IRAQ - The Petroleum Law Debate.

US State Department's Co-ordinator for Economic Transition in Iraq Charles Ries was on March 17 quoted as saying the debate on Iraq's petroleum law was political, not technical. He said the proposed law was not necessary for Iraq to produce oil "but it would clearly be much, much better to incentivise private investment to help Iraq produce more if a bill would pass".

Iraq had set aside $2.5 bn for Technical Support Agreements (TSAs) over the next two years. TSAs, being negotiated with BP, Shell, ExxonMobil, Chevron and Total, would see a transfer of technology to the petroleum sector, while the autonomous Kurdistan Regional Government (KRG) has signed more generous exploration and production sharing agreements (EPSAs) with smaller IOCs for the north (see Part 24 in ood2-IraqOilDeals&KurdsFeb11-08).

Ries said Iraq will sign EPSAs for new areas, adding: "That is the likely course for the upstream industry in Iraq", pointing to Syria and Indonesia as examples of states which utilise PSAs to garner investment. He said: "all parties, with a few exceptions of parties that are not in government", backed EPSAs.

Iraq's petroleum workers and civil society groups, as well as MPs, have come out against EPSAs, fearing Iraqis will not get their fair share. Some MPs have said they would accept EPSAs in certain situations and only if the percentage for companies is low enough. The EPSA is a favorite of IOCs, reimbursing then for expenses and guaranteeing them a percentage share of petroleum for usually decades-long deals. It is compensation for the risk of exploring and coming up empty, say the companies, which can add the reserves when stock exchanges look at their books. But Iraq is not like Syria or Indonesia. It holds the world's third-largest oil reserves despite being vastly under-explored. Those in search have higher percentage of finds than in other countries, and what they get is usually the highest quality, thus less expensive to produce, transport and refine.

The contract model to determine the extent of foreign involvement in the nationalised petroleum sector is one sticking point in approving the law. The other is a power struggle between the majority in the central government and Iraq's Kurds and others.

Ries said: "The oil and gas law from a technical standpoint is largely done. The problem relates to the distribution of power and autonomy in the federal structure". The KRG insists on a decentralised governing structure over petroleum instead of the national government. The law is stuck in parliament's Energy Committee.

Iraq is producing about 2.45m b/d and exporting about 1.95m b/d of crude oil. Sales in 2007 brought in $41 bn. With increased output and higher prices, crude oil exports have fetched $11.6 bn through the first 10 weeks of 2008, according to the US State Department's Iraq Weekly Status Report.

Iraq's oil reserves could handle producing much more. The Oil Ministry has a 6m b/d goal for 2012 and some say 10m b/d is feasible, even without bringing online oilfields not yet found. The producing fields need to be fixed and modernised and workers retrained. This will take tens of billions of dollars.

Iraq has been trashed by members of Congress in Washington for not investing enough of its own funds - a mostly misguided attack. Sens. Carl Levin, D-Mich., and John Warner, R-Va., have asked the Government Accountability Office (GAO) to look into what banks Iraq stores its revenue, how much is going to reconstruction and what is America's contribution to the rebuilding effort. Sen. Hillary Clinton, D-NY, on the campaign trail on March 17 reiterated such concerns.

They could have just asked Ries. He said of the $49 bn FY 2008 budget, $13 bn was pegged for capital investment and more than $3 bn was heading to the Oil Ministry. Iraq still lacks the capacity to actually spend the funds, according to previous years. Ries said 2007 will see 60% of capital budgets spent when the final numbers were in, though a GAO report in January questioned the figures provided by the US State and Treasury departments and the Iraqi Finance Ministry. Regardless, it has increased the allocation.

Ries said: "They are paying several orders of magnitude more of the cost of reconstruction than we are now. Iraq's oil revenues are all being spent on the Iraqi government, both operating expenditures and reconstruction". There is about $27 bn at the US Federal Reserve to stabilise Iraq's currency. Ries said: "We spent somewhere between $4 and $5 bn in the oil sector in five years. And they're spending $3 and a half [bn]", adding there was no new US spending in the petroleum sector. The State Department was focusing its effort away from "bricks and mortar" to capacity building.