Iraq's new oil law is a huge step backward, but stops short of the OPEC-busting dreams of some Washington conservatives
On February 26, Iraq's cabinet agreed to a draft law that will give long-term contracts to multinational oil companies. It heralds a sweeping transfer of control over the country's oil, ending 30 years of an (at least formal) state monopoly over oil production.
Over the past two years, both the US administration and the international oil industry had been putting pressure on the Iraqi government to stop stalling on oil legislation - with the international oil companies refusing to sign any joint ventures until there was a legal framework which broadly met their interests.
The Iraqi government's foot-dragging over the oil law, however, has had more to do with regional issues than with attitudes towards state ownership or control. The country's provinces can now expect to share in oil revenue in proportion to their population, meaning that the percentage of oil revenue that stays in Iraq will be shared fairly (at least in theory) among the regions - a major concession from the autonomous Kurdistan Region and the Shi'ite provinces.
Despite the importance given to regional issues in February's draft law, it was obvious that international oil industry experts were more publicly involved in writing the legislation than Iraq's own parliamentarians. As a result, "investment friendliness" takes a higher priority than a strong management structure and (central or regional) government oversight. While the law appears to suit the Big Oil Bush administration, its history also reveals setbacks and disagreements within Washington power blocs.
There were three possible directions for the oil industry in Iraq following the 2003 US invasion and ouster of Saddam Hussein. The first would have been to leave it in Iraqi hands. The second, favored by the global oil industry, was a so-called "Production Sharing Agreement" - a modernized version of the old concession system whereby oil companies would be granted licences to develop particular fields. The third option, promoted by a handful of White House and Pentagon neo-conservatives, was to sell off all the country's oil fields and subsequently to increase production massively. By upping Iraq's production from around 3-4 million barrels a day to over 5 million, the neo-cons reasoned, they could destroy the monopoly power of the Organization of Petroleum Exporting Countries (OPEC).
This plan was never taken seriously by the oil industry, and by 2005 a more pragmatic State Department faction had managed to craft an oil policy where Production Sharing Agreements were the main avenue for foreign investment, and (at least notional) Iraqi state ownership and control of oil was conceded.
The broad outlines of the State Department and oil industry approach were endorsed by the Iraq Study Group (ISG) in its December 2006 report. In many cases, the ISG merely described processes that were already at an advanced stage, such as the drafting of the oil law:
"As soon as possible, the US government should provide technical assistance to the Iraqi government to prepare a draft oil law that defines the rights of regional and local governments and creates a fiscal and legal framework for investment."
The report went on to recommend that:
"In conjunction with the International Monetary Fund, the US government should press Iraq to continue reducing subsidies in the energy sector, instead of providing grant assistance. Until Iraqis pay market prices for oil products, drastic fuel shortages will remain. ...
"The United States should assist Iraqi leaders to reorganize the national oil industry as a commercial enterprise, in order to enhance efficiency, transparency, and accountability."2
However, the practical mechanism for part-privatization of Iraq's oil was through production sharing agreements. The expression "Production Sharing Agreement" had met with some resistance in Iraqi government circles, so a new term - Exploration and Risk Contract - was introduced. The effect remains the same: a long-term (15-20 year) licence to develop oil in a particular area, with little governmental oversight and no guarantee of either public or private Iraqi participation in the venture.
Perhaps this is the best draft law that a weak and dependent central government could manage to negotiate. Whether or not Iraq manages to establish a stable government over the next decade or more, its economy will be considerably more dependent on outside interests than any of its oil-producing neighbors.
Ken Simons is managing editor of Peace.
1 Tariq Shafiq, "Iraq Draft Petroleum Law: An Independent Perspective" for Iraq Revenue Watch (Soros Institute), February 17, 2007.
2 Iraq nationalized its oil industry in 1971, after a 48-year history of foreign ownership and a concession system which granted near-monopoly powers to a single large consortium.
3 Greg Palast, "Secret US plans for Iraq's Oil," on Newsnight (BBC), March 17, 2005.
4 Iraq Study Group report, pp.56-57/
5 PLATFORM press release, "Cabinet Readies Iraqi Oil for Privatisation," Feburary 27, 2007