Complex Iraqi Politics.

Iraq's petroleum law has been touted as a major step towards the political reconciliation of the country's major sects. The US military "surge" in Baghdad is, in part, designed to provide the sectarian-defined political groups breathing room to pass this and other measures which should give every group a greater stake in the political and economic future of a unified Iraq.

Yet as negotiations over the petroleum law drag on and grow increasingly bitter, reconciliation seems less and less likely. It now appears impossible for parliament to pass the petroleum law by a government-imposed deadline of May 31. The immediate cost of this failure will be economic - while many of the Western oil majors will not invest in Iraq because of the remaining security risks, Eastern and smaller oil firms appear willing if the political risks are first removed through legislation.

However, the long-term damage done by the failure to reach a consensus on the petroleum law will be a hardening of the sectarian fractures in Iraq's political landscape. The debates surrounding the law do not centre on what is best for the country as a whole, but only on what is best for each sectarian group. By defining the debate as yet another zero-sum competition, politicians have made it impossible to emerge from the negotiations without at least one group feeling like the losers.

The US Embassy in Baghdad - whose new complex of buildings in the fortified centre of the capital will be completed in September 2008 as the largest of its kind in the world, described as a "city within the city" - has only encouraged this situation by insisting on a greater role for foreign firms in future investments. As such, reconciliation may not emerge from the passage of the petroleum law. This darkens the prospects of success for the US military "surge".

The Petroleum Law's Background: The Iraqi constitution passed in October 2005 was deliberately vague on ownership and control of Iraq's petroleum resources. The document was written in such a way as to win the approval of the Kurdish and Shi'ite negotiators. Sunni Arab representation at the talks was minimal because the Sunni leadership was still largely boycotting the political process at the time. The text was vague on issues of governance and specific on issues of power politics. Article 111 of the constitution states that "oil and gas are [under] the ownership of all the people of Iraq", while Article 112 calls for distribution of oil revenues to be allocated "in a fair manner in proportion to the population", with little clarity on either issue.

Because the constitution is so vague, and because Sunni Arab leaders remain unsatisfied with large portions of the document, a new petroleum law is needed to clarify issues of control and revenue distribution. The oil sector accounts for 95% of the government's revenues. Iraq's proven reserves are estimated officially at 116 bn barrels, putting it only behind Saudi Arabia and Canada. But more recent estimates by independent experts put the recoverable oil at 325-360 bn barrels, with more than 100 bn barrels of oil equivalent said to lie in the Sunni-dominated western desert. Less than 20% of Iraq is explored (see survey of Iraq in APS Review's current volume, Nos. 18-21).

It is vital for the future of Iraq that there is legal certainty in the petroleum industry to encourage future exploration and acceptable distribution of the country's leading stream of revenue among Iraq's major sectarian groupings. Kurdish opposition to the current draft, approved on Feb. 26 by the Baghdad government, is based on fear that the central authorities will have too much control over the oilfields in the relatively peaceful north. Kurdish leaders claim the constitution gives them the right to develop reserves in their semi-autonomous region because it grants regional control over existing oil. But Shi'ite and Sunni leaders interpret the constitution as only granting regional control to operations developed before 2005. This would mean that incremental additions to existing operations would also be controlled by the central government.

As the constitution does not define what is a "new" field, the sectarian groups are pushing for their interpretation to be spelled out in the law. The Kurds also want decisions about foreign investment to be made at the regional level. They have already concluded five PSAs with foreign oil firms to explore and develop the Kurdish zone (see omt19IraqFieldsMay7-07).

Kurdish leaders are concerned about granting control to the central government for two main reasons: Assuming oil-rich Kirkuk is brought under control of the Kurdish Regional Government (KRG), the proven reserves in the semi-autonomous region would provide enough to fund a Kurdish state when its leaders feel it is time to cross that bridge. And they are sceptical about granting control to ill-defined bodies to control oil developments and revenues, which the central government would oversee.

The existing draft would re-establish the Iraqi National Oil Co. (INOC), a state-owned firm abolished in 1987, to manage new projects. The Federal Oil and Gas Council would regulate the industry, but it is not clear how membership to the council would be granted, or whether it would be limited to Iraqis. The Kurdish leadership would prefer regional control of all oil reserves, with a defined portion of revenues going to the central government.

Ideally, Western experts say, existing oilfields would contribute a lower rate, and "newly developed" but narrowly defined fields would contribute to the central fund at a higher rate.

Opposition to the draft law is only part of a larger agenda for Sunni politicians, who fear the law could cut off their regions from Iraq's main source of income. Sunni Vice President Tareq al-Hashemi, leader of the Iraqi Islamic Party (IIP) and member of the Iraqi Accord Front (IAF), in early May threatened to pull IAF's 44 MPs out of the 275-member House of Representatives if the government did not meet his demands for redrafting the constitution before May 15. After a face-saving meeting with PM Nuri al-Maliki and Iraq's Kurdish President Jalal Talabani, Hashemi backed away from his threat (see his & others' profiles in gmt21IraqWhoMay21-07).

Sunni MPs are only interested in passing the law if it leads to revisions in the constitution. Sunni demands are primarily concerned with creating a strong central government and preventing the breakup of Iraq into autonomous zones. As such, Sunni negotiators are pushing for a larger role for INOC in new oil developments. It is their belief that Sunnis would need to be brought in to run the company because of their experience gained under Saddam Hussein's Sunni/Ba'thist dictatorship in operating Iraq's petroleum industry. They would like to limit the role played by foreign firms in developing Iraq's reserves, partly for similar reasons.

Sunnis want redistribution based on population and discount other concerns which might be brought into the equation such as retributions for hardships endured under Saddam. While many of their demands are close to those of the Shi'ite leadership, the Sunnis appear willing to prevent the law's passage until their other demands are granted.

The Shi'ite leadership is united in its desire for a stronger role to be played by the central government in Iraq's petroleum sector, if only to prevent the Kurdish region from growing in power. Oil Minister Hussein al-Shahristani has inserted language into the draft bill that would strengthen the government's role. Four appendices were inserted into the law after it emerged from the cabinet on Feb. 26, which grant INOC control over 93% of Iraq's reserves. This is not acceptable to the Kurdish leadership and is now a major obstacle to its passage.

The main Shi'ite coalition, the United Iraqi Alliance (UIA), made up of the Supreme Council for the Islamic Revolution in Iraq (SCIRI) and a ruling faction of al-Da'wa al-Islamiya, was formerly closely aligned with Iran. But it has moved closer to the US interests as it tries to maintain Maliki's government. SCIRI re-branded itself as the Supreme Iraqi Islamic Council (SIIC) this month to distance itself from the Islamic Revolution in Iran and give it more of an Iraqi-centric title. The main goal of the UIA now is passing the petroleum law in whatever form is acceptable. Because Washington has hinged the prospects of its current "surge" policy on Maliki's ability to reach reconciliation with Iraq's other groups, the law has become even more important. Every other group knows this, and their intransigence stems from either a desire to gain concessions from the UIA on other issues or a goal of removing the UIA from power.

However, there is a large split within the Shi'ite majority over the role of the central government. Politicians aligned with Muqtada al-Sadr favour a strong central government for strategic reasons. Since the US-led invasion of Iraq, Sadr has advocated maintaining the existing borders of Iraq, as well as a powerful national government, because he believes this will lead to creation of a strong Shi'ite state on Iran's border. Sadr seems to be preparing for the downfall of the Maliki government. For this reason, Sadr loyalists may prove to be another obstacle to the passage of the petroleum law, even if they believe in the spirit of the text.