30 March 2007
Iraqi oil veterans have made no bones about their unhappiness with the petroleum law approved by the cabinet in February. Not only do they criticize the speed at which it could open the upstream doors to major oil companies and the extent of Big Oil’s potential involvement, they say it’s wrong to be deciding the fate of the industry at a time when the state is struggling to exist. Officials involved in drafting the legislation retort that if it isn’t passed now, when the federal system is still being built, it will end up being adapted to suit the circumstances created by groups who want regions to be stronger than the center.
Former oil executives, including ex-ministers and ministry directors as well as experts, have over the past few weeks sent a number of letters to the speaker of parliament and other lawmakers pointing out “loopholes and ambiguities” in the draft. They want the bill delayed until amendments to the constitution are introduced and approved by referendum.
Under a US-brokered deal that guaranteed Sunni participation in the “national unity” government, Sunnis were given the right to propose amendments, provided this was done within four months of the assembly’s March 2006 swearing-in. But the deadline passed last summer with no amendments, which were supposed to balance the distribution of power among Sunnis, Shiites and Kurds. Iraqis based in Baghdad say they don’t expect any, since Sunnis lack the parliamentary majority necessary to pass the amendments before they go to a referendum.
In the circumstances, backers of the legislation believe it offers the best chance of avoiding the partitioning of oil fields among the regions — especially a Kurdish region in the north and Shiite one in the south — that some parties are pushing for. They add that improvements on what is already in the constitution will be limited.
One major achievement for which “federalists” take credit is the stipulation that all revenues, whether from sales, royalties, signature or production bonuses, are collected by the federal government and go into a federal oil fund. The revenue sharing law, which has yet to be approved by the cabinet, would decide how income should be distributed in line with the constitution. Kurdish politicians want to be able to collect revenues in their own region and receive a share of whatever is collected by the federal government based on a system that takes regional populations into account.
“That is not going to happen,” says one official involved in drafting the oil law. “The federal budget drafted by the ministry of finance will include all revenues and all expenditures, and regions will obtain their shares which will be paid from the main account based on the budget. Any unspent funds will go back to the federal reserve and will not be distributed among the regions.”
The law confirms State Oil Marketing Organization (Somo) as Iraq’s sole oil marketer. All producers, including the soon-to-be-established Iraq National Oil Co. (INOC), will sell the crude they produce to it directly for marketing on behalf of the federal state. Major pipelines and export terminals will be put under INOC authority for an interim period of two years, until a specialized, federal-level company is established with authority over transport and exports from all regions, the official says. Oil policy will also be decided federally, with the oil ministry in Baghdad tasked with drafting model contracts and guidelines for prequalifying and contracting companies, in consultation with regional authorities. The policies would then be approved by the federal oil and gas council and applied by all regions.
One advantage of drafting the law now, before a federal system with its regional components has been established, is that it makes INOC — which will comprise existing upstream firms North Oil and South Oil — solely responsible for all fields, producing or otherwise. “INOC will be in charge of all 27 producing fields and 25 nonproducing fields.
It will also have its share of the remaining 26 fields while the federal ministry will be in charge of organizing licensing rounds for the 65 exploration blocks, as long as those fields exclude any in the Kurdish northern region. “Had we waited until other regions had been established, INOC’s responsibility would have been limited to the fields not included under the regional authorities,” the official says. The law also states that contracts can only be awarded after transparent, public licensing rounds, ending Kurdish authorities’ practice of holding direct negotiations with companies. All contracts are to be made public within two months of approval by the federal oil and gas council, with the council given tacit veto power.
Critics say Baghdad should avoid making long-term exploration or production commitments with foreign firms until the situation is stable enough to ensure deals can be implemented, and that all agreements should get parliamentary approval. But firms say they need to be sure that a contract signed today will be respected by a new government or parliament — which suggests few would be willing to sign anything right now.
By Ruba Husari, Dubai
(Published in Energy Compass March 30, 2007)