IHS Global Insight Perspective | |
Significance | CNPC's al-Ahdab field was raided by local Wasit province authorities and police earlier this week, with the officials demanding to see all contracts between CNPC, the Iraqi government, and state oil entities, under the threat of force, in a clear challenge to the national government over hitherto allegedly ignored local grievances. |
Implications | The al-Ahdab project, located amid fertile, populated, Iraqi farmland has been suffering from problematic relations with the local population and tribal leadership from the outset, although the escalation—this time involving local authority and police—is troubling and clearly aimed to test the Iraqi caretaker government's resolve to provide full backing and protection to all of Iraq's oil projects. |
Outlook | Al-Ahdab's problems underline the importance of local community engagement and management from oil companies' side, as Iraq is still coming to grips with political relations between central government and local authorities, suffering not only from unclear legal divisions of power but—after decades of dictatorship—also a tendency by the centre to deal undiplomatically with individual or tribal claims and grievances in the region. |
Al-Ahdab Problems
The China National Petroleum Corp. (CNPC) is experiencing continuing problems with the local population at its al-Ahdab project in the Wasit province, and yesterday an ominous escalation of the situation, likely meant to send a message both to CNPC (and other oil companies) and to the Iraqi government, was staged. Local Wasit authority officials, backed up by the local police, raided the premises, demanding to see all contracts signed between CNPC and Iraqi counterparties—including the government—and immediately sending shockwaves out to oil officials in the Iraqi capital, Baghdad.
"When we saw the situation was about to explode and that armed clashes may occur, to maintain the lives of the Chinese, we allowed them to enter with their arms," Ahmed Abdul Ridha, chief engineer at the al-Ahdab field told Reuters, although local officials also were at pains to point out that work at the field had continued without interruption. "We are continuing to work and will start pumping oil to the export platform to reach 60,000 barrels per day by July 2011", Abdul Ridha said, while a CNPC official, who declined to be identified, told Reuters that "We can't say we're not annoyed by this action, but we still consider it a domestic issue and we're confident the Oil Ministry will solve this problem. We are watching closely and we do not expect any effect on our work in the field". It is understood that the local Wasit council wanted to investigate complaints that US$3 billion or more of contracts had been awarded and signed at the project without a proper tendering process. Such criticism has been levied against the al-Ahdab project right from the start, given that it was an old-era production-sharing contract (PSC)-based deal from the 1990s revived and converted into a technical service agreement (TSC) in bilateral negotiations between CNPC and the Iraqi government (see Iraq: 5 January 2009: CNPC Engineers Launch Work on Iraq's al-Ahdab Field and Iraq: 11 November 2008: China's CNPC Signs US$2.9-bil. al-Ahdab Field Development Service Contract with Iraq).
The Iraqi Oil Ministry and Cabinet immediately reacted strongly to the incursion by the local authorities, with the Oil Ministry clearly stating that "Intervention of the provincial councils is the ministry's job is a clear legal violation" and criticising the local authority for "entering the site forcibly and using military force". Oil Ministry spokesman, Asim Jihad, said legal complaints would be filed by his ministry against the provincial council members who had "trespassed" on the project site, according to Reuters.
Outlook and Implications
CNPC has suffered problems with the local population—and by extension the local authorities—almost since the start of the project, initially facing complaints that it was not hiring sufficient numbers of locals at the project, but bringing in Chinese workers for relatively menial jobs. Concerns have since escalated, as the al-Ahdab field is located in fertile Iraqi farmland and hence any expansion of the field with new production facilities is expected to encroach on land belonging to local farmers and seen as crucial to the survival of families as well as whole communities. In the highly tribal area, relations have then quickly gone downhill with whole tribal groupings, inevitably turning the local authorities against CNPC and the project, with several instances of low-level sabotage—though more akin to vandalism than the violence normally associated with Iraq—and threatening protests having been reported.
At a time when Iraq, six months after a general election, is still lacking a new government, this looks like a clear attempt by the local government to raise the stakes in the dispute and try to force some concessions from CNPC and its Iraqi state-owned partner, exploiting the caretaker government's eventual weakness. The rapid Oil Ministry reaction was hence designed immediately to scare the local government into backing off and to set a wider example, rather than to try to mediate and find a solution. Also, any reflection on the situation must take into account that the Iraqi institutions, at all levels, have not developed a stable culture of interaction. This is amplified by the often still unclear apportionment of power between institutions at regional, local, and national levels, as—unclearly—defined in the constitution. Hence, following decades of violent politics, it is not surprising that the tone is immediately heightened and undiplomatic on all sides.
This, however, further deepens the problem of integrating a project with the locals from a company's point of view. CNPC was the first company to re-enter Iraq on a large-scale project, but given its background, it has also the least experience in working closely with local communities and building goodwill with surrounding populations (and authorities). It has not necessarily had to learn this at home, and it has not normally been a high priority in its initial overseas ventures either, as it often has come in on a strong government-to-government-negotiated mandate. It is also part of CNPC's business model to fly in cheap but highly skilled workers to run its projects within budget, something that certainly annoys locals expecting swift dividends from an oil boom in their vicinity.
The al-Ahdab project shows the importance of rapidly launching a programme of engagement, support, and employment with the local population and authorities for all companies entering Iraq. Most of the more recent entrants with more sophisticated experiences in this regard have followed this path, often using specialised security consultancies advising and co-ordinating such programmes for them by drawing on local knowledge and understanding. When, for instance, land compensation talks become acrimonious between a government used to not having to care much about individual family matters and a disaffected local population, some added expenditure by the oil company is usually better—if only as a bridging solution—than in every case sticking to principles about who carries what cost. This is a lesson most IOCs have learned over the past two decades, but which CNPC only now seems to be grasping.
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