Focusing On The Non-Oil Sector - Part 11 - Iraqi Oil & Iran War.

After months of tense bargaining, a cabinet-level committee has produced a draft law governing Iraq's vast oilfields which would distribute all revenues through the federal government and grant Baghdad wide powers in exploration, development and awarding of major international contracts. The draft, described by several members of the committee, could still change and must be approved by the Iraqi cabinet and parliament before it becomes law.

Negotiations have veered off track unexpectedly in the past, and members of the political and sectarian groups with interest in the law could still object as they read it more closely. But if approved in anything close to its present form, the law would appear to settle a longstanding debate over whether the oil industry and its revenues should be overseen by the central government or the regions dominated by Kurds in the north and Shi'ite Arabs in the south, where the richest oilfields are located.

The draft comes down firmly on the side of central oversight, a decision which advocates for Iraq's unity are likely to trumpet as a triumph. Because control of the oil industry touches so directly on the interests of all Iraq's warring sectarian groups, and therefore the future of the country, the proposed law has been described as the most critical piece of pending legislation.

The New York Times on Jan. 19 quoted Iraqi Planning Minister Ali Baban, a member of the Sunni-dominated Iraqi Islamic Party (IIP) and who serves on the negotiating committee, as saying: "This [draft) will give us the basis of the unity of this country. We pushed for the center in Baghdad, but we didn't neglect the Kurds and other regions".

Negotiators said the final weeks of wrangling on the draft focused on a federal committee that will be set up to review the oil contracts. Kurdish, and to some extent Shi'ite, parties wanted to maintain regional control over the contracts, while Sunni Arabs, with less oil resources in territories they dominate, insisted that the federal committee have the power to approve contracts, rather than just reviewing them and offering advice.

The negotiators appear to have finessed that issue by allowing the regions to initiate the process of tendering contracts and by drawing up an exacting set of criteria to govern the deliberations of the committee rather than simply relying on its independent discretion. And in a bow to the Kurds, who objected to the use of the word "approve" in describing the committee's duties, the draft law says instead that the committee may review and reject contracts which do not meet the criteria.

The draft law would radically restructure parts of Iraq's state-controlled and often lethargic oil industry by giving wide independence - possibly leading to eventual privatisation - to the government companies which control things like oil exports, the maintenance of pipelines and the operation of the oil platforms in the Persian Gulf. The law would revive the Iraqi National Oil Co. (INOC), a country-wide umbrella organisation which was essentially shut down by Saddam Hussein's Ba'thist dictatorship.

At the same time, the law would place substantial administrative authority outside Baghdad by allowing any region that produces at least 150,000 b/d of oil to create its own operating company, according to Oil Minister Hussein al-Shahristani, who is a member of a powerful coalition of Shi'ite political parties and who also serves on the negotiating committee.

Deputy Prime Minister Barham Saleh, a prominent Kurd from Suleymaniya who chairs the negotiating committee, said the precise wording of clauses could still change. Saleh was on Jan. 19 quoted as saying he was still working to cement support for some provisions in the draft law, adding: "This is the most important piece of legislation that Iraq will adopt, and it is not a surprise that it is taking long, tedious rounds of negotiations. We are close, but we have not yet closed the deal. We are making progress and need to continue".

The developments come with several additional cautions, not the least of which is that in Iraq's chaotic wartime environment, even laws which do get passed can have little impact on the street. In one example of a document arrived at through similar negotiations, Iraq's constitution, it remains unclear what effect, if any, many of the fastidiously negotiated clauses are having in the governance of Iraq.

While the main political and sectarian groups have been represented in the negotiations over the oil law, it is still possible that members of those groups could object as the draft is scrutinised more widely. As a case in point, the Kurdistan Regional Government (KRG) issued an angry statement on Jan. 19 criticising an oil ministry spokesman for saying the oil law had been agreed upon unanimously and put in final form. The statement said: "Although the process of drafting the oil law is nearing completion, the important annexes to the law are still pending".

Some of those annexes will cover things like how to deal with fields which are already producing crude oil under existing contracts, how to begin taking bids for drilling new wells in known fields and exploring areas where currently unknown oilfields could be located.

The committee achieved a breakthrough of sorts in December, when negotiators took a step towards central control by agreeing that all oil revenues should first go to the central government before being sent back to the regions in amounts proportional to population. But the talks bogged down on the question of whether the committee, to be called the Federal Oil and Gas Council (FOGC), would be called upon to approve contracts proposed by the regions or just review those contracts and offer advice. In its current form, the draft law avoids the word "approve" and in effect gives the committee veto power.

Whatever the language, Minister Shahristani said the committee will in fact pass judgment on each contract, even when it originates in a proposed deal between a company and one of the oil-producing regions. Shahristani, a prominent Shi'ite scientist, said: "If the committee decides it does not meet all the conditions, it will reject it". But he said the committee must make its decision based on specific guidelines, like a directive to maximise profits for Iraq and to keep the contracting process transparent.

There are other checks and balances written into the law. For example, while the regions can propose their own deals, they will have to work with companies which have been "pre-qualified" in Baghdad. Directives like that could still generate objections in Kurdistan, which wants as much freedom as possible to write its own contracts.

The draft law specifies that technical experts in the Oil Ministry are to be included in the process at all levels. It is the ministry, for instance, which will be called upon to write a plan for which oilfields will be developed and drilled first, and which ones will follow.

The FOAC would simply be called upon to endorse that plan or send it back for revisions. The Oil Ministry would be closely involved in developing "model contracts" to be used as templates at all levels of Iraq's oil industry.

Having an oil law will lay out the rules of the game in Iraq and in principle make it easier to attract international oil companies (IOCs) with the resources and expertise which the country so desperately needs.

Still, hovering over all the negotiations is the question of whether companies will want to come to this country with Iraq in its current state. Dr Shahristani, for one, says that because of the financial stakes, companies are already reaching out. He said: "The international companies keep contacting me, every week, without exception. They are all very, very keen".

Addressing a news conference in Baghdad on Jan. 21, Minister Shahristani said the law will pave the way for "transparent and fair" competition in bids to develop Iraq's oil wealth. The new law, if approved, is to encourage IOCs with their investment clout and technology to modernise Iraq's oil sector and meet the country's goal of doubling the current crude oil production of 2.5 million b/d by 2010. Iraq's proven oil reserves stand at about 115 bn barrels, the world's third largest after Saudi Arabia and Iran.

Dr Shahristani said new oilfields will be added as bids are submitted by IOCs, adding: "The competition will be transparent and fair and companies will be chosen according to their modern technological capabilities to guarantee the highest benefits for Iraqis. We will not consider their nationalities and we will ignore any contract that does not achieve the highest benefits".

Shahristani refused to give a timeline for parliamentary action and did not say how the ministry would negotiate with foreign companies. He cautioned that attacks against oil installations and employees were increasing, with 289 people killed over the past year and 179 wounded. He said: "The ministry is always suffering from these terrorist attacks. I call on all honest people to co-operate with the Oil Ministry in order to find those who are attacking the employees of this sector and provide us with any related information".

Insurgents have frequently targeted oil facilities, pipelines and employees, disrupting exports and efforts to modernise the industry. The oil minister again stressed that all Iraqis will share in the profits amid continuing concern by the Sunni Arabs that they will lose out to the Shi'ites and Kurds who dominate the country's two chief oil regions in southern and northern Iraq.