Global Policy Forum

Iraqi Leaders Still Wrangling Over Hydrocarbon Law


Hassan Hafidh

Dow Jones
January 9, 2007

Senior Iraqi officials are still wrangling over the country's oil and gas law that would set out the legal framework for the Baghdad government to sign production-sharing agreement contracts with foreign companies to develop its vast oil reserves, officials said. They said that there were still differences among federal government officials and those of regions, particularly the Kurdistan Regional Government on some provisions that could delay the issuance of the law for months.

The draft law was supposed to be presented to the Iraqi parliament this week for final approval. "Issuance of the law could take as long as the first quarter of this year," an Iraqi oil official close to the cabinet committee, which is wording and discussing the law, told Dow Jones Newswires Tuesday. He said the stumbling block was mainly centered on the types of PSA contracts that Iraq would sign with foreign companies to develop the country's oil fields. PSAs permit a country to retain legal ownership of its oil, but give a share of profits to the international companies that invest in oil fields, pipelines and refineries.

Iraq's hydrocarbon law is crucial for Iraq as a basis for international oil companies to begin discussions on investing in the country's under-exploited and run-down oil sector and to generate much-needed reconstruction revenues for the country's coffers. A copy of the draft law, which was seen by Dow Jones Newswires last month, referred to PSAs as one type of contract that the government would conclude with foreign companies along with service and buyback contracts, but it didn't spell out details of the types of PSAs.

The other sticking point is a number of PSAs already signed by the Kurdistan Regional Government with foreign companies, the Iraqi oil official said. The Kurdish authority has already signed agreements with several small oil and gas companies, including U.S.-based Calibre Energy Inc. (CBRE), Canada's Addax Petroleum Corp (AXC.T)., Norway's DetNorske Oljeselskap (DNO.OS) and Turkey's Petoil. "The issue whether these signed agreements should be reviewed or not, hasn't been settled yet," he said.

KRG Prime Minister, Nechirvan Barzani, said last month that his government had reached an agreement with the federal government in Baghdad on the control of oil in the region. Barzani was referring to an issue that delayed the draft law for months, namely who should sign oil contracts with foreign companies in the Kurdistan region. That issue has been resolved, Barzani said. Kurdish authorities would negotiate contracts with companies with a representative from Baghdad and a contract wouldn't be signed without the approval of the federal government. "We have agreed with the Kurdistan region on most of the provisions of the law, but there are still differences on some of other provisions," another senior Iraqi Oil Ministry official said.

All parties have agreed that oil revenues should be distributed evenly among all Iraqis, whether the oil is produced in the north, center or south, a point already stated by the draft law, the official said. Iraq has huge reserves, third only after Saudi Arabia and Iran. But its oil sector needs up to $20 billion in investments to raise crude oil production to 3 million barrels a day from below 2 million b/d at present.

The sticking point over a hydrocarbon law has always been the issue of how much control the regions should be given over resources in their areas. Although Baghdad has been displeased with the fact that the Kurds have awarded contracts to oil minnows in the mostly unexplored northern part of Iraq, it's more worried it could set a precedent, particularly in the oil-rich south, where most of the country's giant hydrocarbon structures lie.

The four main principles for the draft law under debate remain the issue of federal versus regional control, the sharing of oil revenues, the types of contracts that are awarded and the formation of an Iraqi National Oil Company to handle the country's oil production, exports and exploration. But without the hydrocarbon law, many of the large oil majors have been reluctant to make deals despite the relative security in northern Iraq.

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