Global Policy Forum

By Kamil Mahdi

If passed, the new Iraq oil law would fragment the country's national oil industry, opening it up to exploitation by multinationals and strengthening the hands of corrupt and sectarian politicians. Kamil Mahdi offers an in-depth analysis of the historical and political background to the proposed law.

At the beginning of July, 23 out of the 37 members of the Iraqi cabinet voted to approve a draft oil law, sending it to parliament for approval.The minister of planning announced that he would resign if the bill passes, while a member of the parliament's energy sub-committee didn't wait and resigned immediately. Many other MPs expressed misgivings but, dependent on massive US military support, a government that barely governs the few square miles of the Baghdad ‘green zone' plans to tie up Iraq's most valuable national resources in contracts that run for decades. The government and parliamentary opposition to the oil law is symptomatic of disaffection and uncertainty within the new political establishment, and a reflection of much wider anger across the country over what is seen as an act of plunder. The Wall Street Journal reported that George Bush had phoned Iraqi prime minister Nouri Al-Maliki personally to thank him for the cabinet's approval of the draft.The US, Britain and the IMF have been applying relentless pressure every step of the way in order to have a package of oil laws passed and to prepare the legal grounds for a corporate takeover of Iraq's oil resources.

Weakening the Iraqi state

This diplomatic and economic pressure is backed by a series of US ‘benchmarks' – requirements that, in effect, threaten to remove the Maliki government if it fails to oblige or, at best, leave it to its miserable fate in the face of growing militant opposition.These requirements, supported by Congress as much as by Bush, include passing the oil laws. By arming tribal militias – a policy that is not confined to Sunni areas – the US has further ratcheted up the pressure on the Maliki government and the rest of the political establishment.

US insistence on the oil law demonstrates that its priority remains one of securing oil and oil rights for international capital.The US is therefore following a two-pronged policy of attempting to establish a central government that is capable of securing these rights while, at the same time, ensuring that the newly reconfigured state has no independent ambitions to control the oil resources and use them to pursue its own path of development and reconstruction. The weak, sectarian and fractious Maliki government has proved to be just what the US needs at this time: one that is willing to acquiesce in US military offensives and to pursue the handover of oil to the multinationals, while at the same time applying the harsh economic policies dictated by the IMF, particularly over the domestic price of fuel.

The latter measure includes jacking up fuel prices considerably – which accounts for most of the overall inflation rate of 70 per cent in 2006.These measures, supposedly designed to stimulate greater efficiency and fiscal prudence and stop corruption, have achieved none of these aims. Nor have they prevented the outright theft of oil, which is funding criminal gangs and militias. But they have served to prepare the domestic oil sector for the coming privatisation by bringing domestic oil prices in line with export prices.This has caused massive distress in a country whose main electricity power generation and distribution infrastructure has already been smashed by war and the destructive outcomes of the occupation.

Dividing up the spoils

The oil laws currently before parliament include two separate bills.The main law concerns the future management of the country's oil and gas resources, while the second deals with the allocation and distribution of national oil revenues.The main draft oil and gas law calls for the development of these resources through ‘production sharing contracts' with foreign oil companies.This has been met with stiff opposition among the Iraqi public, including the Iraqi Federation of Oil Workers, other trade unions, the majority of Iraqi oil industry professionals and political opinion outside parliament. In response, the ‘production sharing' terminology has been dropped from later drafts of the law but the content remains the same.

The supporters of these types of contracts are largely those associated with the sectarian and ethnically chauvinistic political blocks allied with the US, who are seeking to strengthen their hold over Iraqi politics and state institutions.They want the rapid exploitation of resources to generate the highest revenues in the short term, but have not shown any interest in attempting to achieve better use of oil resources for development, nor in rehabilitating and strengthening the national oil industry. Instead, they appear to be most concerned with strengthening their political control, building their client social bases, and cementing their international alliances.

These sectarian politicians are now vying with each other for the rights to sign contracts with oil multinationals, with various fees, royalties and other dubious payments and benefits written into the small print. Since these serve to benefit particular fiefdoms and client groups, there has been a great deal of wrangling as to who has the right to negotiate and sign oil contracts, whether it is a regional or provincial government or a national institution.

The Kurdistan regional government asserts its own right to sign, and the draft law effectively endorses the production sharing contracts it has already agreed with small foreign companies. In contrast, the dominant government block of Shia sectarian parties has been asserting the right of the central government to sign most oil contracts, but only after conceding wide prerogatives to the regions and the governorates.Through their inability to project a wide national appeal, these parties have acquiesced in the separatist aspirations of the Kurdish militia-based parties.They have endorsed contentious, vague and contradictory articles in the 2005 constitution that are being interpreted to give regions and governorates the rights to manage hitherto unexploited oil, and that place local and regional law above national law in many vital areas and in a manner that would inevitably lead to the fragmentation of the country.

It is paradoxical that the oil law is being pushed so urgently while the relevant articles of the constitution upon which the law rests are now under review. But it is no surprise, given that the inept, USsupported government has consistently appeased warlords and self-styled claimaints to communal leadership, oblivious to any sense of a national interest or consistent policies for national resource management. The constitutional provisions are reflected in the draft oil and gas law, which allocates managerial responsibility to the national oil ministry and operating responsibility to a national oil company only in the case of already operating fields.The right to award contracts for other fields and for unexplored areas of the country is given to regional and provincial authorities. But these lack the technical expertise and institutional structures that have been established in the ministry and national oil companies over many decades.

Given that the vast majority of Iraq's oil resources lie in unexploited fields, and that there is significant potential for oil to be discovered in new areas, the practical implication of these measures is that the majority of Iraq's oil resources are to be surreptitiously privatised and handed over to multinationals under the guise of decentralisation and benefit-sharing.The bizarre resource management arrangement under the draft law simply means that the regions will be competing with each other to award contracts to multinationals, with the benefits flowing to corrupt local elites and the multinationals themselves.

It also means that Iraq's oil industry will be fragmented and is likely to remain an extractive industry without a clear organic link between plans for crude oil production and downstream activities of refining and petrochemical industries, and without integration with the country's power sector requirements. The country's oil services industry and its project management capabilities will be set back and are likely to be liquidated through a credit squeeze and privatisation.

Private oil: future and past

The stated intention of the oil law is to subject the industry to ‘market principles and techniques', a euphemism for strict financial measures that accentuate the advantages of powerful multinationals over an industry already weakened by decades of war, sanctions and a haemorrhage of skills and capital.

Alongside this, a PR campaign deprecating the national industry is under way. It ignores the major achievements of the public sector, coupled with claims of great efficiency and reformed reasonable business behaviour by the multinationals.Yet these fly in the face of the historical experience in Iraq and elsewhere – which includes a record of political subterfuge by companies that are integral to US strategic objectives, and which remain highly influential in US and western politics.

The weaknesses of the Iraqi oil industry are allegedly inherent to the public ownership and management of the country's natural resource. However, Iraq's own experience is one of terrible mismanagement and high-handedness by the foreign oil companies in their dealings with the country. An international corporate oil consortium had a monopoly over Iraq's oil for 50 years, during which time it developed Iraq's oil industry only very slowly, keeping it largely as an undeveloped reserve.

That oil consortium, which included BP, Shell and Exxon, enjoyed 50 years of a 75-year exclusive concession, during which time it did not build a single commercial refinery in the country.The consortium flared all the gas that was produced with oil, and kept Iraq without an indigenous oil services industry and with only a very limited infrastructure for transport and distribution. It made phenomenal profits, as Iraq's oil production costs were only a few cents a barrel, and very little attention was paid to environmental and social costs of oil production.

For decades, the oil consortium resisted Iraq's attempts to establish its own industry alongside the foreign one.When the main concession was nationalised in 1972, Iraq's oil reserves were estimated to have been about 34 billion barrels.Within a little over 10 years, the nationalised industry trebled the country's reserves and expanded the infrastructure, production facilities and export networks, as well as developing substantial refining and oil related industries. Massive investments were made in the oil sector, and for the first time the industry began to be integrated in a real and physical sense with the rest of the Iraqi economy.The level of competence of the nationalised industry was reflected in the reconstruction achievements after the bombardment during the 1991 war.

Over the past three decades and more, the Iraqi oil industry was managed under severe political and physical strains, with oil resources remaining under Iraqi sovereignty.The role of foreign companies during that period was substantial, of course, especially in the major developments, but it took the form of short-term development and service contracts in which the companies had no control over the country's oil resources. In other words, the country could, in principle, manage the oil sector in ways that would serve its long-term development advantage.

The draft oil law would change this relationship completely, and begin the process of handing Iraq's oil resources back to foreign companies under long term contracts that would be governed outside the Iraqi court system.These would bind future Iraqi governments for decades to come, and would take effect under terms that are bound to be iniquitous for a country that is under occupation, wracked with corruption and in a state of chaos.

The US and British governments portray the oil law as one that brings about modernisation and equity among different Iraqi communities.This is a fictional reconstruction. The effect of the proposed distribution of oil revenues will be to prevent the possibility of state-led development programmes from emerging.

As many resources as possible are to be allocated directly towards consumption, without enabling the development of an infrastructure for productive activities.This way, Iraq's oil revenues will be captured by influential, corrupt and external agents. Despite Iraq's potential wealth, this will most likely form the basis of a weak unproductive economy that remains subservient to oil interests and imperial power. Apportioning oil revenues according to formulae that are neither economic nor functional, but instead sectarian and regional, is a dangerous policy. Similarly, allocating rights to sign contracts as the local prerogatives of warlords and self-styled ethnic community leaders is divisive and damaging.

The oil law threatens Iraq's integrity and future stability. Extreme interpretations of the law, such as those of the Kurdish warlords, are especially destabilising.Yet the US continues to play on the prospect of fragmentation and chaos to push through the denationalisation of Iraq's oil resources.

Kamil Mahdi is senior lecturer in Middle East economics at the University of Exeter, a fellow of the Transnational Institute and author of Oil and Oil Policy in Iraq (Pluto Press, November 2007)