Renewed Discussions on Iraqi Oil Law Again Hit Obstacles

The Laws of Oil

Discussions in Iraq about how to get regulations for the oil and gas sector approved seem to be moving in the direction of drafting and passing several of the laws that were previously part of the stalled national oil law initiative as individual laws, or bundles of laws, in order to unlock at least parts of the sector to improvement and get work under way. Reports yesterday indicate that negotiations are ongoing in the Iraqi parliament's Committee on Oil, Gas, and Natural Resources to hammer out two measures: first, to re-establish a NOC and regulate its role; and second, to introduce regulation of the country's crude and oil products market aimed at combatting the widespread black marketeering and smuggling within and out of Iraq.

The law intended to establish a new Iraqi NOC (INOC), might be introduced to parliament as early as Tuesday (8 April), Abdul-Hadi al-Hassani, Deputy Chairman of the Committee on Oil, Gas, and Natural Resources, told AP. He also said that discussions of an oil smuggling bill would begin sometime this week. The bill will introduce tougher penalties for smuggling, ranging from fines to sentences of five years in prison, as well as giving the government the right to confiscate boats and tankers used in the illegal trade. Iraq has been estimated to lose around US$3 billion per year in government revenue as a result of smuggling, theft, and black marketeering within its oil sector, although al-Hassani told AP that his committee estimated the loss to about 10% of total revenue, around US$5 billion per year.

The potential anti-smuggling law comes with the Iraqi government making inroads into the smuggling networks in the south of the country via a security crackdown that has lead to heavy clashes with the Mahdi Army militia. The Iraqi army has taken over security at some key oilfields and export installations from southern security forces that are mainly loyal to the Fadhila party, which, together with the other regional parties and their connected militias, is believed to be financing its organisations directly or indirectly through the black market.

Revisiting INOC

Re-establishing the INOC, would mean consolidating all government-owned production, refining, marketing, and engineering companies in the oil and gas sector under a single NOC umbrella, al-Hassani told UPI, and would also define the company's scope. While the main stumbling point for the national oil law has been the level of national and regional control over hydrocarbon resources, as well as the control over and division of revenue, parts of the INOC law that defines its scope will inevitably challenge Kurdish interests as they will probably call for INOC superiority over all pre-2003 discoveries and producing assets in Iraq.

Legal Challenges

These two measures have hitherto been part of the Iraqi oil law bill, which has been stalled between Iraq's main political factions since early 2007 and has yet to make it into a parliamentary debate. The version introduced to parliamentary committees in February 2007 had itself been the subject of year-long negotiations, but was alleged to have been amended by the Oil Ministry following the end of the inter-factional negotiations and the introduction to the parliament. Meanwhile, the oil law inertia made it possible for the Kurdistan Regional Government (KRG) last year to move ahead and introduce its own oil law in the autonomous region, making investment possible for IOCs in its oil sector. The region was not only able to sign up a large number of oil companies, committing resources to exploration and development, but also to sign some refinery construction and gas production contracts from existing fields with international players.

Remaining oil law components, the reorganisation and scope of the Oil Ministry, and a revenue-sharing law, still appear to be bogged down by deep disunity between the factions, with leading Kurdish parliamentarians on Saturday telling Iraqi Kurdistan media that the KRG is unlikely to accept the now-discussed oil and gas law, as the Kurds are "not happy about the many amendments made to the draft oil and gas law". The KRG has been able to secure full control over the resources in its region and some adjacent areas, and there is currently no reason for it to give up what it has secured without a compromise being reached that secures most of its advances, but gives it access to Iraq's crude export routes.

Outlook and Implications

The KRG and the Kurdish faction’s representatives in the Iraqi parliament have sufficient influence to continue stalling the Iraqi parliamentary committee proceedings, as they have done, largely single-handedly, to this point. An oil-smuggling bill might, however, pass, as it is not pitted against KRG interests (indeed, quite the contrary); although, with its potential to deprive several of the political parties' armed wings of their income, its approval would be an indicator of the strength of the more militant parts of the Iraqi polity within the parliament, as opposed to the government.

Re-establishing the INOC might be a potentially complex issue, as some of the laws defining the company's scope and purpose, will inevitably collide with the KRG's self-asserted right to govern all hydrocarbon resources within its claimed area. The discussions around this draft will, however, also be a gauge as to how far-reaching and serious the reported new attempts to find a comprehensive national oil law solution between the factions are. Should it be approved, there would be reason to think that the factions have reached a kind of compromise, opening up the possibility for the remaining parts of the oil law to be discussed in parliament.

Meanwhile, oil majors are waiting to enter Iraq and take up projects, even if these are under TSCs to start with. The re-launch of the INOC will not mean that a strong company will be created, despite it producing around 2.5 million barrels per day from the outset. Decades of underinvestment and wars have destroyed and damaged much of the outdated production technology used and reservoir overproduction and mismanagement under the former regime has raised the need for expensive and advanced solutions in order to preserve the health of some of Iraq's largest fields. The recent years of violence have damaged the Iraqi oil industry even further, by exposing it to a massive and extremely comprehensive “brain-drain”. With most of the educated Iraqis having fled, there is little scope for the company effectively to plan, prospect and undertake development programmes without international help until its capacities have been rebuilt. As all of this requires an oil law to achieve, it is still too early to ascertain if a compromise is possible. However, the parliamentary discussion of the INOC law will provide an indication as to whether Iraq's factions are ready for compromise yet, or not.

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Iraq: 15 January 2008:Shi'a, Sunni Parties in Iraq Launch Common Platform, Challenging Kurdish Oil Autonomy

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