Global Policy Forum

As Iraq goes to the polls in this month's referendum on the draft Constitution, the fate of the country's oil reserves has once again escaped public scrutiny – despite their central importance to Iraq's future economy. According to Oil Ministry officials, contracts will be signed with foreign oil companies during the first nine months of 2006, opening the majority of Iraq's oilfields to western companies for the first time in 33 years.

While the unrealistic deadlines imposed by the US/UK occupation – in effect, the Constitution was drafted in just three months – have helped reduce debate to a battle between three political blocs, oil plans proceed unchallenged. In this factionalised politics, one key issue was how revenues from, and control over, oil production would be shared between central government and the regions. What was missing, however, was the debate on how revenues and control should be divided between the Iraqi state and private companies.

The draft Constitution states that oilfields will be developed according to "the most modern techniques of market principles and encouraging investment." This perhaps sounds innocuous enough, and indeed – like much of the Constitution – is open to considerable ambiguity in its interpretation. But placed in context, it can be seen as laying the ground for radical change in Iraq's oil industry, which will be unique among the major oil producers of the Middle East.

Parallel to the Constitution, a Petroleum Law has been drafted, to be implemented following the elections of December/January. According to sources in the government, although some details are still being debated, it specifies that Iraq's currently producing fields should be developed by the state-owned Iraq National Oil Company (INOC), but all other fields should be developed by private companies.

Only 17 of Iraq's 80 known fields, and 40 billion of its 115 billion barrels of known reserves, are currently in production. Thus the policy potentially allocates to foreign companies 64% of known reserves. If a further 100 billion barrels are found, as is widely predicted, the foreign companies would control 81% of the total, and if 200 billion were found, as some suggest, they would have 87%.

The policy has its roots in guidelines issued by Interim Prime Minister Ayad Allawi in August 2004. He stated that new fields should be developed by private companies through production sharing agreements (PSAs), the contractual mechanism favoured by the oil companies.

But Allawi went further:

• New fields would be developed exclusively by private companies, with no participation of INOC;

• The Iraqi authorities should not spend time negotiating good deals, but should proceed quickly with terms that the companies will accept, while leaving open the possibility of later renegotiation;

• INOC should be part-privatised. It is not known whether these details have been carried forward into the current draft Law. But whatever the detail, it is clear that the opening up to foreign companies is moving forward apace.

The Oil Ministry is already actively seeking discussions on the development of 11 oilfields in the south of Iraq, and has held preliminary talks with BP, Chevron, Eni and Total. It has explained that since contract negotiations can take several months, running them in parallel with the Constitutional process and the finalising of the Petroleum Law could save time, to sign contracts as quickly as possible once the Law is passed.

PSA contracts generally last for 25 years or more. Not only will they impact on Iraq's public revenue (of which oil accounts for almost the entirety), they are likely to preclude any future regulation or legislation that damages the oil companies' profits. And once signed, they will be irreversible.

That contracts signed while Iraq is still under occupation will tie the hands of any future Iraqi government is of grave concern. And that this is happening without public debate is even more worrying. However, oil companies remain nervous about the deteriorating security situation. The great tragedy is that the one thing that may stop the loss of Iraq's sovereignty over its resources, and of its main opportunity for development, is the continued bloodshed.