x Abu Dhabi, UAEFriday 21 July 2017

Lack of a federal oil law cripples Iraq's economic recovery

Iraq's oil potential is enormous - but to attain it will require legal and political reform

Foreign "experts" like to depict Iraq's oil industry as a cesspit of corruption, turmoil and factional politics. In fact, however, Iraq has made real progress, and is aiming for more. But it is true that serious legal, political and technical challenges must be met if the sector's ambitious plans are to become reality.

Remember that the events of the last decade, beginning with the US-UK invasion of March 2003, have presented Iraq with far more social, economic, military, legal, political and infrastructure challenges than any of its Opec neighbours have faced.

Getting oil production up to the current level of about 3 million barrels per day (bpd) is an accomplishment in itself. Baghdad says production is at a 20-year high; the US says Iraq has now surpassed Iran in daily production.

The Iraqi government plans to keep pumping, and is bringing in major international oil companies. The government has now held four petroleum licensing rounds: in the first three, private companies bid to take over certain producing oil and gasfields from the old state monopoly company; the fourth was for exploration rights in promising areas not yet producing.

Iraq's oil ministry says the areas involved in these rounds should increase production to about 12 million bpd by 2017. If actual production gets to even half of that target figure by that year, Iraq will be able to boast of monumental economic and engineering success, by the standards of post-conflict nations at least.

However, to get there certain improvements in the current legal and regulatory regime, as well as infrastructure upgrades, will be essential.

The most urgent need is for a comprehensive federal law to regulate the hydrocarbons industry. At present, petroleum operations are governed by a collection of laws from previous regimes and by the 2005 constitution. This legal hodgepodge gives no guidance on the interplay between the federal government and the Kurdistan Regional Government (KRG), nor does it set out any rules for oil-revenue sharing between the central administration and the regional governorates.

A draft law to govern oil and gas production was tentatively agreed upon as far back as 2007. However, disputes between Baghdad and the KRG blocked enactment of a law, and today there are three draft versions, none of them likely to win approval anytime soon.

The pressure to increase production is adding new urgency to this problem, but there is still no plausible timeline for enactment of a law.

The absence of a hydrocarbons law is one side of a coin. The other side is the lingering, exasperating dispute between Baghdad and the KRG, not only about production but also about exports from Iraq's northern provinces, and about federal-regional power sharing in general.

The KRG passed its own hydrocarbon investment law in 2007 - based on a contentious interpretation of the Iraqi constitution - and then independently negotiated lucrative production-sharing agreements with international oil companies.

The first companies to venture into the Kurdish region were small ones, without significant worldwide footprints. However, today several "super-major" companies such as ExxonMobil of the US, Total (France), Chevron (US) and Gazprom (Russia) have commenced operations under KRG licences. This is a direct challenge to the central government's professed authority over these fields.

Without a national hydrocarbon law there is no clear mechanism for dispute resolution and arbitration between the central and provincial governments on oil matters.

But that's not all. At the crux of the KRG-Baghdad dispute lies the central legal and political issue of Iraq's future: the long-running dispute over who controls the ethnically mixed, oil-rich area around the city of Kirkuk.

Resolving these disputes would open the way to tackling the industry's substantial infrastructure needs and problems.

The climate of violence through most of the last decade has chilled investment, and as if that weren't bad enough there were 465 bomb attacks on oil-industry facilities and pipelines from 2003 to 2007.

Destruction and a lack of investment have left Iraq with total refining capacity estimated at a maximum of 790,000 barrels per day, even including current refinery upgrade projects.

New oil export terminals have been opened in the past year but if crude oil output is really going to rise at the rate proposed so boldly by Baghdad, existing terminals will have to be expanded or additional ones built.

The same is true of pipelines. There is a line, for example, from the Kirkuk field to the Syrian port of Baniyas, but it has not been operational since 2003. Another pipeline, from Kirkuk to Ceyhan, a Turkish port, was designed to handle 1.6m bpd but at present can cope with only 300,000 bpd. Another pipeline through Saudi Arabia was closed by the kingdom after Iraq invaded Kuwait in 1990; it has reportedly just reopened.

Even if all these issues of law, politics and infrastructure can be managed successfully, however, Iraq will face one more hurdle: pairing its production with international consumers.

For decades, the Opec cartel has operated on the assumption that Iraq would produce 3 million bpd or less. The International Energy Administration estimates that Iraq's share of Opec crude oil production will increase from 11.69 per cent in 2015 to a remarkable 15.76 per cent in 2030. Such a rapid increase in share has rarely been seen, and will surely bring with it some market disruptions.

 

Thomas W Donovan is an attorney at the Iraq Law Alliance