1 June 2007
Iraq has missed a May 31 deadline to approve the country’s first hydrocarbon law since regime change in 2003 — but in Iraqi terms, that’s no big deal. Every other deadline pushed by the US administration in the past four years for rebuilding the country’s institutions has also been missed. But for Iraq’s dilapidated oil sector, the delay is pushing back some initiatives that could provide a modest improvement to oil production and exports, notably the reactivation of old contracts signed by the former regime and the launch of a limited bid round. The delay is also holding up the northern Kurdish region’s first steps toward becoming a small, semiautonomous oil producer and exporter.
Iraqi oil officials say priority will be given to the handful of contracts signed with international oil companies under Saddam Hussein’s rule; these could give the country a quick start in oil development, as much of the background work has been done. For example, the production sharing agreement (PSA) signed by China National Petroleum Corp. (CNPC) in 1997 to develop the Al-Ahdab oil field would develop 90,000 barrels per day of output, once terms are renegotiated to bring the deal in line with the new law.
CNPC has initiated talks with Baghdad on modifying the old contract, but in the absence of an approved draft law, the revival process is on hold. The draft bill stipulated in Article 40 that the oil ministry should review all existing exploration and production contracts “in order to make them in line with the objectives and principles of the law.” The revised contracts would then be submitted for approval to the new federal oil and gas council within three months of the law’s official publication. Iraqi officials say CNPC’s contract would have to be converted from a PSA to a development and production contract, but even the guidelines for this model are not yet ready for submission to parliament.
In all, Iraq had six active upstream contracts before the 2003 war. Petrovietnam’s deal for the Amara oil field could add a further 80,000 b/d to Iraqi total production, while Syrian Petroleum has a contract to develop the 50,000 b/d Noor field near the Iraqi-Syrian border.
Another three companies — Indonesia’s Pertamina, Russia’s Stroitransgas, and India’s Oil and Natural Gas Corp. — had firm deals for exploration in Iraq’s Western Desert. Again, work could proceed quickly if the contacts were renegotiated and endorsed, although Iraqi officials say exploration is not a priority for either side.
Finally, Russia’s Lukoil hopes to renegotiate a major deal for the 600,000 b/d West Qurna field, which was signed in 1997 but canceled by Saddam just ahead of the war. Baghdad will be tempted to reopen talks with the Russian company, as this offers the promise of a much faster jump in output than if the project were reoffered to the national oil company or a newcomer.
The oil law’s delay has also held up the oil ministry’s plan to launch a first postwar upstream offering later this year. That tender won’t go out until the federal oil and gas council is established and oil policy guidelines are submitted and approved. The latter will likely involve a long process of consultation with the different regions and producing governorates. Even the 15 fields to be offered could change, as a list of 26 fields eligible for tender in Annex 3 of the hydrocarbon law could be renegotiated as part of a compromise on the controversial annexes. The tender’s current list of 15 includes Nasiriyah, Gharraf, Rafidain, Kifl, Merjan, Samawa and Badra. The other 11 fields of the 26 are located in the Kurdish region.
As debate continues between the Kurds and Baghdad over how much central power should be exercised over Iraq’s oil fields, companies with discoveries in the Kurdish region have had to hold up full development plans. Iraqi officials say technical and legal issues are hampering exports from Norwegian DNO’s Tawke field: High-pressure pumps on the Kirkuk-Ceyhan pipeline, for example, would require DNO to produce at least 350,000 b/d to avoid shutting down the system. One option would be to build storage at the field and export the crude in batches.
Furthermore, the use of the export pipeline is regulated by a government-to-government agreement between Iraq and Turkey, which would require further agreements to open it to the Kurdish region, Iraqi officials say. The use of national pipelines by producing companies would also require a contract with the Iraqi oil ministry based on the still-pending hydrocarbon law.
Compass Points
• SIGNIFICANCE: The hydrocarbon law was one of several benchmarks set by the US administration for the Iraqi government of Nuri al-Maliki. Some US politicians have talked about linking future funding to these milestones.
• CONNECTION: The oil sector underpins the Iraqi economy — and a viable economy is vital for a stable and functioning Iraq. But most foreign companies want stability before they invest, creating a catch-22.
• NEXT: Although differences with the Kurds threatened to derail the oil law, compromises are possible that could see the bill approved in the next two to three months. Talks are also ongoing on two related laws, covering revenue sharing and the creation of state company INOC. But the Kurds are getting impatient, and could use the missed May 31 deadline to justify signing further upstream deals — in defiance of the draft law.
By Ruba Husari, Dubai
(Published in Energy Compass June 1, 2007)