Government says deal has been reached with Kurds over Iraqi oil law

Significance

The central Iraqi government and the Kurdistan Regional Government (KRG) have reportedly agreed on a draft oil law, based more or less on the original February 2007 draft, which covers how—and under whose auspices—hydrocarbon revenues will be shared, as well as a mechanism to validate nationally the KRG-awarded oil contracts.

Implications

The importance of an agreement—which has still neither been confirmed nor denied by the KRG—cannot be overstated, although the draft will now have to be carried all the way through the parliament to become law. Iraq's government says it has secured the sufficient parliamentary support, but several institutions will find it hard to resist putting their mark on the draft, risking a repetition of last year's conflict.

Outlook

It enacted as law, the draft could usher in a new era for Iraq: allowing IOCs to invest in the country, leading to a rapid inflow of badly needed technology and expertise, more effective and modern management, and—in the medium-to-long term—large oil and gas output increases.

Finally an Agreement?

In comments to U.S. news agency UPI's Ben Lando yesterday, Iraq's top government spokesman, Ali al-Dabbagh, said that a deal between Iraq's central government and the Kurdistan Regional Government (KRG) has been reached, based on the draft oil law version agreed among Iraq's main political factions in February 2007. Al-Dabbagh also said that political parties in parliament had recently pledged their support and that the talks held with representatives of the Kurdish factions had led to a 'new atmosphere'.

The draft oil law is centred on the establishment of a federal oil and gas council, not unlike the supreme oil and gas councils steering hydrocarbons policies in—among others—Kuwait and the United Arab Emirates, guaranteeing a continuity and stability in policies.

The council would, in Iraq's case, delineate national versus regional government control over producing fields and exploration blocks, as well as having a last say on the legality of the terms offered in all contracts. Al-Dabbagh seemed to imply that an understanding has been reached with the KRG about respecting their right to award contracts, especially the contracts it already has awarded, saying that 'this is going to be reviewed and is going to be checked whether they are workable with the new law or not. If not they should be amended in order to have them matching with the new regulation of the oil law.'

The review process is therefore likely to just bring the terms offered by the KRG in line with the terms agreed upon at the national level. This should not immediately result in any major changes in the contracts signed between IOCs and the KRG, as the oil law the KRG autonomously enacted last year bases the terms it offers more or less on what was agreed on in the February 2007 draft.

The agreement is also said to comprise measures for revenue sharing between the regions, the re-establishment of the Iraqi national oil company, and measures to reorganise the Oil Ministry into more of a supervisory and policy-developing structure.

Close, but no cigar

While the reported agreement between the shaky government coalition and the KRG is a major step forward in the Iraqi political process to get development and rebuilding under way, and al-Dabbagh's comments indicate that a critical mass of parliamentarians could be ready to support the draft, the document's journey to the parliamentary floor will be perilous. Following last year's February agreement, the draft was amended several times by the Oil Ministry, the Parliament's Energy Committee, and the Shoura Council (Iraq's constitutional court equivalent), resulting in mainly the Kurds withdrawing their support, feeling that the compromise to which they had agreed had been changed afterwards, to their detriment.

While the more-than-year-long deadlock that followed should serve as a warning, there will be so many vested interests in the involved institutions and committees to amend certain parts of the draft—which for Iraq is vital—that further attempts to change its content cannot be ruled out. In addition, last year's stalemate also saw the reforming of political groups and grassroots movements favouring the continued full nationalisation of Iraq's oil and gas industry, as violence levels dropped and the government lost its privatisation momentum. This could herald some increasingly lively debates in parliament, with intra-party and grouping divisions coming to the fore.

Outlook and Implications

Vast Opportunities, Huge Challenges

The Iraqi oil and gas industry, damaged by decades of underinvestment and years of war, is in a bad state of repair and in dire need of technological upgrades.

While high oil revenues at today's export levels would already allow Iraq to pay for most of its own production increases and just enlist IOCs under technical service contracts (TSCs) where needed, this would still be a more time-consuming way for Iraq to ramp up its production and bring its large number of discovered, but untapped, fields onstream.

Suffering from a prolonged brain drain for decades, which rose to extreme levels during the years of war and sectarian strife, the Iraqi oil and gas industry is very short of engineers. Decades of underinvestment and international isolation have also resulted in its workforce lacking the required know-how regarding the last decades' vast technological improvements within the industry.

Allowing IOCs to invest under production-sharing agreements (PSAs) is a rapid way to address all these issues, while allowing the Iraqi government to lower its own investments in the sector and use a larger share of its export revenues to repair and develop other sectors of Iraqi society.

Allowing IOCs to invest in the country also undercuts the risk of recreating the inefficiencies that were inherent in the nationalised oil and gas industry in previous decades, and which still can be seen in some of Iraq's neighbouring states.

Oil Contracts in Waiting

The Iraqi Oil Ministry is currently preparing a tendering round for which 35 IOCs already have been pre-qualified and is hoping to close the licensing by November this year. Aiming for the draft oil law to have passed parliament by then and been enacted is probably over-optimistic, with both processes likely to slip, but nevertheless there is a dynamic sense of urgency with the Oil Ministry at this time, likely to lead to sustained progress.

The pilot TSCs currently being negotiated with a core group of oil majors for development works that will add around 100,000 b/d of production at five of Iraq's main fields will also be speeded up on this news. One of the hold-ups in this process has been how to create assurances for the IOCs that the short-term TSCs will be converted to PSAs at the implementation of a law, when PSAs technically still are illegal. With a new oil law on its way though parliament, this will be less of a problem, perhaps leading to some of the projects getting under way—in a best-case scenario—as early as a few months' time.

Security, Security, Security

Imperative for any development and investment will naturally still be the continued improving of security in Iraq.

Recent outbreaks of violence in the oil-rich south, following the government's launch of a campaign to root out criminal black-market gangs dealing in oil products and crude theft—as well as re-establishing government control over oilfields and installations and so weakening the political militias that have been deriving much of their funds from oil-sector theft and graft—ended somewhat inconclusively.

The government was, however, successful in exchanging militia-controlled forces at the oilfields and some core crude installations for Iraqi army units, and was yesterday reported by Agence France-Presse (AFP) to have continued the push by changing the main army and police chiefs in the region.

Security issues with the KRG will continue to be a divisive question, with the settlement of the explosive Kirkuk issue being particularly charged. Both sides are reported by UPI to have agreed on allowing the United Nations (UN) to try to resolve the question under the forthcoming initiative.

The KRG and the Iraqi government are also said to have agreed on a framework for the financing of the KRG peshmerga military forces and a way to bring them—at least ostensibly—in under the national armed forces umbrella.

Fragile Future

The understanding that seems to have been reached between the two sides holds the potential to unlock a new chapter in the development of Iraq's oil and gas resources, as well as to open up vast new reserves for IOCs to tap.

Progress is slow and tentative, however, and many obstacles remain before the draft Iraqi oil law is passed through parliament and can be enacted. Nonetheless, it does seem that the KRG tactic of creating a fait accompli by signing up IOCs under its own oil law during the past years has been largely successful, and that its positions have been secured.