The Tribulations of Iraq's Oil Industry Due to the Ambiguity of the Constitution
Walid Khadduri Al-Hayat - 16/12/07//
Among the many humanitarian and political crises that Iraq is currently experiencing, there is a vital economic problem that will have a negative impact on the country's economic course over the foreseeable future. This problem is having an affect today, and it is represented by the vagueness surrounding the constitutional articles that deal with the management of Iraq's oil and gas resources.
A well-known American writer famous for his articles in which he advocates the partition of Iraq is actually the person who edited these articles before dictating them word by word to the committee to draft the flawed Constitution at the time, and the contradictory texts were unable to be modified. It was clear to Iraqi experts that these provisions would lead to chronic problems in Iraq's oil industry. This is not only because of the division of tasks and activities among governorates and regions, on the one hand, and the Oil Ministry and National Oil Company, on the other, but also because of the deliberate vagueness in the distribution of tasks and responsibilities among these parties.
Proof of the poor quality of these oil industry-related provisions can be attested to by the memorandum recently issued by 80 Iraqi oil experts to the Speaker of Parliament, in protest at the Regional Kurdistan Government's signing of contracts for production participation with foreign firms prior to the Iraqi Parliament's endorsement of the Oil Law.
Moreover, there is the open dispute between the media and the Parliament between the minister of oil, Hossein Shahristani, and the RKG. The minister affirms that he did not permit firms to sign contracts with the RKG to work in other Iraqi regions and that he did not approve the export of oil from Kurdistan, while the regional government is demanding the minister's ouster; the minister says openly that he is supported in his stance by the prime minister and the Cabinet.
The danger of this unprecedented initiative in the Arab world is the weakening of the central government's influence. More importantly, it will open up the way for international oil companies to take advantage of the limited experience of institutions in Iraq's provinces in negotiating with oil companies backed by international lawyers, accountants and geologists. Meanwhile, the institutions in Iraq's governorates lack the minimum level of this expertise. Of course, this defect raises questions about the transparency of these contracts.
The points of dispute can be summarized by three basic items. First, there is the scope of the regions and governorates' prerogatives in negotiating and signing exploration and development contracts with international companies for periods of time of approximately 25 years, with the advice or knowledge of the Ministry of Oil.
The vagueness and contentiousness in interpreting the Iraqi Constitution have been deliberate, and have led, as expected, to the appearance of these disputes, although it wasn't expected that things would move so quickly, and that division would break out among key allies in today's Iraqi regime. The problem lies in signing important oil contracts by some governorates for 20 or 25 years, saddling the country with international economic agreements without the knowledge of experts and officials at the Oil Ministry, or even their advice and input. It is very likely that these contracts, about which the Oil Ministry was unaware when they were negotiated, will weaken the country's future negotiating position. We should note that the Kurdistan Region contains a very small percentage of Iraq's petroleum reserve, while 90 percent is located in the governorate of Basra. Thus, we can imagine the losses to be incurred by Iraq if Basra and the southern provinces follow the present course of Kurdistan.
The second item that has created a problem for the future of the Iraqi oil industry involves the need to sign production sharing agreements. In fact, most of the world's oil countries have adopted this type of contract, although they are implemented in unexplored regions; these contracts grant oil companies the right to own a part of the reserve and a high percentage of the profits, since the companies assume the risks of not finding any oil and spend millions of dollars on exploration.
In most oil countries, this type of contract is considered an incentive by international companies. In Iraq, regarding what has taken place in Kurdistan up till now, which has provoked considerable criticism and confusion, is the granting of these contracts in regions where discoveries have been made, where there are signs of petroleum, and even a little production. Therefore, the element of geological risk is almost nil for international firms that have signed this type of contract.
We don't know why these companies were granted production sharing agreements in the absence of any geological risks. The fear in Iraq in particular involves the entire country, where there are dozens of regions with known indications of oil and even facilities, which means huge financial losses for Iraq, beyond what the country has already incurred up to now.
The third item is that one of the contracts that has been signed, with Hunt Oil from the US, covers areas outside the Kurdistan region, which fall in the Nineveh (Mosul) governorate. This has increased fears about the Ministry of Oil's lack of a role in the negotiations regarding the details of the agreements and the disputes that these contracts will generate; some of these disputes go beyond the borders of a province or region. These problems will lead to huge financial losses for Iraq due to the delay in exploring a certain region and developing it for years, until a legal decision settles the dispute, not to mention the legal costs and the local political disputes that will result from problems of this kind.
We hope that the dispute between the Oil Ministry and the Kurdistan Region will be sent to the Iraqi Constitutional Court to be settled as soon as possible, to reduce the resulting losses. We also hope that Iraq's political parties will find the necessary courage to put the country's interest ahead of narrow calculations and review these articles before their consequences spread and millions of dollars are lost annually due to disputes that will arise, and that have already started to surface.
*Dr. Walid Khadduri is an expert in energy affairs.
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