Global Policy Forum

By Greg Muttit

The debate over national vs. regional control of Iraq's oil sector intensified last week, as the new Natural Resources Minister of the Kurdistan Regional Government (KRG) stated his opposition to amending the oil-related articles of the Constitution. In his first public statement since his appointment, Dr Ashti Hawrami argued that, "the Constitution was adopted as a package by all the people; it is a single document … The rights of the regions and governorates are clear and cannot be modified in any way to enhance the powers of federal authorities."

He was responding to calls by Iraqi oil experts to use the agreed constitutional review process, culminating in a second referendum, to change the controversial articles, which are seen by some as ambiguous, contradictory or impractical. The Constitution grants the federal government control only over "current fields". In most interpretations, the regions and governorates would control all other fields. However, the meaning of "current fields" is unclear.

Iraq has about 80 known oilfields, and many more fields likely still to be found in unexplored areas. Of these 80, only about 20 have ever been developed, and some of those have only partially been developed, producing oil at a fraction of their potential rate. These latter include the four super-giant fields of Majnoon, West Qurna, Nahr Umar and East Baghdad, which between them contain nearly half of Iraq's total reserves.

A recent research paper by oil expert Kamil Mehaidi pointed out that it is unclear whether the term "current fields" refers to all discovered fields, to those currently in production (accounting for about 78% of Iraq's known reserves), or just to those which have been fully developed (about 36% of reserves). Natural Resources Minister Hawrami interpreted current fields as those which are producing oil now. But he went much further, arguing that the regions and governorates should control all of the revenue from undeveloped fields, and should have effective veto power even over the limited roles he prescribed for the federal government.

It is worth considering separately the political issue of who takes the revenue and the more technical issue of who has management control. Most people accept that some share of revenue should stay in the region in which it was produced, and this is common around the world – it compensates regions for their investment in infrastructure and for the environmental impacts of oil production. However, over time the balance of Iraq's oil production will shift from fields which are now "current" to those which are new. Thus, with Iraq's oil mostly concentrated in the south and the north of the country, to give all revenue from non-"current fields" to producing regions could leave other areas – notably the centre and west – impoverished.

The greatest disputes are over who should control oil decisions, such as strategy, policy, operational management, and the role of the private sector, including signing of contracts. Those who argue that regional autonomy should be maximised are concerned that in a centralised system some regions might be de-prioritised for investment and access to resources, a concern felt especially by many Kurds. Others fear that too much autonomy could sow the seeds of division of the country.

Meanwhile, many technocrats argue that too much decentralisation brings the risk of an uncoordinated and bureaucratic system, in which each region has its own approach and procedures. The need for coordination is most obvious with strategic infrastructure that either physically spans more than one region or province, such as pipelines, or serves more than one, such as refineries. Similarly, geology does not recognise administrative borders, and several oilfields straddle more than one province, and potentially more than one region. In the absence of clear coordination, competing authorities keen to maximise their production could damage the geology of an oilfield by overproducing on their side – the problem that at a national level has caused disputes between Iraq and Kuwait.

But the oil federalism issue should not be isolated from the equally big issue of privatisation. Dr Hawrami's comments on the Constitution came two weeks after the Kurdistan Regional Government signed an oil-production contract with the Canadian company Western Oilsands, the fourth such deal signed by the KRG. It had previously signed contracts with Norwegian company DNO in June 2004, and with Turkish companies Genel Enerji in January 2004 and Petoil in April 2003. DNO recently announced the discovery of oil near Zakho in Dohuk province.

The legal status of these deals is hotly contested, with the Oil Ministry in Baghdad arguing that only it has the right to sign such contracts. On the other hand, Kurdish authorities have argued that the KRG is authorised by the Constitution to sign contracts – even though the first three were signed even before the Constitution was first drafted. It is far from clear how this dispute will be resolved. All four contracts are with small companies. The major international oil companies are unlikely to invest while there is such legal uncertainty, at least until the finalisation of the Constitution, due to the high risk of losing their investments if the contracts are ultimately found not to be valid. As in any investment, the higher the risk taken by an investor, the higher the profit they will expect, to make it worth their while. So it is likely that these contracts give a very high share of revenue to the companies, with a correspondingly lower share going to the public authorities. However, the detailed terms of the deals – the revenue split, the legal terms and even the duration of the contracts – are mostly unknown, as they have not been disclosed. For citizens and civil society organisations to know what the revenue terms are is an important defence against corruption, as well as providing for democratic scrutiny.

But although private companies are cautious about legal uncertainty, they benefit from negotiating with weaker public institutions. The regions and provinces do not have the strategic and negotiation experience that is possessed by the Oil Ministry in Baghdad. And if the Kurds' precedent is followed elsewhere, the result could be a race to the bottom, in which different regions compete with each other to attract investment by offering greater shares of revenue – and more generous legal terms – to private companies.

While the desire for greater regional autonomy is understandable, it could in fact end up also transferring power – and more of Iraq's oil wealth – from public to private sector, and from Iraqis to foreign companies.