the price at which the State Oil Marketing Organization is selling the oil.

Shahristani said the deal gets sweeter because importers of Iraqi oil won't have to ship it to refineries outside the country, but make fuels in an established market.

"When you produce your fuel product in country you will not need to import it from outside," Shahristani said, though he also said the companies will be "totally free" to export the fuel if they can make more money doing it.

He said the law requires a certain percentage of Iraqi workers to be hired for a given project, leading to more jobs, more refining capacity and more fuel.

A company must submit a proposal to the Oil Ministry, "either on their own or in partnership with one of the Ministry of Oil companies," Shahristani said.

If approved, the ministry will also offer infrastructure support, sweet land deals and discounted utilities costs, he said, explaining such projects have "reasonable profit margins but not very large and investors have to be encouraged to come to areas like Iraq to start their work."

Shahristani said it is not only the stark security situation that's preventing investment, but Iraq is "an evolving economy from totally centralized to free market, and the economic system has not really developed to a point" that investors are confident in the safety of their investments.

The "new" Iraq as a free-market state isn't the goal of the entire country. It was a priority of the Bush administration, though. As head of the Coalition Provisional Authority, the first occupation administration of Iraq in 2003, Paul Bremer made it a guiding rule, shutting down 192 state-owned businesses where the World Bank estimated 500,000 people were working. The Washington Post reported in May that Deputy Undersecretary of Defense Paul Brinkley recently skirted the U.S. State Department's free-market-or-nothing mandate on Iraq's economy and began the process of reopening the factories.

The oil sector, however, at least upstream, was a harder sell. The debate over the oil law pits those who want strong central government control over oil planning and development against proponents of regional/local control, which would likely lead to more reliance on private companies. There is no overall agreement as to the type of contracts those companies would sign, sparking worries it will be too friendly to foreign companies.

Shahristani said Iraq's gradual move out of refining will let it put more into the upstream sector.

The refining law doesn't include any government sell-off of its state operations "because the country needs fuel products."

"Currently our policy is to keep our government-owned and operated refineries until we are sure the market can be supplied from the private sector," Shahristani said. "As the private sector takes over this activity, the government will be stepping down."

Last week Iraq again increased its prices for gasoline as part of its obligations to the International Monetary Fund and Paris Club agreements on debt relief and new loans, which are nudging Iraq toward capitalism.

Iraq has long subsidized fuel to its citizens. That, in part, is spurring smugglers to take advantage of the high demand, long fuel-station lines and cheap station prices. The government estimated late last year such a black market was routing $700 million a month. The Brookings Institution's Iraq Index estimates available fuel supplies are at about half the "stated goal."

The Planning Ministry estimated earlier this month unemployment averaged between 60 percent and 70 percent, but the government says it will continue decreasing subsidies.

Shahristani said the end decision to erase all fuel subsidies is part of the annual budget process but will likely not happen "until the standard of living of Iraqis is raised until they can afford the international prices."

Ben Lando is UPI energy correspondent. (energy@upi.com) This article was re-printed by permission.

© Copyright 2007 United Press International, Inc. All Rights Reserved.

Iraqi Government | Oil Email This Post

Governments Buying Equity Stakes Worldwide

Of course it is only certain governments that are doing this. The US and European capitalist states adopt the ideological stance that governments are not in the profit making business just private investors! China is still socialist enough that it is quite happy to have government owned industries and now it is capitalist enough to invest for profit globally!

Governments Get
Bolder in Buying
Equity Stakes
By JASON SINGER in London, HENNY SENDER in New York, JASON DEAN in
Beijing
and MARCUS WALKER in Berlin
Wall Street Journal
July 24, 2007; Page A1

Foreign governments, flush with cash and no longer content with the
meager
returns to be had on safe but low-yielding investments like Treasurys,
are
becoming increasingly aggressive players on the equity front.

The new boldness of these government-controlled investors was on
display
Sunday night when entities controlled by the governments of China and
Singapore agreed to invest as much as $18.5 billion in return for
stakes in
the big British bank Barclays PLC.

In doing so, Chinese lender China Development Bank and Temasek Holdings
Pte.
Ltd., the Singapore government's investment agency, could play a role
in the
outcome of the biggest bank-takeover battle ever. That increasingly
bitter
contest pits Barclays against a consortium of European banks led by
Royal
Bank of Scotland Group PLC in seeking to acquire Dutch banking giant
ABN ABN
Amro Holding NV.

The Barclays deal is the latest in a string of investments in U.S. and
European companies by governments in Asia and the Middle East. Temasek
last
year became the largest shareholder in London-based Standard Chartered
PLC,
a bank that has most of its assets in Asia. In May, the Chinese
government
invested $3 billion in Blackstone Group on the eve of the U.S.
private-equity giant's initial public stock offering.

And last week, an investment fund controlled by the government of Qatar
made
a $21.8 billion takeover approach for British supermarket chain J
Sainsbury
PLC, one of the largest potential acquisitions ever by a state-owned
fund.

While potentially boosting their investment returns, such deals expose
the
government-controlled funds and other entities involved to risks that
range
from simple investment losses to political backlash. If it continues,
the
trend could also reshape global financial markets, bidding up prices
for
more speculative assets like stocks, corporate bonds and real estate,
while
crimping demand for safer investments like Treasury bonds.

"There has been a fairly spectacular increase in financial assets under
management by governments," said Dominic Wilson, director of global
macro
and markets research at Goldman Sachs Group. "The scale of the issues
around
such investment is different than anything the world has ever seen.
Neither
[governments] nor the markets know exactly what they should do with the
assets."

China Development Bank plans to invest as much as $13.5 billion in
Barclays,
in what could become the largest overseas investment by a Chinese
company to
date. The planned investment is part of a broader deal that also
includes as
much as $4.97 billion in funding from Temasek, and would enable
Barclays to
buttress its bid for ABN Amro.

Should Barclays succeed in acquiring the Dutch bank, the deal
ultimately
could leave China Development Bank with a stake of about 8% in the
newly
enlarged Barclays, making it by far the biggest shareholder.

If completed, the Barclays deal would provide further evidence of an
important global shift in wealth. "This is basically a flow of capital
from
emerging markets to established markets," says John Studzinski, former
chief
of investment banking at HSBC Holdings PLC and now head of Blackstone
Group's mergers-and-acquisitions advisory group, which advised China
Development on the deal. The private-equity firm's role shows how
private
and public investors are joining together to create powerful forces.

"Going forward, you have to look at where wealth is being created...I
think
it's a very logical trend," adds Mr. Studzinski.

To be sure, investors controlled by foreign governments have bought
stakes
in Western companies before. One example, the Kuwait Investment Office,
which grew into an investment heavyweight as oil prices boomed in the
1970s,
amassed sizable holdings in several major companies, including the
then-British Petroleum and Germany's Daimler-Benz AG. But what
distinguishes
the latest wave of investment is the sheer size of the sums involved,
which
could give those investors the potential to affect strategy and bolster
or
block corporate transactions like takeovers.

China Development Bank's agenda in the Barclays deal is somewhat
unique, say
people close to it. It hopes that substantially expanding its existing,
but
narrower, relationship with the 300-year-old British bank will help
accelerate its own transformation from a policy institution to more of
a
commercial bank, and give it a much higher profile overseas.

But many other recent deals reflect the quest by China and other
countries
for higher returns on their mounting foreign-exchange reserves. Those
holdings traditionally were invested in safe, liquid investments that
could
be quickly converted to cash to buy up local currency if it came under
speculative attack. But in many countries, especially China and the
oil-producing nations of the Middle East, global trade has swelled
those
holdings to far more than might be needed to stabilize their
currencies.

Since 2002, such holdings have increased 20% a year, according to U.S.
Treasury calculations, well ahead of the average 6% rate of 1997-2001.
Global foreign-exchange reserves now stand at about $5.6 trillion. An
additional $1.5 trillion to $2.5 trillion held by "sovereign wealth
funds"
brings total assets controlled by governments to "roughly $7.6
trillion," or
15% of global gross domestic product, the Treasury says.

As a result, governments are treating these reserves less like
rainy-day
funds and more like pools of investment capital.

Sameer Al Ansari, executive chairman and chief executive officer of
state-back investment firm Dubai International Capital, says he is
scouring
the world's 500 largest publicly traded companies looking for a place
to
invest as much as $10 billion. His next target: a U.S. company that he
has
already identified but will only describe as "a household name."

Mr. Ansari says Dubai International, which has $6 billion under
management,
is hoping to announce the U.S deal in September. His company bought a
major
stake in London-based HSBC Holdings PLC earlier this year, and this
month
bought 3% of Airbus maker European Aeronautic Defence & Space Co. and
3% of
India's ICICI Bank Ltd.

The new wave of investment carries numerous risks. Most obvious is the
potential for political backlash. Political pressure to block or
restrict
these investments appears to be mounting.

In the U.S., a Dubai company's deal last year to buy a British ports
operator that operated several American ports ran into political
obstacles,
as did a 2005 attempt by Chinese oil company Cnooc Ltd. to buy U.S. oil
producer Unocal Corp. Dubai Ports World ultimately agreed to sell off
the
U.S. holdings, and Cnooc pulled out of the Unocal bidding.

In Europe, there is a rising clamor to restrict foreign investment.
German
Chancellor Angela Merkel said last week that state-controlled investors
might use stakes in European companies to pursue political, rather than
only
financial, goals. The European Union should think about ways to protect
its
firms from politically motivated buyers, she said, mentioning the
U.S.'s
interagency Committee on Foreign Investment in the U.S. as a possible
model.
CFIUS reviews the national-security aspects of overseas deals.

Others have been more outspoken. Ms. Merkel's powerful conservative
colleague Roland Koch, governor of the German state of Hesse, has
warned in
stark terms about encroachment by industrial groups such as Russia's
OAO
Gazprom, as well as financial investors controlled by China and other
emerging economies. "We haven't only recently gone through the trouble
of
privatizing companies like [Deutsche] Telekom and Deutsche Post so that
the
Russians can nationalize them again," he told German media.

Even the idea of such sales could inflame nationalist passions, as
occurred
last year when there were riots in Thailand following Temasek's attempt
to
buy Thai telecommunications provider Shin Corp.

Critics say backlashes could go beyond issues of foreign investment and
hurt
global trade. "Once you start to define what sensitive sectors are, you
realize that clever lobbyists can identify nearly every sector as
sensitive,
because everything is connected with everything," says Norbert Walter,
chief
economist at Deutsche Bank in Frankfurt. "This will open a wide door
for
protectionism," he says.

Another risk is that the investments go bad. The financial landscape is
littered with examples of foreign buyers being duped by savvy locals
into
overpaying for assets. The Singaporeans, for example, lost money on
dot-com
flameouts.

"The government's management of its hoard of cross-border assets either
in
the form of reserves or in some type of sovereign wealth fund is likely
to
be a source of political controversy and frictions as the inevitable
losses
are recorded," Edwin Truman, a former U.S. Treasury official and now a
senior fellow at the Peterson Institute for International Economics,
warned
in a recent speech.

The trend toward more aggressive government investments also has the
potential to reorder global financial markets. "We have entered a whole
new
world," says Jim O'Neill, head of Global Economic Research for Goldman
Sachs
International in London. "We are at the early stage of a secular
process
where the relations between the prices of stocks and bonds will change.
The
whole world is discovering the equity culture."

While Singapore's Temasek, which manages about $85 billion in assets,
has
long invested in private companies mostly in Asia, the Barclays deal
launches onto the international stage a large but so-far little noticed
Chinese institution. In contrast to Temasek, whose main role is to
invest
government money, China Development's main business is lending to
companies
and local governments for government-backed infrastructure projects in
China.

Under 62-year-old chief Chen Yuan, China Development Bank has been run
increasingly like a commercial entity, and one with a growing
international
agenda. China Development boasts an international advisory council
including
major figures in global finance like Maurice "Hank" Greenberg, the
former
head of insurer American International Group, and Sir Edward George,
former
Bank of England governor.

Mr. Chen is the son of one of the Chinese Communist Party's most senior
early leaders, the late Chen Yun, who along with Mao Zedong and Zhou
Enlai
is enshrined in modern Chinese political lore as one of the party's
"Eight
Immortals." The younger Mr. Chen graduated from Beijing's prestigious
Tsinghua University, and served for many years as a Chinese central
bank
official before taking the helm at China Development in 1998.

Under terms of the Barclays deal, China Development will buy up to
€2.2
billion ($3 billion) of new Barclays shares initially, amounting to a
3.1%
stake. China Development will then buy as much as €7.6 billion worth
of
additional Barclays's shares, if the British bank's bid for ABN
succeeds,
and if regulators agree. China Development had just $6.6 billion in
cash and
cash equivalents at the end of last year. To finance the deal, it will
raise
funds by issuing debt on China's domestic market.