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Iraq politics: Oil accord
[February 27, 2007]

Iraq politics: Oil accord

(EIU Viewswire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING


The Iraqi government has approved a draft petroleum law that will allow regional authorities to award exploration and development contracts, subject to review by an independent panel of experts. The agreement, following months of intensive debate, will provide some encouragement to companies looking for a way into Iraq's dilapidated and under-developed oil industry. However, a number of critical issues related to the law still need to be resolved, and the lack of security in much of Iraq means that Kurdistan remains the only part of the country where significant investment in the oil sector is possible.

Kurdish drivers

The Kurdish Regional Government (KRG) claimed that its flexibility on some of the contentious issues in the law--central vetting of regional contracts and the pooling of oil revenue--had played an important part in securing the cabinet's agreement. The KRG's minister for natural resources, Ashti Hawrami, said that his government had "voluntarily" agreed to share some of its constitutional powers to manage petroleum development and exploration in Kurdistan with the federal government. This will entail allowing an independent panel to review the KRG's petroleum contracts, "against certain agreed commercial criteria", and pooling all of the revenue to which is it is entitled with the other regions and governorates. In return, Kurdistan will be guaranteed a share of pooled revenue proportionate to its population, Mr Hawrami said.

The new law is to be debated by parliament after it reconvenes in early March, and Mr Hawrami said that he hoped that it would be passed within two months. However, he insisted that there should be a single legislative package, comprising the petroleum law, as well as its annexes and a related law guaranteeing the sharing of oil revenue among regions on the basis of population. Agreement has yet to be reached on the revenue-sharing law and on the annexes, which provide for the allocation of specific territories and oilfields to the Iraqi National Oil Company, the Ministry of Oil and the KRG, as well as setting out model contracts.

Revealing all

In the spirit of transparency, Mr Hawrami said that the KGR would submit the five contracts that it has signed thus far for review by the independent panel (which will be appointed by a Federal Oil and Gas Committee). He also said that the KRG intends to publish details of these five contracts to demonstrate that they meet all of the criteria and guidelines set by the constitution and laid out in the new law, notably the requirement that such contracts should aim to maximise the national benefit for Iraq. "I am quite sure that some commentators will see them as being amongst the toughest contracts, even by today's high oil price and market conditions," he said. Some oil ministry officials have claimed that the KRG has guaranteed excessive profits for foreign firms. The contracts are with several relatively small companies, from Norway, Turkey, Canada, the US and Australia. The most advanced is DNO of Norway, which is planning to start pumping oil later this year. Mr Hawrami said that negotiations were being held with a number of parties, "including large companies" based on bids invited for several new exploration and development blocks.

The interest of foreign companies in the KRG area stems mainly from the relatively stable and secure conditions there, rather than from any outstanding geological factors or fabulously attractive contract terms. Elsewhere in Iraq, there are more than a dozen major fields of proven potential that could be brought on stream with relatively low levels of investment if the political and security conditions were to allow it. The contract model to be applied to such developments is of secondary importance to the basic issue of security and political stability. The worsening of the violence over the past few months is likely to have contributed to the decline in Iraq's oil production over the same period, with output sinking to 1.65m barrels/day in January, according to industry estimates.


Another factor of critical importance for the oil sector is the future of the Kirkuk region, which contains some of Iraq's largest oilfields. Kirkuk currently lies outside the KRG area, but could well be included in it following a referendum on its status, which Kurdish parties are keen to arrange this year. The concessions that the Kurds have made on the principle of pooling oil revenue should allay some of the concerns of other groups in Iraq about the risk of the Kurds gaining the lion's share of Kirkuk's oil wealth as a result of incorporating the province into the KRG.

SOURCE: ViewsWire

Copyright 2007 Economist Intelligence Unit

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