Iraq and Gulf Analysis

Archive for August 25th, 2009

The Second Licensing Round for Iraqi Oil: Political Aspects

Posted by Reidar Visser on Tuesday, 25 August 2009 19:01

Iraqi oil ministry officials have returned to Istanbul for another road show promoting a bouquet of Iraqi oil fields for international oil companies. In contrast to the previous licensing round, the fields now on offer include partly developed and previously undeveloped “green fields”. The actual bidding is expected to take place in December.

The legal problems concerning the proposed deals are the same as those involved in the first licensing round: Iraq has no oil and gas law, and the constitution has still not been revised in accordance with the one-off revision mechanism that was added to the new Iraq charter in the last minute to make it more palatable for voters in the October 2005 referendum.

On the other hand, there could be greater support for the proposed contracts in at least some circles within the Iraqi oil sector (which formed an important part of the opposition to the first licensing round). Many Iraqi oil experts are not opposed in principle to a degree of foreign involvement in the country’s oil sector. Rather, in the case of the first licensing round it was the particular constellation of cornerstone oil fields and a very long timeframe that drew substantial opposition even from high officials inside the Iraqi oil ministry. Also, since the first licensing round, the oil ministry has apparently employed a stick-and-carrot approach towards the South Oil Company (where much of the opposition was based), involving the replacement of its head (the new chief is Dhiaa Jaafar) but also the withdrawal of two gas fields from the ongoing stoppage-time phase of the first licensing round, and the exclusion of the Siba field near Basra from the second round – all of which are now likely to be developed with Iraqis rather than foreigners in the lead.

But the main headache for foreign companies contemplating prospective contracts with Iraq must be that they cannot possibly know what kind of Iraq they are entering, and what the parameters of the country’s oil industry will be in the future. Why? Because people at the highest level of power in Iraq evidently don’t know. Recent (15 August) comments by Daawa politician Ali al-Adib illustrate this point. In an interview with the Akhbar al-Iraq news agency he reportedly stated that the position of the Daawa party on the contested status of Kirkuk is crystal-clear: the province should be transformed into a standalone federal entity (i.e. the existing governorate should have its status elevated to that of a federal region). This is a highly specific but also a highly controversial stance. While it is supported by voices in the international community (notably the International Crisis Group), much like the various Biden plans for Iraq it is problematic in several different ways – partly because it implicitly posits an elite hijack of provisions for federalism in the Iraqi constitution that originally were supposed to guarantee a bottom–up process based on local, popular initiatives, and partly because it would involve a multiplication of federal entities in Iraq at a time when the popular trend appears to be towards limitation of the concept of federalism to Kurdistan only.

It seems unlikely that Adib enjoys the full support of the entire Daawa party in this proposal, and it is interesting that his statements should transpire at a time when he was said to be involved in a leadership struggle within the Daawa, possibly as a challenger to Maliki (ISCI media made much of this during the last-minute negotiations of the new, “national” Shiite alliance). But first and foremost this all serves to underline the problematic nature of the recent assurances by the Iraqi oil minister, Hussein al-Shahristani, to the effect that international oil companies should expect the next Iraqi government to take an identical approach to the current one when it comes to the oil sector. Quite the opposite appears to be the case: Even within the circle of centralisers around Maliki there seems to be fundamental disagreement on how key issues like state structure and “disputed territories” should be approached in the future. The oil ministry itself, normally considered part of this centralist trend under Shahristani’s leadership, recently reiterated its non-recognition of deals cut between the Kurdish regional authorities and foreign firms, threatening to exclude China’s Sinopec from future deals in Iraq after its purchase of the smaller company Addax which is operating in Kurdistan.

Few international oil companies know more about the business implications of this kind of problem than the Norwegian company DNO which is also involved in controversial deals with the Kurdish regional authorities. In a recent statement to the press, the company revealed that its operations in Kurdistan are going according to plan, with increasing exports, except for one small problem: So far no one is paying them a dinar for their efforts.

Posted in Iraqi constitutional issues, Oil in Iraq | 3 Comments »