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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.

IF economic growth of companies is the sole critieria for determing what is good, then the world IS in big trouble. Below is an article of interest as even the writing of it is symptomic of a Big Problem.

Meanwhile the vast comsumption of oil and gas by world "markets" continues unabated by common sense or concern for the next generations!

Veeger

		Opinion & analysis
		When will Russia run out of oil and gas?
		23:04 | 10/ 12/ 2007

MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - Russia must increase investment in oil and gas exploration and production, and save its energy resources, say German scientists.

"At the current level of production, [Russia's] reserves will have been used up in around 22 years,"

says a report by the Berlin-based German Institute for Economic Research (DIW) released on December 4.

Russian experts are unanimous in their reaction to this gloomy German forecast. They say this is "nonsense and distortion of reality."

The report claims that although Russia is the second largest oil producer (9.7 million barrels per day) after Saudi Arabia, it holds only the seventh place for proven oil reserves (6%-7% of the world's total).

German scientists point to such drawbacks of the Russian energy policy as insufficient investment into

increasing commodities production,

inadequate energy-saving technologies, and

low domestic energy prices,

which results in mindless burning of hydrocarbons.

They say that Russia must do something now to improve the situation and reassure Western Europe that hydrocarbons supplies from Russia are reliable.

According to the German institute, the EU imports 29% of its oil and one third of its gas from Russia.

Russian oil and gas experts said the gloomy forecast was not true, despite problems in the Russian oil and gas sector.

Timur Khairullin, an analyst with the AntantaPioglobal investment group, described the report as inaccurate. He said that Russia has enough oil for at least 30 years, and the situation in its commodities sector is not deteriorating year-on-year.

Russian oil producers conduct enough prospecting and exploration to replenish between 70% and 80% of their reserves, which keeps the reserves-production ratio at a stable level.

Khairullin said Russia's seventh place in terms of proven reserves was not a cause for concern. As much as 60% of the global oil reserves are located in the Gulf countries, which have enough oil for more than 70 years, he said. However, Russia leads the world in the amount of gas (over 25% of the total).

The pace of oil production in Russia has been slowing down by 2%-2.5% annually in the past three years (it grew by 6%-11% in 2000-2004), because companies spend only 1% of their revenues a year on exploration and the basic deposits in western Siberia are becoming depleted.

But Russia is establishing new oil production centers in eastern Siberia and the shelf, where it offers tax privileges. It is also building the East Siberia-Pacific Ocean pipeline to transport oil from these fields to the rapidly developing Asian countries.

Khairullin said that high oil production and export taxes would hinder a substantial growth of production in Russia in the next few years.

Valery Nesterov, an analyst with the Troika Dialog investment company, believes the replenishment of oil reserves is a problem in Russia. More funds are being invested in oil production at the depleted fields in western Siberia, but this has not increased the production of the local low-quality oil.

However, it is not right to say that Russian reserves will have been exhausted in 22 years, Nesterov said. Many large Western companies have oil reserves that will last only 15 years, but they are replenishing them every year. Russian companies have enough oil for 20-30 years, and are currently replenishing their reserves by nearly 100%.

The analyst admitted that oil exploration was stalled in the early 1990s, when oil production was turned over to private companies in Russia. He said exploration should become a government task. The cabinet has approved a state program for developing the mineral sector, which stipulates the replenishment of reserves, and licenses are being issued for the eastern Siberian oilfields.

Nesterov does not think that Russia should increase production at all costs. We should leave something to the future generations, he said.

Oil production has been growing at 2%-2.5% in Russia, whereas the global figure is 1.5%-2%, and has been the same for years thanks to the efforts of OPEC. The oil cartel, set up to uphold the interests of oil exporters, is doing its best to prevent oil prices from going down.

The DIW report reflects the fears of consumers that Russia will be unable to meet their growing hydrocarbons requirements. They have an alternative - look for other options, such as alternative energy or still more effective energy saving technologies.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.