Der Spiegel on Iraq Oil
Source Ken Hanly
Date 06/12/26/20:56

Will Iraq's Oil Blessing Become a Curse?
By Joshua Gallu in Berlin

THE IRAQI government is considering a new oil law that
could give private oil companies greater control over
its vast reserves. In light of rampant violence and
shaky democratic institutions, many fear the law is
being pushed through hastily by special interests
behind closed doors.

Oil. The world economy's thick elixir yields politics
as murky and combustible as the crude itself. And no
wonder. It brings together some awkward bedfellows:
It's where multinationals meet villagers, where
executives meet environmentalists, where vast wealth
meets deep poverty, where East meets West.

Oil, of course, can be politically explosive at the
best of times, let alone the worst. So, when the
country with the third largest oil reserves in the
world debates the future of its endowment during a
time of civil war, people sit up and take notice.

The Iraqi government is working on a new hydrocarbons
law that will set the course for the country's oil
sector and determine where its vast revenues will
flow. The consequences for such a law in such a state
are huge. Not only could it determine the future shape
of the Iraqi federation -- as regional governments
battle with Baghdad's central authority over rights to
the riches -- but it could put much of Iraqi oil into
the hands of foreign oil companies.

Political differences could still derail the
legislative process. The Kurdish and Shia populations
want to control their oil-rich territories without
Baghdad's help. Meanwhile Sunni Arabs located in the
oil-poor center of the country want the federal
government to guarantee they're not excluded from the

That hasn't stopped the Kurdish Regional Government
(KRG), though. The KRG has already signed agreements
of its own with oil companies. But Baghdad has
declared the contracts invalid, and the new draft law
states that Iraq's oil exploration, production and
transport would be handled by the central government
in Baghdad, according to excerpts of the draft
published by Dow Jones Newswires.

Controversial contracts

Nevertheless, the draft law lays the ground work for
private oil companies to take large stakes in Iraq's
oil. The new law would allow the controversial
partnerships known as 'production sharing agreements'
(PSA). Oil companies favor PSAs, because they limit
the risk of cost overruns while giving greater
potential for profit. PSAs tend to be massive legal
agreements, designed to replace a weak or missing
legal framework -- which is helpful for a country like
Iraq that lacks the laws needed to attract investment.

It's also dangerous. It means governments are legally
committing themselves to oil deals that they've
negotiated from a position of weakness. And, the
contracts typically span decades. Companies argue they
need long-term legal security to justify huge
investments in risky countries; the current draft
recommends 15 to 20 years.

Nevertheless, Iraq carries little exploratory risk --
OPEC estimates Iraq sits atop some 115 billion barrels
of reserves and only a small fraction of its oil
fields are in use. By signing oil deals with Iraq, oil
companies could account for those reserves in their
books without setting foot in the country -- that
alone is enough to boost the company's stock. And, by
negotiating deals while Iraq is unstable, companies
could lock in a risk premium that may be much lower
five or ten years from now.

Without drastic improvements in the security
situation, companies are unlikely to begin operations
anytime soon. "The legislation is not a golden
bullet," one industry source told SPIEGEL ONLINE.
Western oil companies are happy to receive Iraqi
officials in their European headquarters, but are not
keen to return the visit. Firms from China, Russia and
India, however, are less intimidated by Iraq's
precarious security situation and actively court
Baghdad on its home turf.

Russia, after all, knows first hand what's at stake.
They negotiated PSAs after the fall of communism, but
the terms turned out to be so disadvantageous that
they've taken to nationalizing the projects in
question. Not unlike Iraq today, Russia then had weak
governance and needed the money.

That's why some fear Iraq is setting its course too
hastily and in too much secrecy. Greg Muttitt of
social and environmental NGO Platform London told
SPIEGEL ONLINE: "I was recently at a meeting of Iraqi
MPs (members of parliament) and asked them how many of
them had seen the law. Out of twenty, only one MP had
seen it."

Last week, the Iraqi Labor Union Leadership suggested
the same. "The Iraqi people refuse to allow the future
of their oil to be decided behind closed doors," their
statement reads. "(T)he occupier seeks and wishes to
secure themselves energy resources at a time when the
Iraqi people are seeking to determine their own future
while still under conditions of occupation."

Many worry instability would only get worse if the
public feels cheated by the government and
multinationals -- the Iraqi constitution says the oil
belongs to the Iraqi people. The Labor Union
Leadership warned: "We strongly reject the
privatization of our oil wealth, as well as production
sharing agreements, and there is no room for
discussing the matter. This is the demand of the Iraqi
street, and the privatization of oil is a red line
that may not be crossed."

Peter Eigen, chairman of the Extractive Industries
Transparency Initiative, a body that aims to bring
improved governance in resource-rich countries, told
SPIEGEL ONLINE that an open debate is crucial. "Civil
society and private sector should play a role in
this," he said. "If this doesn't happen, it will just
be another country where the blessing of petroleum has
been turned into a curse."

Why so fast?

Oil is central to Iraq's reconstruction and economic
recovery, and the U.S. government is urging Iraq to
develop the sector quickly. The recent Iraq Study
Group report recommended the US help Iraq "prepare a
draft oil law" to hasten investment. The report
estimates Iraq could raise oil production from 2
million to 3 or 3.5 million barrels per day over the
next three to five years.

Critics say the US is leaning on the IMF and World
Bank to push Iraq into signing oil contracts fast, so
western firms can secure the oil before Chinese,
Indian and Russian firms do. An IMF official told
SPIEGEL ONLINE that "passage of a hydrocarbon law is
not a condition for financial support from the IMF."
Nevertheless, Iraqi authorities found it necessary to
promise the IMF a draft petroleum law by the end of
this year -- this in the same letter that says "we
will take whatever steps are necessary to ensure that
the program remains on track."

The IMF sets the conditions for Iraq's debt relief
from the so-called Paris Club countries. Eighty
percent of that debt has been wiped clean, and the
final 20 percent depends on certain economic reforms.
With the final reduction, Iraq's debt would come to 33
percent of its GDP -- but if the reforms are not made,
debt would climb to 57 percent of GDP, according to an
IMF report.

Criticisms have also been levelled against the World
Bank, where former US deputy defense secretary Paul
Wolfowitz is in charge. Wolfowitz has been accused of
pushing a US agenda after opening a World Bank office
in Baghdad.

Most agree that Iraq should develop its oil -- the
question is how and how fast. Apart from the law's
content, Eigen stresses the drafting process must be
transparent for any law to succeed: "Everything that
is done behind closed doors will probably have to be
renegotiated later."

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