Iraq oil hopes slide on legal limbo

LONDON // Five years after the first attempt by the Iraqi authorities to ratify an oil law, the country’s petroleum sector is still in legal limbo.A hydrocarbon law remains a mirage in Baghdad and the reality is dawning that Iraq’s plans to become one of the world’s top-five oil producers are jeopardised by the legal deadlock.

Many oil deals have been signed in the intervening years but the country’s target of pumping 12 million barrels per day (bpd), more than three times the pre-war record and on a par with the Opec powerhouse Saudi Arabia, is still a distant dream.

“For new arrangements to be successful, they have to be in line with the new law that will be ratified … which is still not ratified,” said Rowsch Shaways, the Iraqi deputy prime minister. When Iraq ends the stalemate – which stems from a dispute between Baghdad, the federal capital, and Erbil, the seat of power in the semi-autonomous Kurdistan region – it will have effects well beyond the oil industry.

Funding for infrastructure rebuilding, relationships with foreign governments and economic diversification into areas such as petrochemicals and manufacturing will all be affected.

The uncertainty about Iraq’s future legal framework was one of the factors that helped to dampen interest last month at Iraq’s first auction of exploration blocks since the Saddam Hussein era. Only three of 12 blocks found takers.

“Without a robust legal framework, businesses cannot operate with confidence, and lack of confidence will ultimately undermine attempts to build a lasting economic and political environment in Iraq,” said Lord Howell of Guildford, the minister of state for the United Kingdom’s foreign and commonwealth office. Without an oil law, Iraq faces the “dangers of over-centralisation of power”.

Baghdad believes petroleum policy should be set at the federal level and comply with its interpretation of the constitution. Erbil, in contrast, wants to be able to award production contracts and plan export pipelines on its own terms.

“The delay in ratifying the law is a disadvantage to both sides,” Mr Shaways told journalists at an Iraq oil conference in London this week. “The overall situation of Iraq is not conducive to having laws like this processed easily.”

At the root of the inability of the federal and regional governments to work in harmony are fundamentally different approaches in giving foreign companies access to their fields.

Kurdistan grants companies production-sharing agreements in which companies can take a share of the output and book the reserves. The investor puts all the risk capital upfront and has rights to all the revenue until the money is paid back, when it switches to a shared model. In contrast, Baghdad uses a service-contract model that pays foreign partners a per-barrel fee, which many executives say is not high enough to compensate for the risks involved.

“We know from experience around the world that it’s not always easy to get oil companies to do what you want them to do,” said David Morrison, the chairman of the energy consultancy Wood Mackenzie. “There are many examples around the Middle East where, although governments feel they got a good tax deal, it’s not always the behaviour you want.”

The stalemate threatens Iraq’s production target, now lowered to 9.5 million bpd by 2017 from the original 12 million bpd goal (although analysts say even the reduced target may be out of reach). The ambitious figure is integral to Iraq’s desire to gain more clout on the global stage, not least within Opec.

Under the group’s production ceiling for the first time in 13 years, Iraq has yet to be allocated an individual quota. Nevertheless, it has already begun laying out a case for a target much higher than its last quota of just over 3 million bpd, equal to Iran’s at the time. “The lost capacity over the last three decades benefited other producing countries,” said Thamer Al Ghadhban, the chairman of the advisory commission to the prime minister and one of four candidates to become the next secretary-general of Opec.

The fight for a big quota could be in vain if Iraq can only hit at the low end of the government’s production forecast of 6 million bpd, a figure many analysts say is more realistic.

“It’s not easy to transform a country from dictatorship,” said Mr Al Ghadhban, a former oil minister.

“And Iraq is a very diverse nation.”