No law for oil

At the beginning of July, 23 out of
the 37 members of the Iraqi
cabinet voted to approve a draft
oil law, sending it to parliament
for approval.The minister of planning
announced that he would resign if the
bill passes, while a member of the
parliament’s energy sub-committee
didn’t wait and resigned immediately.
Many other MPs expressed misgivings
but, dependent on massive US military
support, a government that barely
governs the few square miles of the
Baghdad ‘green zone’ plans to tie up Iraq’s
most valuable national resources in
contracts that run for decades.

The government and parliamentary
opposition to the oil law is symptomatic
of disaffection and uncertainty within the
new political establishment, and a
reflection of much wider anger across the
country over what is seen as an act of
plunder.The Wall Street Journal reported
that George Bush had phoned Iraqi prime
minister Nouri Al-Maliki personally to
thank him for the cabinet’s approval of the
draft.The US, Britain and the IMF have
been applying relentless pressure every
step of the way in order to have a
package of oil laws passed and to prepare
the legal grounds for a corporate
takeover of Iraq’s oil resources.

Weakening the Iraqi state

This diplomatic and economic pressure
is backed by a series of US ‘benchmarks’
– requirements that, in effect, threaten to
remove the Maliki government if it fails
to oblige or, at best, leave it to its
miserable fate in the face of growing
militant opposition.These requirements,
supported by Congress as much as by
Bush, include passing the oil laws. By
arming tribal militias – a policy that is not
confined to Sunni areas – the US has
further ratcheted up the pressure on the
Maliki government and the rest of the
political establishment.

US insistence on the oil law demonstrates
that its priority remains one of securing oil
and oil rights for international capital.The
US is therefore following a two-pronged
policy of attempting to establish a central
government that is capable of securing these
rights while, at the same time, ensuring that
the newly reconfigured state has no
independent ambitions to control the oil
resources and use them to pursue its own
path of development and reconstruction.
The weak, sectarian and fractious Maliki
government has proved to be just what
the US needs at this time: one that is
willing to acquiesce in US military
offensives and to pursue the handover of
oil to the multinationals, while at the
same time applying the harsh economic
policies dictated by the IMF, particularly
over the domestic price of fuel.

The latter measure includes jacking up
fuel prices considerably – which accounts
for most of the overall inflation rate of 70
per cent in 2006.These measures,
supposedly designed to stimulate greater
efficiency and fiscal prudence and stop
corruption, have achieved none of these
aims. Nor have they prevented the
outright theft of oil, which is funding
criminal gangs and militias. But they have
served to prepare the domestic oil sector
for the coming privatisation by bringing
domestic oil prices in line with export
prices.This has caused massive distress in a
country whose main electricity power
generation and distribution infrastructure
has already been smashed by war and the
destructive outcomes of the occupation.

Dividing up the spoils

The oil laws currently before parliament
include two separate bills.The main law
concerns the future management of the
country’s oil and gas resources, while the
second deals with the allocation and
distribution of national oil revenues.The
main draft oil and gas law calls for the
development of these resources through
‘production sharing contracts’ with
foreign oil companies.This has been met
with stiff opposition among the Iraqi
public, including the Iraqi Federation of
Oil Workers, other trade unions, the
majority of Iraqi oil industry professionals
and political opinion outside parliament.
In response, the ‘production sharing’
terminology has been dropped from later
drafts of the law but the content remains
the same.

The supporters of these types of
contracts are largely those associated with
the sectarian and ethnically chauvinistic
political blocks allied with the US, who
are seeking to strengthen their hold over
Iraqi politics and state institutions.They
want the rapid exploitation of resources to
generate the highest revenues in the short
term, but have not shown any interest in
attempting to achieve better use of oil
resources for development, nor in
rehabilitating and strengthening the
national oil industry. Instead, they appear
to be most concerned with strengthening
their political control, building their client
social bases, and cementing their
international alliances.

These sectarian politicians are now
vying with each other for the rights to
sign contracts with oil multinationals, with
various fees, royalties and other dubious
payments and benefits written into the
small print. Since these serve to benefit
particular fiefdoms and client groups,
there has been a great deal of wrangling as
to who has the right to negotiate and sign
oil contracts, whether it is a regional or
provincial government or a national
institution.

The Kurdistan regional government
asserts its own right to sign, and the draft
law effectively endorses the production
sharing contracts it has already agreed
with small foreign companies. In contrast,
the dominant government block of Shia
sectarian parties has been asserting the
right of the central government to sign
most oil contracts, but only after
conceding wide prerogatives to the
regions and the governorates.Through
their inability to project a wide national
appeal, these parties have acquiesced in
the separatist aspirations of the Kurdish
militia-based parties.They have endorsed
contentious, vague and contradictory
articles in the 2005 constitution that are
being interpreted to give regions and
governorates the rights to manage
hitherto unexploited oil, and that place
local and regional law above national law
in many vital areas and in a manner that
would inevitably lead to the
fragmentation of the country.

It is paradoxical that the oil law is being
pushed so urgently while the relevant
articles of the constitution upon which
the law rests are now under review. But it
is no surprise, given that the inept, USsupported
government has consistently
appeased warlords and self-styled
claimaints to communal leadership,
oblivious to any sense of a national
interest or consistent policies for national
resource management.

The constitutional provisions are
reflected in the draft oil and gas law,
which allocates managerial responsibility
to the national oil ministry and operating
responsibility to a national oil company
only in the case of already operating
fields.The right to award contracts for
other fields and for unexplored areas of
the country is given to regional and
provincial authorities. But these lack the
technical expertise and institutional
structures that have been established in
the ministry and national oil companies
over many decades.

Given that the vast majority of Iraq’s oil
resources lie in unexploited fields, and that
there is significant potential for oil to be
discovered in new areas, the practical
implication of these measures is that the
majority of Iraq’s oil resources are to be
surreptitiously privatised and handed over
to multinationals under the guise of
decentralisation and benefit-sharing.The
bizarre resource management arrangement
under the draft law simply means that the
regions will be competing with each
other to award contracts to multinationals,
with the benefits flowing to corrupt local
elites and the multinationals themselves.

It also means that Iraq’s oil industry will
be fragmented and is likely to remain an
extractive industry without a clear organic
link between plans for crude oil production and downstream
activities of refining and petrochemical
industries, and without integration with
the country’s power sector requirements.
The country’s oil services industry and its
project management capabilities will be
set back and are likely to be liquidated
through a credit squeeze and privatisation.

Private oil: future and past

The stated intention of the oil law is to
subject the industry to ‘market principles
and techniques’, a euphemism for strict
financial measures that accentuate the
advantages of powerful multinationals over
an industry already weakened by decades
of war, sanctions and a haemorrhage of
skills and capital.

Alongside this, a PR campaign
deprecating the national industry is under
way. It ignores the major achievements of
the public sector, coupled with claims of
great efficiency and reformed
reasonable business behaviour by
the multinationals.Yet these fly in
the face of the historical
experience in Iraq and elsewhere –
which includes a record of political
subterfuge by companies that are
integral to US strategic objectives,
and which remain highly
influential in US and western
politics.

The weaknesses of the Iraqi oil
industry are allegedly inherent to the
public ownership and management of the
country’s natural resource. However, Iraq’s
own experience is one of terrible
mismanagement and high-handedness by
the foreign oil companies in their dealings
with the country. An international
corporate oil consortium had a monopoly
over Iraq’s oil for 50 years, during which
time it developed Iraq’s oil industry only
very slowly, keeping it largely as an
undeveloped reserve.

That oil consortium, which included
BP, Shell and Exxon, enjoyed 50 years of a
75-year exclusive concession, during
which time it did not build a single
commercial refinery in the country.The
consortium flared all the gas that was
produced with oil, and kept Iraq without
an indigenous oil services industry and
with only a very limited infrastructure for
transport and distribution. It made
phenomenal profits, as Iraq’s oil
production costs were only a few cents a
barrel, and very little attention was paid to
environmental and social costs of oil
production.

For decades, the oil consortium resisted
Iraq’s attempts to establish its own
industry alongside the foreign one.When
the main concession was nationalised in
1972, Iraq’s oil reserves were estimated to
have been about 34 billion barrels.Within
a little over 10 years, the nationalised
industry trebled the country’s reserves and
expanded the infrastructure, production
facilities and export networks, as well as
developing substantial refining and oil
related industries. Massive investments
were made in the oil sector, and for the
first time the industry began to be
integrated in a real and physical sense
with the rest of the Iraqi economy.The
level of competence of the nationalised
industry was reflected in the
reconstruction achievements after the
bombardment during the 1991 war.

Over the past three decades and more,
the Iraqi oil industry was managed under
severe political and physical strains, with
oil resources remaining under Iraqi
sovereignty.The role of foreign companies
during that period was substantial, of
course, especially in the major
developments, but it took the form of
short-term development and service
contracts in which the companies had no
control over the country’s oil resources. In
other words, the country could, in
principle, manage the oil sector in ways
that would serve its long-term
development advantage.

The draft oil law would change this relationship
completely, and begin the process of
handing Iraq’s oil resources back to
foreign companies under long term
contracts that would be governed outside
the Iraqi court system.These would bind
future Iraqi governments for decades to
come, and would take effect under terms
that are bound to be iniquitous for a
country that is under occupation, wracked
with corruption and in a state of chaos.

The US and British governments
portray the oil law as one that brings
about modernisation and equity among
different Iraqi communities.This is a
fictional reconstruction.The effect of the
proposed distribution of oil revenues will
be to prevent the possibility of state-led
development programmes from emerging.

As many resources as possible are to be
allocated directly towards consumption,
without enabling the development
of an infrastructure for productive
activities.This way, Iraq’s oil
revenues will be captured by
influential, corrupt and external
agents. Despite Iraq’s potential
wealth, this will most likely form
the basis of a weak unproductive
economy that remains subservient
to oil interests and imperial power.

Apportioning oil revenues
according to formulae that are
neither economic nor functional, but
instead sectarian and regional, is a
dangerous policy. Similarly, allocating
rights to sign contracts as the local
prerogatives of warlords and self-styled
ethnic community leaders is divisive and
damaging.

The oil law threatens Iraq’s integrity
and future stability. Extreme
interpretations of the law, such as those of
the Kurdish warlords, are especially
destabilising.Yet the US continues to play
on the prospect of fragmentation and
chaos to push through the
denationalisation of Iraq’s oil resources.

Kamil Mahdi is senior lecturer in Middle East
economics at the University of Exeter, a fellow of the
Transnational Institute and author of Oil and Oil
Policy in Iraq (Pluto Press, November 2007)