Global Policy Forum

By Joshua Partlow

Two weeks after the United States launched an ambitious security plan for Iraq, then-U.S. Ambassador Zalmay Khalilzad issued an enthusiastic announcement about progress toward an Iraqi oil law, a key American goal. "This is a significant political achievement," the February 27 statement began. "Under the approved law, oil will become a tool that will help unify Iraq and give all Iraqis a shared stake in their country's future."

But Iraq's oil law was far from approved. And as negotiations dragged on during the spring and summer, the inability to devise a means to divide the spoils of the world's third-largest oil reserves had instead torn Iraqis further apart. Khalilzad's hands-on efforts for the law are now seen by many Iraqis as inspiring a swell of Arab nationalist opposition and as one of many stumbles on the legislation's dismal journey. "This was a very bad move by the Americans to push for this law," said Issam al-Chalabi, a former oil minister. "Now it looks like . . . the Americans are after oil -- they will bring their Exxons and Chevrons and they will control our oil again."

There were two main camps from the start. The Kurdistan regional government's minister of natural resources, Ashti Hawrami, drafted a federal oil law that he gave to Oil Minister Hussein al-Sharistani in July 2006 -- a move taken as a "shot across the bow" in Baghdad, according to one Western diplomat. It spurred the Oil Ministry's three-man team of Iraqi oil experts, working out of London and Amman, Jordan, to hurry their draft. The resulting document, completed in August 2006, outlines strong central government control over Ira qi oil production, with scant mention of regional powers. All petroleum decisions "shall be made on the basis of Iraqi Federal laws," the draft began. "The overriding principle is oil is owned by all the Iraqi people and not one region," said Tariq Shafiq, one of the initial drafters. Hawrami said he hated the draft because it ignored the Kurds and was written in a "nationalistic, prejudiced" manner in the "language of the Baathist Saddamist era."

Working with a negotiating committee that included several cabinet ministers led by Deputy Prime Minister Barham Salih, a Kurd, the Kurds asserted a constitutional right to control what they see as their oil, as well as the ability to negotiate their own oil contracts with foreign firms. They relied heavily on articles from Iraq's new constitution deeming that oil management should be on a joint basis with the federal and regional governments, and that in case of any dispute over shared powers, "priority shall be given to the law of the regions."

After a thorough overhaul of Shafiq's draft, by December 17 the Kurds believed an agreement had been reached that would give them the right to negotiate and sign new contracts for oil projects within their territory and receive a share of oil revenue based on population. But revisions made quietly in Baghdad, which the Kurds felt undermined those terms, dissolved the agreement and caused the Kurds to harden their position. They asserted they would pass their own oil law if there was no federal law by May 31 and demanded that three accompanying pieces of legislation -- concerning oil revenue sharing, the role of the Oil Ministry and the charter of the Iraqi National Oil Co. -- be passed as a package. Hawrami told his fellow negotiators he was losing confidence in their "ability to play fair," he recalled.

By February 26, a draft of the main legislation satisfactory to the Kurds and the central government was approved by cabinet ministers, who promised to send it to the fiercely divided parliament for ratification. Meanwhile, bitterness was rising from many factions -- unions in the oil-rich port city of Basra, petroleum industry experts, Sunni politicians and those loyal to Shiite cleric Moqtada al-Sadr -- that the law would allow foreign companies to make off with Iraq's oil wealth. A group of 419 Iraqi academics, engineers and oil industry experts would later sign an open letter to parliament stating that "it is clear that the government is trying to implement one of the demands of the American occupation." The draft oil law, the letter stated, "lays the foundation for a fresh plundering of Iraq's strategic wealth and its squandering by foreigners, backed by those coveting power in the regions, and by gangs of thieves and pillagers."

The antagonism was laid bare on April 18, when the three Kurdish delegates found themselves surrounded by critics at a conference in Dubai. "It was tense," said Ali Baban, the planning minister who was part of the Sunni bloc that withdrew from the cabinet last month. "The Kurds' demands were unreasonable, and therefore many people rejected them." On the tables lay bound copies of the draft law accompanied by four annexes, generated by the Oil Ministry, that the Kurds say they had never accepted. By Kurdish calculations, the annexes dedicated 93 percent of Iraq's proven oil reserves to the jurisdiction of the Iraqi National Oil Co., which they feared would be an unaccountable fiefdom of whoever was dominant in the central government. Sharistani, the oil minister, estimated that 80 percent of oil reserves went to the national company. The Kurds worried that this central control would limit foreign investment in the oil sector, precluding a rapid boost in oil production and revenue for Iraqis, including themselves. Hawrami wrote after the meeting that the annexes and conference presenters "send a clear message: Iraq is closed for business."

As the May 31 deadline for passage of the oil law approached, negotiations deteriorated. The parties began to focus on the revenue-sharing draft, hoping it might be less difficult to pass. Several participants said U.S. Embassy officials began to ratchet up pressure to finalize some law before mid-September. "They were absolutely desperate for anything," said one participant who spoke on condition of anonymity because he is not authorized to comment publicly about the negotiations. "The irony here is that, far from the U.S. pursuing its interest in privatizing the oil sector, and get its hands on Iraqi oil . . . the U.S. was pushing hard to take the path of least resistance, and push for strong centralization and Iraqi state participation."

A U.S. Embassy official, also speaking on condition of anonymity, did not dispute that observation, but added that even in the absence of a legislative framework, oil revenue is already being distributed throughout the country. Over the summer, the State Shura Council, a group of legal scholars, revised the legislation for proper language and formatting, but the Kurds considered it a gutting of the law. "They took out 15,000 words from the original document, 100 paragraphs," Hawrami said.

The negotiating committee decided there needed to be a draft maintaining the original content but in the proper format, and this is what the cabinet approved again on July 3, although the document didn't actually exist yet, according to Hawrami. By mid-summer, nothing was settled. Eventually, a strong backlash against any federal oil law emerged. The parliament in the Kurdish north, frustrated with the delays, passed a regional oil law August 6.

Some now argue that Iraq needs years to reach production levels that would dent its current reserves, so there is no need to hurry for new exploration, sign major contracts with foreign companies or push through an oil law. "What's the rush?" said Chalabi, the former oil minister. "Everybody and his brother from the U.S. administration has been talking about the oil law -- what the hell is this oil law? The priority should be restoring a normal life to the citizens." "I will resign if that law is passed" by parliament, said Baban, the planning minister whose Sunni bloc withdrew from the cabinet. "It gives more power to the regions to sign their own contracts, and I think this threatens the unity of the country."