In this two-part interview with Bonnie Boyd of Pipeline Newsletter, a monthly newsletter on oil markets and political economy, will explain to us the Iraqi oil law and its implications for both Iraqis and Americans. In part one, she provides us with a primer on the Iraq oil law.
Question: What are the key points of the Iraq Oil Law?
Bonnie: Iraq’s Oil Law should set up the institutions that govern the way that oil is developed within the state. That includes who enters into contracts and who enforces them; where payments go when they are made to the state. The question of how these funds are disbursed is a second aspect of the Oil Law which is separate: indeed, more like a budget bill. Yet whether the government intends to enact proportionate disbursement of oil funds continues to underlie many of the conflicts about this bill.
a. Many of the key points to Iraq’s oil law are similar to those of other oil supplier states. First, the law states that the oil is owned in trust by the nation. This notion is unfamiliar to U.S. citizens, but is more common world-wide than our own system. This provision allows the state to control oil production and to some extent sales. That way, the state can plan the best way to reap the benefits of this precious resource. The oil law also creates a Ministry of Oil; and creates or re-creates the Iraqi National Oil Company (INOC). Most supplier states generally have an Oil Ministry and a national oil company.
b. A key difference in the oil law as compared to other supplier states is the inclusion of a third regulatory body, known as the Federal Oil and Gas Council. This Council has been created mostly for the benefit of autonomous regions. For instance Kurdistan has entered some oil contracts and has others pending, and the Federal Oil and Gas Council gives them the authority to enter into these agreements. The Federal Oil and Gas Council includes the Prime Minister, the heads of the Iraqi Central Bank, INOC, and the Oil Minister. In addition, the FOGC will included three experts that may be non-Iraqi, plus regional and provincial representatives of oil-producing areas. This body would meet to advance regional and provincial oil contracts and approve ownership and transfers of interest in projects. It reports to the Council of Ministers, and is subordinate to the Ministry of Oil--but has approval rights on all contracts. Therefore, it may create some anomalies in power. Perhaps understandably, since oil-producing regions must suffer the inconveniences of oil extraction, non-oil producing provinces or governorates are not included in the FOGC. However, combined with other exclusionary provisions in the law, it may add to the possibility of strife between regions of Iraq.
c. Iraq’s oil law does not contain one standard provision that is recommended by the World Bank and other financial institutions. They recommend that a states’ legislature create an Oil Fund that transparently sequesters oil revenue. For Iraq, whose budget will be at least 90% from oil revenue, this may seem like an extra, bureaucratic step. Yet as other sectors of the Iraqi economy begin to contribute to the budget, such a provision makes more sense. Rapid influx of oil money into state budgets frequently pushes extremely high (sometimes 4-digit) inflation. Sequestration would help keep Iraq’s money supply on even keel. States which do not have a sequestered oil fund also have difficulties with corruption as oil funds disappear. In other cases, co-mingled funds makes it difficult for lawmakers to see the importance and contribution of other areas of the economy that need to be supported, acknowledged, and grown. Historically, an oil fund has to be set up in advance, because once the money is commingled, it requires a miracle to sequester it.
2. At least one draft of this law shows a dispute over the kinds of participation that outside oil companies will be allowed to use within Iraq. The first point of contention is that they will come in at all. Many Iraq nationalists, and international green, and/or anti-war activists are against independent oil company investment within the state, because no other Persian Gulf State allows direct investment within its borders: they extract oil themselves. Self-extraction would mean that union jobs might be preserved, and a structure of employment pass forward from the last regime to this one. This difference in investment strategy enshrined in this bill lends credence to the notion that Iraq’s war was for oil, or for oil companies, or other similar charges. It has never been that simple, but certainly oil remains a major factor in calculating actions and outcomes in Iraq.
In some versions of the Iraqi Oil Law, the “production sharing agreement model,” that most used by independent oil companies, is not allowed. The production sharing agreement, or PSA, has been widely excoriated by environmental or anti-oil advocates in places besides Iraq, but I have never understood why. Simply put, a PSA is a kind of joint venture agreement that allows partners to have less than equal share amounts of the production and operation of an oilfield or oil well. What a production sharing agreement does is allow a maximum number of investors to invest in shares. It maximizes the opportunities for participation in a project, which tends to give a project more money with which to invest.
Most oil contracts start with state ownership of oil, plus a substantial interest for the state in production sharing. The state then retains a fee for the oil extracted plus a share of the operation income. It is then free to sell parts of that share in order to drum up capital. Other partners in the production can own variable amounts of those shares, from 1% on up, but most independent oil companies like to spread their investment and liability in shares of 30% or less (usually less). It enables them to spread the many risks of oil investment, and thus, they invest more strategically.
In contrast, a contract such as a lease-back scheme (which for instance, Iran is floating in order to gain technological investment and capital infusion from oil companies) generally diminishes outside investment. Oil wells take time to develop or refurbish, and once they hit a peak production, the oil company would like to recoup its front-loaded investment—which usually is curtailed by a lease arrangement.
3. The oil law shows a very proper concern by Iraqi lawmakers over the abysmal state of technological advance within the country, in oil extraction, delivery, and environmental effects. The law clearly notes, in many of its articles, that INOC and any visiting oil companies are to use the best practices available; to follow international standards of technical and logistical competence; to share those competencies with Iraq’s experts; and to minimize adverse environmental effects.
Some estimates of initial investment project that an immediate USD 25 billion must be invested in order to get Iraq’s oil back online. It’s probably going to take more money than that, and Iraq has a lot of reconstruction to achieve. Yet the true riches of independent oil for Iraq will not be funds, but managerial and technical capability, the transmission of standards, and so forth.
4. Despite the fact that no Oil Fund is included in the versions of the Oil Law I have seen thus far, many passages properly invoke the need for transparency standards and anti-corruption laws, for both government entities and oil investors. However, this could be strengthened and made more concrete. There are many international standards for transparency which could be invoked, added verbatim into the bill, and thus made mandatory by law. Furthermore, the law does not adequately specify transparency oversight or environmental oversight agencies for the state.
In part two Bonnie Boyd will explain the implications of the Iraq oil law.
Bonnie Boyd has a Master of Arts in Diplomacy degree from Norwich University and writes a monthly newsletter, The Pipeline, on oil markets and political economy. She also blogs for the Foreign Policy Association’s Great Decisions Central Asia blog, and at her own site, Ramblin’Gal. She is currently writing a book on the Baku-Tbilisi-Ceyhan Pipeline.