Royal
Dutch Shell has been quietly working with Iraq’s oil ministry over the
past two years, advising it on how to increase the production of two
oilfields. Under an agreement struck after the 2003 invasion, no one
from the company, Europe’s largest oil group, has set foot in the
troubled country; instead, monthly face-to-face meetings with the oil
ministry have been held in Amman, the Jordanian capital, and weekly
contact has been maintained by video-link.
The
Shell-financed project – and the attention showered on Baghdad –
appears to be paying off: Shell is now negotiating a technical support
agreement in which it will be compensated for helping upgrade
production of producing fields. The oil company will again set up a
team outside Iraq, helping, among other things, to bring new equipment
into the country and training Iraqis in its use.
Shell is one of
several international oil companies – including BP and the US groups
ExxonMobil and Chevron – that have been tapping into Iraq’s oil
industry by remote control.
But now, five years after the
invasion, the oil groups are hoping to take their involvement in the
country to a new level. Baghdad, desperate to increase oil production
yet starved of investment, is starting to dangle what the companies
have been after all along: a chance to develop and later explore what
may be the world’s most promising untapped oil reserves. Indeed, as the
companies gear up for technical support agreements, they are also
registering to pre-qualify for the first bidding round of oil development contracts that are to be offered by Baghdad.
“The [initial projects] were done to work with the Iraqis, get a
feeling for fields and build relationships and knowledge,” says one oil
executive, speaking of the assistance projects provided so far.
With
parts of the global oil industry threatened with nationalisation and
much of the Middle East still closed to foreign ownership of reserves,
access to Iraq, with the world’s third-largest oil reserves, has long
been viewed as a huge prize. Although no decision has yet been made in
Baghdad over the nature of the development or the eventual exploration
contracts that will be on offer, Iraq could prove one of the rare
countries in the region where companies will be allowed to claim
reserves as their own. “This is the big frontier,” says Raad Alkadiri,
a senior director at Washington-based PFC Energy.
According to
the oil ministry, only 27 out of 80 discovered fields are producing in
Iraq, the result of decades of under-investment. A report by Wood
Mackenzie, the consultancy, meanwhile says the scale of Iraq’s
remaining oil resources surpasses allother countries in the Middle
East, including Saudi Arabia, and its high-quality reservoirs ensure
that production costs would be very low.
But
Iraq is also a dangerous frontier. Companies invited to invest in its
oil industry – and satisfy Baghdad’s plans at least to double oil
production from the current 2.5m barrels a day – will be walking into a
political, security and legislative minefield. Their involvement
threatens to exacerbate the sectarian tensions that have torn the
country apart since the US-led invasion.
International oil companies acknowledge that security, although
better over the past year, will still need to improve significantly
before workers are dispatched to Iraq. The weakness of the central
government and its patchy control over the southern part of the
country, home to 80 per cent of proved oil reserves, will also be taken
into account. Perhaps most important, however, is that they could be
entering a country with deep political fissures and lingering anger at
foreign intervention, without clear legislation allowing for foreign
participation.
Despite American pressure and government desperation, a law to regulate foreign access to the oil industry has languished in the Iraqi parliament,
a victim of sectarian disputes, particularly between the Kurds and
Arabs. Frustrated by the delays, and virtually giving up on a
successful outcome, the oil ministry has now invited oil companies to
pre-qualify for development of existing fields and says a cabinet
decision will be enough to legitimise foreign participation. Later
bidding rounds are envisaged for exploration contracts.
Officially, companies say they will insist on having new
legislation in place before investing the billions of dollars that
would be needed for development and exploration. Yet the absence of a
law is not preventing them from embarking on negotiations.
“The
companies are positioning themselves; they’re playing the game and the
oil ministry is trying to create a game for them to play,” says Mr
Alkadiri. “Of course you can hit a whole set of problems and the
companies are aware of that and they will factor it in. But [outside
Iraq] there are no such reserves in an unexplored territory.”
Adding
to the complications is uncertainty over who has the rights to sign
contracts in Iraq. The Kurdish regional government, based in Irbil,
claims that the constitution gives it power over its own resources
within the borders of Kurdistan, while the government in Baghdad
rejects this claim completely. It insists it has the sole
constitutional authority to dispose of Iraq’s oil resources.
A
further difficulty is that oil is unevenly distributed throughout the
ethnic regions of Iraq, with resources concentrated in the Shia south
of the country and the Kurdish north. The minority Sunni Arabs, who
formerly controlled the levers of power under Saddam Hussein, can boast
few oil reserves in their ethnic areas. Their priority in negotiating
in the new Iraq has been to ensure they receive their fair share of oil
revenues.
But the competing expectations of Iraq’s communities
have never been confronted head on, and were sidestepped by the framers
of the constitution, agreed in 2005, by means of ambiguous language.
Specifically,
the constitution’s article 112 says the “federal government, with the
producing governorates and regional governments” should manage oil and
gas, but only from “present” fields. The document’s Article 115,
meanwhile, declares that “all powers not stipulated in the exclusive
powers of the federal government” belong to local or regional
authorities.
The KRG has taken this to mean that the federal
government has the conditional right to manage fields currently
producing, but that a regional government such as itself has the power
to manage exploration and the production from newly discovered fields.
To exploit this loophole, the KRG has passed its own oil law, which
allows it to sign contracts with foreign oil companies. It has signed
such agreements with several (smaller) groups from Norway, Turkey,
Austria, South Korea and other countries in the face of Baghdad’s
objections.
“In the Kurdistan region, there is a constitution and
there is a law. We have two instruments that we can rely upon: the law
and the constitution are a pair, and they’re consistent and in harmony
with each other in our case,” says Ashti Hawrami, KRG oil minister.
Baghdad,
however, has declared the KRG contracts illegal, blacklisting
companies that deal with the Kurdistan region and, more recently,
cancelling export deals with South Korean and Austrian groups that
signed exploration deals with the KRG. This has kept bigger companies
away from the north.
The Kurds’ assertive attitude has heightened
the Sunni Arabs’ attachment to strong central control over the
country’s regions and their inclination towards economic nationalism.
Their political leaders have pressed for the constitution to be
rewritten to strengthen the federal government and reduce the powers of
the KRG.
With no agreement on the constitution, the hydrocarbons
legislation – which would set terms for foreign oil companies along
with an agreement on the sharing of oil revenues locally – was
controversial from the start. After months of wrangling, the Iraqi
cabinet in February 2007 came to an agreement on a draft framework that
did not include revenue-sharing legislation. Even that has not been
passed by parliament.
Moreover, as talks over the oil law have
dragged on, opposition to the production-sharing agreements (PSAs)
favoured by western oil companies, once relatively muted, has grown
among the majority Shia as well – underlining a resurgence in
nationalism as much as a reaction to Kurdish unilateralism.
According
to Hussein Shahristani, the oil minister, the cabinet’s approval of a
draft hydrocarbons law last year made no reference to PSAs, and what
his ministry will offer companies are “model contracts” that would
attempt to balance investors’ expectations of financial return against
domestic political concerns, not least the determination of Iraqis to
maintain ownership and control of oil wealth. Kurdish officials,
however, say the contracts envisaged by Baghdad are PSAs in all but
name.
“What’s happening is that various parties are jostling for
position now rather than reaching agreement on the oil legislation,”
says Yahia Said, Iraq expert and Middle East director at Revenue Watch,
a project at the London School of Economics. “The KRG is trying to move
with as many facts on the ground as possible and the federal government
is trying to show that it’s in control.”
Apotential
flashpoint for the oil dispute between Kurds and Arabs is in the oil
field of Kirkuk, the city that Kurds claim as part of their region but
whose status is to be settled by a long-delayed referendum.
It is to minimise the risk of such confrontation that the US
has put enormous pressure on Iraq’s politicians to agree the
hydrocarbons legislation. Judging it a crucial element for Iraqi
stability, the Bush administration listed the oil law as one of the
benchmarks the Baghdad government was expected to achieve as the US
military surge helped to reduce violence over the past year. Even with
the likelihood of an oil law approval fading, US officials continue to
insist that it is essential for signing oil contracts with foreign
groups.
For international oil companies, the hope is that as the
negotiations proceed over the next year, Iraq’s political and
legislative landscape will gain more clarity. Iraqi experts, however,
warn that the oil law may be dead and Baghdad’s only choice,
ironically, will be to fall back on legislation from the Saddam Hussein
era. Although meant to protect the nationalised status of the industry,
the legislation did not stop the previous regime from negotiating
specific contracts with foreign companies, which were then agreed by
the rubber-stamp parliament.
“The ministry might be able to get
away with [contracts] by leaning on Saddam-era regulations. Saddam
negotiated contracts that were not PSAs [the oil companies’ preferred
arrangement] but with Iraq the only remaining major resource in the
world, companies will have to have some investment there,” says Tariq
Shafiq, a former director of Iraq’s national oil company.
Shut out elsewhere, executives await the end of a long exile
Just
months before US tanks rolled into Baghdad and Saddam Hussein was
toppled, US government officials met allies from Iraq’s opposition and
decided it was in the country’s interest for a new government to open
its oil industry to foreign participation as quickly as possible, writes Dino Mahtani
The
so called “Oil and Energy” working group of the US state department,
which met four times in 2002 and 2003 and included influential Iraqi
exiles, had put forward the idea as a crucial plank in Iraq’s postwar
reconstruction plans. Increased foreign participation in Iraq’s oil
industry, members argued, would help revitalise its most important
economic lifeline – ravaged by years of neglect and underinvestment
under Saddam’s regime.
But it would also get US oil companies
close to Iraq’s reserves, which remain significantly under-exploited
compared with those of other big producers and, according to some
geologists, could hold the world’s largest deposits, surpassing even
those of Saudi Arabia.
The Middle East has largely been
off-limits to international oil companies ever since a wave of oil
industry nationalisation swept the region, starting in the 1950s. In
Iraq’s case, the military coup that forced out the British- and
US-backed royal family in 1958 was followed by the gradual takeover
over the next 14 years of the Iraq Petroleum Company, previously a
concession that gave ownership of Iraq’s oil reserves to a consortium
dominated by US, British and French interests.
Access to Iraqi
oil today would give western oil companies an important foothold in the
Middle East, home to about 60 per cent of global oil reserves, at a
time when resource nationalism is on the rise and companies are having
trouble finding new oil reserves to replace those they exhaust. The
reserves they claim are a main determinant of their stock prices.
Western oil executives had long been impatient with the
reluctance of Middle Eastern countries to open up to foreign
participation. This was summed up in 1999 by the US vice- president
Dick Cheney (below), then a director at the oil fields services company
Halliburton. “Even though companies are anxious for greater access
there, progress continues to be slow,” he said in a speech to the oil
industry.
After
the US invasion, American officials collaborated closely with their
Iraqi political allies and oil industry executives. Many members of the
Oil and Energy working group had pushed for production-sharing
agreements to be introduced in Iraq after the invasion. These
arrangements would allow companies to claim a share of the reserves
produced as their own, at least for accounting purposes. In effect,
such contracts would amount to a significant step in reversing Iraq’s
nationalisation process.
The oil industry was well-placed to
lobby for such an arrangement. After the invasion, former executives of
big multinationals acted as consultants to the new Iraqi oil ministry.
The US then hand- picked oil ministry officials under the coalition
provisional authority, which eventually handed over to the interim
government of Iyad Allawi. This in turn advocated partly privatising
Iraq’s oil industry. When a transitional government came into place,
the US backed Ahmad Chalabi – a man who famously said in 2002 that “US
oil companies will have a big shot at Iraqi oil” – to chair Iraq’s
Energy Council.
Today, however, the openness of Iraq’s oil
industry to foreign participation is still in doubt, not only because
of the security situation. Iraq has no national oil law in place. Its
constitution is vague about the degree of control regional governments
can exert over oil policy.
Iraqi officials know they will have the power to dictate terms
to foreign oil companies. “Iraq is definitely in the driver’s seat.
They [the government] know they have one of the most prolific resources
left in the world,” says Bob Fryklund, vice-president of IHS, the
international consultancy.
Energy producers such as Russia, Venezuela and Algeria have
typified a new wave of resource nationalism, in effect expropriating
foreign ownership of oil projects. In Libya, another country whose oil
industry has only just opened up to foreign participation after years
of sanctions, the government has now increased its take from all oil
projects to an average of 95 per cent, from 81 per cent in 2000. Even
in Kurdistan, where the regional authority has signed
production-sharing agreements, the government’s take of future oil
produced is estimated at 87 per cent, says Mr Fryklund.
Oil
industry executives say their companies will not invest if they do not
get a significant part of “the upside”, industry jargon for expected
increases in production. But Tariq Shafiq, a former director of Iraq’s
national oil company, says companies would be prepared to accept
variations of service contracts that pay companies fixed returns rather
than rewarding them with control over reserves.
“Given how
prolific Iraq is, the return to international oil companies [under
service contracts] would be just as favourable as under investment
[contracts]. And I believe the companies are aware of that,” he says.
