The “Eye on Iraq” is a column which we hope will come to be a familiar feature in this publication, and we will be closely watching and reporting on developments.
Iraq has oil reserves of approximately 115 billion barrels, ranking it second in the world after Saudi Arabia. It also has natural gas reserves of approximately 111 trillion cubic feet. Much of the country, however, remains unexplored due to years of sanctions and war. For the same reason, the country’s current oil production stands at an estimated 2.5 million barrels a day (mbd) – relatively low considering the country’s potential. With the Iraqi Government seeking to attract significant investment in the industry and to raise total oil output to 4.5 mbd by 2013 and industry experts believing that production could reach a plateau of 6 mbd if new fields are brought onstream, we anticipate significant developments in Iraq’s energy sector over the coming years.
To further these aims, Iraq’s Government has attempted to introduce a new oil law, the Iraq Hydrocarbon Law, to restructure the oil industry in the country (which was nationalised by Saddam Hussein in 1972) and to address issues such as investment in the hydrocarbon sector, revenue sharing, restructuring the federal Ministry of Oil and establishing the role of an Iraqi National Oil Company.
This proposed legislation was originally submitted to the Council of Representatives in May 2007 but the Iraqi parliament has not yet reached final agreement on the law. The debates over the law broadly reflect those in Iraqi politics and society more generally, namely whether natural resources fall to be dealt with by the central government or by the various provinces (or governorates) of Iraq. Further, there is concern as to how control over natural resources will be divided between the public sector and the private sector, including foreign companies. The stakes, of course, are high, and the entity or entities which end up controlling Iraq’s vast oil wealth will naturally be endowed with a significant degree of influence in the country.
As the Iraq Hydrocarbon Law is still only in draft form, this article does not seek to provide a comprehensive analysis of it, although there are some points worth noting.
Firstly, what is clear under the current draft is that the law intends for there to be a degree of central government control over natural resources. The preamble of the draft Iraq Hydrocarbon Law itself quotes the new Iraqi constitution (ratified by referendum in October 2005) and states that oil and gas are “the property of the whole nation in all its provinces and governorates” but then goes on to clarify that “ownership of oil and natural gas is vested in the entire Iraqi Federal Oil and Gas Council in all provinces and regions”. This raises issues over the validity of agreements entered into by regional authorities, in particular the regional government in Iraqi Kurdistan which has, until now, been signing its own agreements with various foreign oil companies. The regional government in Iraqi Kurdistan believes that it has the authority to enter into such agreements without the involvement of the Ministry in Baghdad. This is an issue that we are certain to examine in future editions of the Middle East Energy Review.
Secondly, while one aim of the law was to promote foreign investment in the oil and gas sector, there are deliberate mechanisms for retaining national control over revenue and exploration. The Iraqi National Oil Company and its regional subsidiaries are likely to retain a large degree of control within the industry regardless of the government-stated aims in respect of foreign oil companies. The structure envisaged under the current draft of the law makes the Council of Ministers the supreme body for oversight of the sector, the Ministry of Oil the policy-setting body and the Iraq National Oil Company and its regional subsidiaries the operating entities. The Federal Oil and Gas Council will be responsible for carrying out the Council of Ministers’ duties in overseeing the sector.
This year has seen the first significant moves by the Ministry of Oil to re-launch the industry, pending agreement on the Iraq Hydrocarbon Law. In April, 120 companies applied to participate in the country’s first bidding round in the post-Saddam era for new contracts in respect of six major producing oil fields (Rumaila, Kirkuk, Az Zubair, West Qurna I, Bai Hassan and Maysan) and two undeveloped natural gas fields (Akkas and Mansuriya). It was announced that Iraqi state-run entities will have 51 percent control in projects to rehabilitate the six oil fields and the two gas fields. Foreign companies will have 49 percent in these projects and operate under fee-based service contracts.
In October, Iraq’s oil minister, Hussein Al Shahristani, met representatives of 35 of the applicant companies which were pre-qualified to bid in London to present them with field data and forms of the contracts in order for them to submit bids for 20-year service contracts which the Iraqi Government hopes will be in place by June 2009. Officials said that bidders would have to pay signature bonuses of at least US$10 million per field. It was reported that foreign firms would recover their costs and earn additional revenue from any oil produced above current output levels at the fields. Governing law is expected to be Iraqi law. The firms could choose whether to be paid in oil or in cash. December may well see announcements on the second round of bidding.
Meanwhile, in June 2008, the Ministry of Oil entered into no-bid negotiations with a number of western oil companies, including Exxon Mobil, Shell, Total and BP, for short-term service contracts in relation to some of Iraq’s largest oil fields. The Iraqi Government’s goal in inviting these companies to participate in such negotiations was to increase oil production by 0.5 mbd using the technology and expertise possessed by such firms, while the Hydrocarbon Law was debated and while the first round of bids mentioned above was prepared. The contracts also represented a continuation of the work, including free advice and training, that these companies had been providing the Ministry of Oil under various memoranda of understanding. The contracts were thought to represent an important foothold in Iraq. However, this initiative was withdrawn in September when Mr Al Shahristani stated that the Ministry had instead decided to announce that these short-term contracts would be competitively procured.
With up to 90 percent of the Iraqi Government’s revenue being generated by oil, the oil and gas sector is critical to the country’s economy and its efforts at reconstruction after years of sanctions, war and internal turmoil. Inviting the participation of foreign companies is a sensitive political issue in a country which nationalised its oil industry in 1972 and given its recent history. The ongoing failure to come to an agreement over a new Hydrocarbon Law reflects the deep divisions that still exist in national opinion over this issue.