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Iraq Struggles to Finish Oil Law
Forging an Agreement Requires Balancing Sharply Divided Interests, Ethnic Groups

By Steven Mufson
Washington Post Staff Writer
Wednesday, January 24, 2007; D01

Four months ago, about 80 oil company executives and consultants packed an office on St. James's Square in London for a briefing on exploration prospects in Iraq's Kurdish region and a Kurdish draft of an Iraqi national petroleum law.

Despite the immense risks of working in Iraq -- pipeline explosions, kidnappings, insurgency, political infighting -- the oil company executives were lured by the potential rewards, which are immense, too. Outside Saudi Arabia, no country has proven oil reserves as big as Iraq's. And the oil there is high quality, easy and cheap to produce, and bottled up in reservoirs that many major oil companies were familiar with three decades ago before wars and sanctions drove them out.

"Exxon Mobil has more seismic data on Iraq than on Houston real estate," says Fadel Gheit, an oil analyst at Oppenheimer & Co. who used to work for Mobil. "If Exxon had security on the ground, the following day it would have crews there," Gheit said. "And money would be no object."

Gheit estimated that Iraq could easily produce 6 million barrels a day, more than three times its current output and enough to help keep a lid on world prices.

Four months after the London meeting, however, security remains elusive and so does the national petroleum law. Barham Saleh, Iraq's deputy prime minister, said in a recent telephone interview that a compromise was "very, very close."

The proposed law has taken on significance beyond oil. While Iraq and foreign oil companies are eager to tap new revenue, the Bush administration and many Iraqis also hope that the law can be a model for resolving disputes and can bind Iraq's warring factions together.

Agreement has been reached on sharing oil revenue on a per-capita basis, a benefit for Sunnis who live mostly in areas with less production. A deal also has been struck that recognizes the power of regional authorities, such as the Kurdish Regional Government, to award oil contracts, but establishes a national petroleum commission with the power to review contracts within 60 days. A "revamped" national oil company would continue to manage existing production while new regional affiliates would participate in new exploration and production.

"We need to close the deal on one or two small issues," Saleh said. "A number of the major issues have been resolved."

But an adviser to the Kurdish authorities said those "small issues" included some significant details. On Friday, the Kurdistan Regional Government posted an item on its Web site denying news reports that a deal was complete. The "important annexes to the law are still pending," it said.

Outstanding issues include how much oil revenue will go to the central government; a charter for the new national oil company; the role of the oil ministry; and the principles upon which the new commission could reject regionally negotiated contracts. Also unsettled is whether the commission will require a simple majority vote or a two-thirds vote to reject a contract's terms. Those provisions must all be part of one package with the petroleum law, Kurdish leaders said.

If the Shia-dominated Iraqi central government spends heavily on its own projects, it could deny the Kurds and other regional authorities significant shares of oil revenue.

Even if negotiators agree on a draft, it must win approval from Iraq's cabinet and fractious parliament, which hasn't met in weeks.

The United States has been pressing Iraq to complete the law. "As awful as the Saddam Hussein government was, it did have a record of dealing with foreign investors that wasn't that bad," said James A. Placke, an expert at Cambridge Energy Research Associates. "That's gone and hasn't been replaced."

Now, forging a petroleum law requires a balancing of sharply divided interest and ethnic groups, not just the word of a dictator.

"This is not a regular piece of Iraqi legislation being signed off on," said Jonathan Morrow, an adviser to the Kurdistan Regional Government. If successful, he said, "it . . . might show the way forward in Iraq."

Saleh suggested that a deal might discourage attacks on oil installations and reduce corruption. "Since we all agree on revenue sharing, all elements of Iraqi society will have an interest in maximizing revenues and best business practices," he said.

For now, however, the oil sector is a mess. Since the first attack on a pipeline on June 1, 2003, it has been a struggle to keep oil flowing. Basic production equipment has been looted or destroyed. Many wells still are not working properly. And last year, the U.S. special inspector general for Iraq reconstruction complained that Iraq's oil ministry was not reporting on its budget and had spent "only a fraction" of money set aside for capital costs.

While the Bush administration once thought that Iraqi oil revenue would cover occupation and reconstruction costs, the Iraq government still relies heavily on U.S. technical and financial aid. Placke estimated that Iraq produced 1.85 million barrels a day last year, less than the year before, less than the prewar output and well below the U.S. target of 3 million barrels a day.

Placke, who was part of the Iraq Study Group, estimated that 200,000 barrels a day is siphoned from the main export line through southern Iraq, put on barges, and loaded onto tankers waiting in the Persian Gulf. What's left after discounts and bribes goes to militias or insurgent groups, he said.

In the south, some local Shia militia, clan or clerical groups are trying to claim the rights to some Iraqi fields and a voice in negotiating access for foreign companies. A stake in a billion-barrel field could be more important than a stake in the parliament or cabinet. Some experts worry that, as in Sudan, oil could contribute more to tearing the country apart than to uniting it.

A senior Iraqi government official involved in the petroleum-law talks said that if militias and clans were to cut separate deals with foreign companies, it would be a "recipe for disaster and civil war." He warned foreign companies against signing such deals. "We are very interested in credible investment in the oil sector," he said. "We cannot afford to have these cowboys running around trying to manipulate the situation in Iraq."

The national petroleum law remains a touchy subject in part because of widespread suspicion that the U.S. invasion in 2003 was motivated by designs on Iraq's oil riches.

The Iraq Study Group report contained three pages of recommendations for the sector, including suggestions that international oil companies invest in the country and the government fight corruption on contracts.

"Before embarking on controversial measures such as this law favoring foreign oil firms, the Iraqi parliament and government must prove that they are capable of protecting the country's sovereignty," Kamil Mahdi, a senior lecturer in Middle East economics at the University of Exeter in England, wrote in the Guardian newspaper. "A government that is failing to protect the lives of its citizens must not embark on controversial legislation that ties the hands of future Iraqi leaders, and which threatens to squander the Iraqis' precious, exhaustible resource in an orgy of waste, corruption and theft."

In a telephone interview, Mahdi said, "My main worry is that if I were an official in the ministry of oil negotiating a contract and living under the kind of threats that people in Iraq are daily experiencing, I would probably be in a very weak negotiating position."

While the debate continues, the Kurdistan Regional Government is pushing ahead. In 2002, at the suggestion of Jalal Talabani, the Kurdish leader who is now Iraq's president, the Turkish conglomerate Cukurova Group set up an oil unit called Genel Enerji to look for oil in Kurdistan. Genel signed a production-sharing agreement in July 2002 and took over the Taq Taq oil field in February 2003 on the eve of the U.S-led invasion. It signed another exploration contract in July 2005. A Norwegian firm, DNO, and a Canadian firm, Heritage Oil, also struck exploration and production deals in the Kurdish region.

Tariq Shafiq, a former executive of Iraq National Oil and director of the consulting firm Petrolog & Associates, has drawn up three contracts -- service, buyback and production-sharing -- that the government will use in its new petroleum law. He said the Kurdish production-sharing contracts give away too much to the foreign companies; he said that after paying for capital and operations costs, as much as 55 percent of the oil goes to the foreign firms. "These, in the eye of many, are illegal and would have to undergo review to bring them in line with this law," he said.

But Kurdish authorities said they have no intention of submitting existing contracts for review. Duran said Genel's contract was renegotiated last November and falls within the 20 percent share production that would be the ceiling under the new law. "The commercial terms of the PSA are in conformity with internationally acceptable PSA terms," Duran said in an e-mail response to questions. "Therefore, our PSA is not generous at all."

Major U.S. oil companies haven't signed any contracts in Kurdistan yet. Some of them have tried to build goodwill with the central government. Chevron, for example, helped clear mines from the coastline. Others have collected seismic data or trained Iraqi oil company technicians in Dubai.

Some major companies from other nations -- Russia's Lukoil, a Chinese state company, France's Total -- are hoping to get their big Hussein-era concessions back. Their prospects remain uncertain.