x Abu Dhabi, UAEFriday 28 July 2017

Buoyed by oil, a semblance of stability in Iraq

The recent rise of oil prices worldwide has helped Iraq emerge from its civil wars with a new outlook and better prospects for lasting prosperity.

As upheaval and political instability sweep across the Middle East, Iraq has quietly consolidated recent security gains against a backdrop of economic progress. As the recent rise of oil prices worldwide coincided with a petroleum industry that has reached its production targets, Iraq is now emerging from its civil wars and sectarian uncertainty with a new outlook and better prospects for lasting prosperity.

Although several demonstrations in the Kurdish north have recently occurred, demanding systemic political change, the early gains in 2011 cannot be ignored.

The ruling coalition, led by the prime minister Nouri al Maliki, has forged a transparent - albeit tenuous - unity government from two duelling political parties, curtailed nation-wide violence and helped to reduce long-simmering tensions.

More importantly, increased revenue from the petroleum sector has enabled the Iraqi government to revise its budget forecast and pay for many infrastructure-related investments. These developments are welcome and long overdue.

The crucial aspect in this development strategy is, of course, the stability of the petroleum and natural gas industry, and whether the electricity delivery system will function during the summer months.

Since June 2009, the Maliki government has secured over a dozen major oil field contracts with international oil companies, and has made these deals the cornerstone of Iraq's future economic development. The challenge now will be sustaining these impressive gains.

While the country's future oil production has been optimistically projected as high as 12 million barrels per day (bpd) by 2020, significant obstacles remain to increased output.

For one, the country's infrastructure and skilled labour supply are insufficient for the country's ambitious plans, and billions of dollars must be invested to facilitate a supporting infrastructure for oil field development and exports. Although Iraq has the second largest amount of reserves in the world, current output is similar to the level of Algeria, whose proven reserves are a fraction of those of Iraq.

Beyond capacity are more bureaucratic hurdles. For instance, much has also been discussed about the legality and constitutionality of the agreements awarded through the bid round processes. At the centre of the debate is the ambiguous legal framework that underlies Iraq's oil industry. The absence of any national hydrocarbon law leaves lawmakers and regional governments at odds and uncertain over the application of laws already in place.

The 2005 Iraqi National Constitution arguably grants significant power to the regional semi-autonomous governments, such as the Kurdistan Regional Government (KRG), when it comes to managing hydrocarbon resources, as well as negotiating their extraction. However, previous governments chose to negotiate these bid rounds in a centralised fashion, despite the lack of a comprehensive petroleum law.

One of the main challenges facing Iraq is the lingering dispute between Baghdad and the KRG over oil production and exports in Iraq's Kurdish region. Frustrated by stalled negotiations over a national oil law, the KRG passed its own hydrocarbon investment law in 2007, based on a contentious interpretation of the Iraqi constitution, and began independently entering into their own production sharing contracts (PSCs) with over three dozen independent oil companies.

At first, Baghdad condemned the PSCs, which have drawn international scrutiny over allegations of impropriety, and the central government blacklisted any oil company operating under agreement with the KRG. This early resistance, however, appears to be changing.

One of the first acts of the new federal Iraqi Minister of Oil, Abdul Karim al Luaibi, was to resume permission allowing the export of petroleum from the Kurdistan Region. This breakthrough was further supported by Mr al Maliki's assertion last month that federal Iraq will abide by the terms of the PSCs signed by the KRG.

At the nexus of enacting a federal oil law and the dispute with the KRG rests the central legal and political issue of Iraq's political future: the long-running dispute over the ethnically-mixed and oil-rich area around Kirkuk against a backdrop of Kurdish demands for greater autonomy. Iraq's Kurds have repeatedly called for the area's energy resources to be placed under KRG administration.

The local Arab population is equally insistent that Kirkuk and its oil remain under the authority of Baghdad. This dispute will undoubtedly last well past the tenure of Mr al Maliki as prime minister, who has also stated publicly that he will not seek a third term in office past 2014.

Although the need to develop the electricity production and delivery system, increase petroleum production to required levels, political cleavages, and sectarian differences may seem daunting and insurmountable, the challenges which Iraq continues to face are relatively manageable compared to the progress it has already made.

Thomas W Donovan is an attorney with the Iraq Law Alliance, PLLC