C.The Battle over
the Hydrocarbons Law
Kurdish officials are buoyant over their success in finding oil and claim that their region’s oil wealth will benefit all Iraqis since the KRG has agreed to share revenues. The president of the Kurdistan national assembly, Adnan Mufti, said, “our oil policy is right. We don’t want to go begging the federal government for help. We want to be economically strong and share our wealth with the rest of Iraq and jointly rebuild the country”.146 Likewise, Karim Sinjari, minister of state for the interior, after complaining that “we want to increase Iraqi exports [by pumping oil in the Kurdistan region], but the federal government says it’s enough”, declared: “We want to rebuild Iraq, but for this we need money. There is not a single good road between Basra and Zakho. If oil exports were to be increased, we could rebuild Iraq for the good of all Iraqis”.147
Such outwardly warm feelings have not been reciprocated by the federal oil ministry, which has taken a dim view of the KRG’s unilateral actions. Oil Minister Hussain al-Shahristani declared the KRG’s contracts null and void, blacklisted companies doing business with the KRG and threatened to do the same with those contemplating similar moves.148 Moreover, he has blamed the KRG for blocking progress on the hydrocarbons law by unilaterally issuing production-sharing contracts and has announced that, in response, the federal government would have no choice but to issue contracts for oil fields under existing law, a Saddam-era legacy that favours the kind of central control over the oil industry that is anathema to the Kurds.149
As stated above, negotiations over a new hydrocarbons law have stalled over deep differences about the state’s economic role, as well as a struggle between rival nationalisms. On one side stand the Kurds. They are pursuing broad autonomy to shake off decades of ethnically based neglect, discrimination and underdevelopment. To accomplish this, they seek the right to extract their own oil without interference from a central state that has historically thwarted their economic self-reliance and well-being. They want a fair share in revenues from all Iraq’s oil and gas but, more importantly, full control over their mineral resources. They do so not only because of the secondary economic benefits of having a full-fledged oil industry (infrastructure, investments and employment), but also because the KRG requires direct control should it seek independence. An energy expert stated:
The Kurds care about owning and managing the oil industry more than about revenue sharing because they want to establish sovereignty and build up a record over time of examples in which the KRG has exercised effective sovereignty and use this as a basis for a claim of independence under international law.150
If and when the Kurds achieve independence, revenue sharing, along with all agreements enshrined in federal law and the constitution, would become moot. As Crisis Group previously argued:
The Kurds have repeatedly asserted that it should not matter who controls the oil fields – the federal government or the KRG – and therefore whether the disputed territories are incorporated into the
Kurdistan region, because the KRG has agreed to transfer revenues from oil sales from fields in the Kurdistan region to the federal government. But although this may not matter today, it will if and when the Kurdistan region seeks or declares its independence: Why would an independent Kurdistan agree to transfer oil and gas revenues to a neighbouring state, Iraq, if these revenues are a key to its own survival?151
The Kurds need a federal hydrocarbons law to gain access to viable export channels. However, they appear willing to do without one, at least for now, if terms are unsatisfactory regarding control and management. Among other objections, the KRG opposes the establishment of a federal oil and gas council empowered to veto contracts and rejects the oil ministry’s proposed annexes classifying producing and non-producing oil fields. It contends that these measures, respectively, would give too much power to the federal government relative to the regions and assign fields to the federal government that instead should fall under the KRG’s control.152
On the other side stands a group of officials inside and outside the federal government who, raising the banner of Iraqi nationalism, express concerns first that the future law will permit a sell-out of the country’s natural resources to foreign nations and companies through production-sharing contracts and, secondly, that the extreme decentralisation permitted by the constitution will spark unregulated competition between federal regions over oil production for export and thus undermine Iraq’s unity.
As the past five years have shown, Iraqi nationalism is a potent force. It has tripped up the U.S. more than once, and it has deep roots. In 1972 it led to nationalisation of the petroleum industry. The resulting law prevented any foreign or private-sector interest from acquiring equity in oil and gas still in the ground. As a result, the oil ministry has issued only technical service contracts since that time. These pay foreign companies a fee for their services rather than a share of the oil they pump. The February 2007 draft law, by contrast, provides for so-called risk-reward contracts, also known as production-sharing contracts (PSCs). These would grant foreign oil companies equity shares of oil produced from the fields as compensation for their investments, their work and the commercial and political risks they assume.153
Although the oil ministry has started to back away from PSCs in light of rising opposition (from trade unions to oil experts),154 both drafts of the federal hydrocarbons law permit them, and indeed the KRG insists on them.155 The KRG and foreign companies each favour PSCs for their own reasons. Companies prefer to be paid in oil because it swells their holdings and thus raises the value of their shares.156 The KRG considers PSCs an indispensable tool for exploration, which is the Kurds’ top priority, having had no development in their region whatsoever.157 The KRG uses the 2005 constitution to argue that Iraq’s nationalisation of oil has been superseded by market principles (Article 112),158 which allow for PSCs, and that the KRG’s 2007 oil and gas law renders contradictory federal laws inoperable (Article 115).159 Moreover, the Kurds say, PSCs enhance performance: a company will seek to increase its oil intake by pursuing maximum exploration, so Kurdistan will receive more oil to export.160 Finally, those favouring PSCs argue they attract the best companies for technology and management expertise.
Critics charge that PSCs are the worst kind of contracts because they lock in fiscal and legal terms for an extended period – 32 years in some KRG contracts – and freeze the political, legal and economic situation that existed at the time of signature; this could have a long-term adverse impact on human rights and the environment and would seriously encroach on the KRG’s, and Iraq’s, sovereignty.161
This critique merges with a second – that the extreme decentralisation permitted by the constitution pre-empts a central oil strategy that would prevent over-development of oil and gas resources. Instead, it spurs unbridled competition by sub-state entities possibly no larger than a single governorate, with the overall result of tearing up the country. As Tariq Shafiq, a former senior oil executive, put it, referring to an earlier draft of the KRG’s oil and gas law:
The KRG draft petroleum law is tantamount to a sovereign act and, in effect, is a move in itself and by its implications that could encourage fast, unplanned, uncontrolled devolution. This will exacerbate these damaging trends by inducing similar provincial moves among the “haves”, opening the way to border disputes with the “have-nots”….. This draft law is not in conformity with the foremost objective of the constitution to preserve the unity of its people, land and sovereignty.162
The consequences of not having a hydrocarbons law are severe. Without a law, oil “super-majors”163 will continue to resist investing in Iraq, however attractive the prospects may be, given the risks of operating in a lawless environment. For its part, the KRG needs access to a strategic pipeline, which only a federal law could provide. Any hope to pump oil straight from the Kurdistan region to Turkey is, literally, a pipedream. Turkey, which will do nothing to promote Kurdish independence, will request an Iraqi certificate of origin for any oil flowing through its pipelines.164 The federal oil ministry will not issue one without a federal law to which the KRG is party.
The problem is pressing – DNO (Tawke) and Addax/
Genel Enerji (Taq Taq) are primed to start pumping – but far from resolved. While rumours have circulated that the federal oil ministry may be prepared to issue an export license in the case of these two companies, because their contracts preceded the 2007 conflict over the hydrocarbons law and issuance of the KRG’s own oil and gas law, there also are signs that under such circumstances, the KRG may rebuff the oil ministry to avoid the implicit inference that its later contracts are illegal.
The KRG’s inability to export will soon be costing it $1.7 million a day ($620 million a year), based on 100,000 b/d at $100 p/b and current budget allocations. This would be extremely damaging to the KRG’s prestige and credibility at home, given pressing needs. It could have the same effect on the federal government, which would be losing $8.3 million a day (just over $3 billion a year) from the same sales. An oil expert said, “the government is cutting off its nose to spite its face”.165 This truth would hit home even harder once both the KRG’s discoveries and its output capacity increase, even at more moderate prices.166
While simple economic calculus would suggest that, as another oil expert said, “it is in no one’s interest to land-lock a million barrels of oil a day”,167 the KRG and federal government are trying very hard to do precisely that. Unable to come to terms, they are unilaterally pursuing diametrically opposed policies that foretell a head-on collision. Both are holding their breath to see who can hold out the longest – the federal government by blocking the KRG’s exports, or the KRG by blocking legislative progress – and both may suffer due to their stubbornness.
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