Lack of a Lucrative Oil Law is the ‘Real’ Problem in Iraq

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According to those in the corporate world, the fighting and the lack of security in Iraq is no longer a major obstacle to getting at Iraq’s oil. The real problem now is the lack of a favorable hydrocarbon law.

Meet Michael Wareing. He is Prime Minister Gordon Brown’s business emissary to Iraq. His job is to bring international investors to Iraq to help stimulate economic growth.

Wareing is head of a well-connected auditing firm and was appointed head of a new Basra Development Commission. The Basra region has 70 percent of Iraq’s proven oil reserves and according to The Observer, Oil giants are poised to move into Basra. Wareing thinks security is no longer an issue for investors in Iraq.

‘If you look at many other economies in the world, particularly the oil-rich economies, many of these places are quite challenging countries in which to do business,’ he said. ‘Frankly, if you can successfully operate in the Niger Delta, that is a very different benchmark from imagining that Basra needs to be like London or Paris.’

Iraq’s parliament has yet to pass a hydrocarbon law setting out the terms oil companies will operate on and how profits will be split. ‘My sense is that many of the oil companies are very eager to come in now, and actually what they’re waiting for is the hydrocarbon law to be passed and various projects to be signed off. That is what is causing them to pause, rather than the security position,’ he said.

As noted, Wareing is also the CEO of KPMG International, a position he began in October 2005 after the U.S. Department of Justice accused the U.S. member firm of creating fraudulent tax shelters. The criminal conspiracy charge was dropped last year after the firm cooperated with the investigation. Today, KPMG firms are auditors for many major corporations and governmental agencies such as Halliburton and the U.S. Department of Justice. (Go figure the DoJ would use a firm that admitted criminal wrongdoing… Well, maybe not considering you-know-who’s administration.) But, that is beside the point.

The real problem is Iraq’s oil isn’t flowing fast enough for the governments of the United States and Britain. Time is running out for the Bush administration to persuade the Iraqi parliament to pass a hydrocarbon law that is favorable to the major oil companies. Last September, The New York Times reported Compromise on Iraq’s oil law was collapsing. The hydrocarbon law “is one of several benchmarks that the Bush administration has been pressing the Iraqis to meet as a sign that they are making headway toward creating an effective government.” And the prospect of the Iraqi approving the Bush administration’s draft hydrocarbon law remains elusive today with Iraq oil law stalled, with no end to impasse in sight according to Reuters.

“Basically we’re talking about political will here,” said a U.S. official in Baghdad, who asked not to be identified. “These are not technical issues, it’s a question of if they have the political will to reach the kind of compromises both sides need to make to achieve this. There’s a lack of trust.“

Trust, but whom? The major oil corporations do not find existing Iraqi law favorable, but that hasn’t stopped 70 foreign firms from submitting paperwork to the Iraqi government to compete for oil contracts. The “law” is something oil companies know how to exploit to their advantage if Exxon Mobile’s recent court victory freezing Venezuela’s assets is any indication.

For the Kurds, they do not trust the Shiite-controlled government in Baghdad. In the northern Iraq, Kurdistan, are about one-fifth of Iraq’s oil reserves and the Kurdish government isn’t playing along with getting the oil corporation enabling hydrocarbon legislation passed into Iraqi law. Instead, they’ve been cutting their own deals. In the Kuwait Times, Kurdish Regional Government President Masoud Barzani blamed Baghdad for the problems with the hydrocarbon law. In Kurdistan leader rules out major clashes in Baghdad, Barzani said, “The stalling of the hydrocarbon law is not from our side but from the federal government. Let this law go to the Parliament in order to implement it, and end the problem.” The Kurdish government passed its own oil law last year and have made fifteen oil deals already.

But in a background research paper published by the Council of Foreign Relations, Why Iraqis Cannot Agree on an Oil Law, “a draft oil law (PDF) has drawn criticism from Iraq’s Sunnis, who prefer a stronger role for the central government, and from Kurds, who prefer a stronger management role for the regional authorities. The majority Shiites have sought to mollify the Sunnis by keeping control of Iraq’s oil sector primarily in Baghdad, not the regional governorates.”

At the heart of the Kurdish objection to the hydrocarbon draft law is the lack of regional autonomy. According to the CFR paper:

“Kurdish dissatisfaction stems from its objection to a state-run, relatively unaccountable oil company that’s given almost all of Iraq’s proven reserves,” says Jonathan Morrow, legal adviser to the Kurdistan Regional Government’s natural resources minister. Yet most observers say that without federal legislation, major oil companies will stay out of Iraq, including Kurdish territory.

The Sunni minority does not trust the Baghdad government either and then there is also the issue of who profits from Iraq’s oil. “Sunnis in particular are worried that doing so would erode Iraqi sovereignty and redistribute oil revenues away from Iraqis and into foreign hands.” With the international oil giants now seeing the security situation no longer being an obstacle to oil development, these concerns over who gets the oil revenues now become important. As The Independent reported in January 2007, How the West will profit from Iraq’s most precious commodity. Drafts of the oil law allow the oil giants to sign 30 year “production-sharing agreements” that give a share of the oil profits to the corporation that invested the oil infrastructure.

Iraq’s passage of the hydrocarbon law is the single most important benchmark the Bush administration has left in Iraq before leaving office in January 2009. In February 2007, Secretary of State Condoleezza Rice described its passage as “really critical“.

“I’m told that the oil law is almost complete.” she said. “I did say to my colleagues that I’ve heard it’s almost complete before, and this time I hope it really is complete – as in, complete – because people are looking to see some elements of national reconciliation put into place. It’s really critical.”

As demonstrated by one of the Bush administration’s own benchmarks for the Iraqi government, getting the hydrocarbon law and securing Iraq’s oil is, likely, the Bush administration’s primary reasons for remaining in, if not also invading, Iraq. Leaving Iraq without its oil secured, according to Bush in 2005, would let terrorists “seize oil fields to fund their ambitions; they could recruit more terrorists by claiming an historic victory over the United States and our coalition.”

So the lack of an Iraqi oil law is going to loom large in the upcoming final months of the Bush administration. Energy-related corporations are going to be applying pressure to the Bush administration, which will in turn try to apply pressure to the Iraqis.

As of last year, the largest single profiteer from Iraqi reconstruction money was KBR. “The largest beneficiary of reconstruction work in Iraq has been KBR (Kellogg, Brown & Root), a division of US giant Halliburton, which to date has secured contracts in Iraq worth $13bn (£7bn), including an uncontested $7bn contract to rebuild Iraq’s oil infrastructure.” But those pale when compared to the profits to be made with a new hydrocarbon law. Oil pumped from Iraq could be worth about $6 billion a day!

Even in the absence of a new, lucrative hydrocarbon law, the major oil corporations are still working with the Iraqi government and submitting the necessary documentation.

The contracts may not be what the oil firms want, but they have signed up to ensure they are in the game if and when deals for Iraq’s giant oilfields are offered.

“Companies are signaling their readiness to be involved,” said Mustafa Alani, senior consultant at Dubai-based think tank the Gulf Research Center. “It’s the foot-in-the-door strategy. They are involved but they are not committed. And until security and the legal issue are completely clarified, they won’t commit.”

For Iraq, the potential gains from overhauling oilfields could be huge, Alani said.

The country could boost output from existing fields by 1 million-1.5 million barrels per day (bpd) for around $6 billion, he estimated. Current output is around 2.3 million bpd and Iraq aims to raise output to 2.6-2.7 million bpd this year.

Large oil firms that win contracts would supply equipment, materials, and expertise but would sub-contract the actual work. That would keep them involved for a minimum investment and risk.

So, the international oil corporations will still be pressing for more lucrative Iraqi hydrocarbon law. There’s billions upon billions of dollars at stake in Iraq in Bush’s final year. Arguably the primary reason why Bush invaded Iraq in 2003 is at risk. As a businessman, Bush has a record of failures. Will Bush be able to close the deal for his corporate backers? At what cost?

^{Cross-posted from the European Tribune.}