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Analysis
Iraq Oil Law Turns Back the Clock to 1951
U.S. Supported Legislation Pressures Iraq to Transform Oil Industry
By SANDRA HERNANDEZ Posted 20 hr. 48 min. ago
The supplementary spending bill passed by Congress last month contained one of the most telling pieces of Iraq-related legislation since the U.S. invasion, and it wasn't the August 31, 2008, deadline for withdrawing U.S. troops. It was an obscure and little-understood bill called the Iraqi Hydrocarbons Law, and it could dramatically undermine the economic and political progress of Iraq.
The Hydrocarbons Law contains two fundamental provisions, the first governing how Iraq will distribute revenues from its 115 billion barrels of oil reserves--the second-largest after Saudi Arabia's. The second provision will allow regional governments to negotiate production contracts with foreign oil companies.
Should Iraq's parliament pass the oil law, it will effectively return the country's oil industry to the conditions of pre-1951 Iraq. Yet it is under extreme pressure to do just that.
The spending bill makes the oil law one of many "benchmarks" tying Iraqi political progress with continued American military support. That means that if Iraq's parliament fails to pass the Hydrocarbons bill, then the U.S. could in theory withdraw troops before the 2008 deadline. At the very least, it might cease to provide protection to Iraqi parliament members.
Iraq nationalized its oil industry in 1951, taking control of the country's oil reserves away from international oil companies (IOCs) and putting them in the hands of the Iraqi government, and later a state-owned Iraqi oil company. Henceforth, IOCs could only work as contractors for the state. Nationalization gave Iraq a bigger cut of its oil profits and greater control over all aspects of the oil industry, from drilling to exploration to refining. Today, this arrangement prevails in Arab oil producers like Saudi Arabia and Kuwait.
The Iraqi oil law undoes all of this.
Approved by the Iraqi council of ministers in March, the law permits regional governments to enter into contracts of up to 20 years for production, and up to 12 years for exploration in 65 sites around the country. That would leave Iraq’s National Oil Company in direct control of less than one-fifth of the country’s 80 oil fields.
The length of such contracts would allow foreign oil companies to sit on Iraq's oil for years until the security situation improves, delaying the revival of Iraq's devastated economy.
What is more, the law focuses on exploration and expansion of Iraq's industry--that is, new drilling--rather bringing existing oil fields back online. Iraq’s oil infrastructure has been crippled by acts of sabotage since the start of the war; what it needs most right now is investment to bring production technology up-to-date.
A New York Times editorial praised the oil law for “equitably distributing oil revenues,” while The Nation's Chris Parenti (sub.req.) noted lamely that a proposal for distributing revenue son a per-capita basis might help de-escalate sectarian conflict.
In fact, by devolving negotiating power to regional governments, the law promotes competition for foreign oil contracts, potentially exacerbating sectarian tensions. In effect, the law looks at oil as "a prize to be divided rather than a resource to support public investment and development", said Kamil Mahdi, an expert in Middle East economics at the University of Exeter, in remarks at Columbia University's School of International and Public Affairs this week.
One contract with the Kurdish Regional Government would give foreign companies a 40 percent cut of profits, said Mahdi. Clearly, it makes little sense to discuss equitable distribution of oil revenues within the country if such a large chunk will be going to non-Iraqis.
Government ministers and Iraqi oil unions, which represent tens of thousands of workers, have denounced the law, but it remains to be seen whether parliament will overcome enormous outside pressure to pass it.
The oil law has raised nary an eyebrow in Washington. One exception was Dennis Kucinich (D-OH), who called it “a concerted effort to ensure that American oil companies are granted access to Iraqi oil fields” and called on Congress to remove it from the spending bill’s list of performance benchmarks. Otherwise, lawmakers have hailed the oil law’s passage by Iraq’s Council of Ministers as a milestone for sectarian cooperation.
Besides opening Iraq’s doors to oil companies, the law might also benefit American interests by undermining Iraqi membership in OPEC. By putting so much of the oil sector under foreign control, the law would make it extremely difficult for Iraq to implement OPEC quotas. “It’s an anti-OPEC policy,” said Mahdi.
The future of Iraq’s oil is not a zero-sum game. Foreign oil companies have a constructive role to play in the sector, just as they do in neighboring Arab countries. But only a drastically revised law can make that possible.
IraqSlogger: Iraq Oil Law Turns Back the Clock to 1951