IRAQ - Law Allows Private Refining.

Parliament on July 24 approved a law allowing private oil refineries to be set up in Iraq. This was a step towards relinquishing state control in the refining sector and, when poverty is alleviated, moving Iraqi consumers from subsidised to market prices for fuel. Oil Minister Hussein al-Shahristani on July 25 said Baghdad will provide incentives to both domestic and foreign oil firms whose refinery plans in Iraq are approved by his ministry.

Shahristani said the refining law, however, did not include any sell-off of the state-owned refineries "because the country needs fuel products", adding: "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. As the private sector takes over this activity, the government will be stepping down".

In the previous week, Bahgdad again increased gasoline prices as part of obligations to IMF and Paris Club accords on debt relief and new loans, which are nudging Iraq towards capitalism. (Iraq has long subsidised 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 in late 2006 said such a black market was routing $700m a month. The Brookings Institution's Iraq Index estimates available fuel supplies are at about half the "stated goal". The Planning Ministry estimated earlier in July that unemployment averaged 60-70%). But the government says it will continue decreasing fuel subsidies. Shahristani said the final decision to erase all fuel subsidies was not likely to happen "until the standard of living of Iraqis is raised so they can afford the international prices".

Demand for oil products such as gasoline, cooking and heating fuels is being met by over-stretched domestic refineries - which suffer from sabotage, fuel smuggling and electrical shortages - and regular fuel imports. Earlier in July Baghdad put out tenders for 1.3m gallons/day of gasoline for the second half of 2007, as well as tenders for kerosine, gasoil and other cooking and heating fuels. The security situation has caused import problems in the past.

To produce more fuel from Iraq's own crude oil supply, Shahristani said the new law allowed his ministry to offer private refineries "long-term supply of required crude oil at a discounted price...". This will be 1% below the price at which the State Oil Marketing Organisation (SOMO) is selling the crude oil. Shahristani said the deal gets sweeter because importers of Iraqi crude would not have to ship it outside Iraq, but make fuels locally, adding: "When you produce your fuel...in the country you will not need to import it from outside". But he said firms will be "totally free" to export the fuel for profit.

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

The oil minister said that, if approved, the ministry will also offer infrastructure support, sweet land deals and discounted utilities fees, explaining that such projects will have "reasonable profit margins...and investors have to be encouraged to come to areas like Iraq to start their work".

Shahristani said it was not only the stark security situation which prevented investment, but Iraq was "an evolving economy from a totally centralised to free market, and the economic system has not really developed to a point" that investors are confident in the safety of their assets.

Turning Iraq into a free-market was a priority of the Bush administration. As head of the US-led Coalition Provisional Authority (CPA), 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 US Deputy Undersecretary of Defence Paul Brinkley had skirted the State Department's free-market-or-nothing mandate on Iraq's economy and began the process of reopening the factories. But the petroleum E&P sector was a harder sell.