Sitting on one of the world’s biggest reserves of oil, Iraq continues to be presented with a still difficult-to-answer question — are its vast hydrocarbon reserves an asset or a curse? The country has the third largest proven oil reserves in the world, with an estimated 112 billion barrels. But while Iraq’s oil is relatively easy and cheap to extract, tapping into these reserves is being impeded by political, technological and financial constraints.
In June, eight oil fields were made available in a televised auction, the first major tender since the 2003 US-led invasion. This, however, proved to be a rather embarrassing event as some 41 oil companies that had been invited to bid backed out, including ExxonMobil and other major players. Just one contract was allocated, a 20-year contract to BP and China’s National Petroleum Corporation to develop the 17 billion barrel Rumaila field.
The principal reason for this disappointing result could be put down to the current climate of uncertainty in Iraq amid security and political problems. But in reality, international oil companies were unwilling to bid due to the terms Baghdad offered and the lack of regulatory clarity.
The federal government in Baghdad and the Kurdistan Regional Government (KRG) are still, for example, yet to pass an oil law that provides for revenue sharing, production and exploration of Iraq’s oil. The stalled law is being opposed by the KRG because it gives too much control to Baghdad, contrary to the intentions of the Iraqi constitution. Concerns stem from more than 70 years of financial dependence on Baghdad, tainted by deprivation of both people and land in the Kurdish areas.
The KRG, during the two-year impasse over the proposed law, has enacted its own oil law, developed Kurdistan’s resources (Kurdistan holds an estimated 45 billion barrels of oil reserves), and independently signed more than 20 exploration and development deals. The federal government deems these illegal and void since, it argues, all contracts must be submitted to Baghdad. But the failure to pass the hydrocarbons law has hindered foreign participation in the energy sector and therefore development of Iraq’s dilapidated oil infrastructure.
There is also a level of intricacy surrounding it all. The oil ministry offers international investors a service contract whereby companies receive a fee for the oil that is produced as opposed to a share of the oil itself. In contrast to the terms offered in other parts of the region, oil companies that invest in Iraq will have to be content with a lack of ownership over the oil they produce and an inability to benefit from fluctuations in oil prices.
Then there is uncertainty over the regulatory environment, given the lack of transparency as to whether any deals will be ratified and implemented.
The KRG, however, does provide ownership over physical barrels of oil. Baghdad rejects this model, rendering illegal any contracts concluded pursuant to this format, and blacklists any companies that do so. The tussle is also a legal and constitutional one. Looking at the constitution, Article 111 states that “oil and gas are owned by all the people of Iraq in all the regions and provinces.” Oil and gas ownership, however, is not within the exclusive powers of Baghdad. Articles 115 and 121(2) give regions like Kurdistan legal supremacy on matters outside the exclusive powers of Baghdad. In the absence of any provision explicitly suggesting otherwise, Article 111, or federal government control over oil, is therefore subject to the laws of the Kurdistan region.
In any case, economic realities may force Baghdad’s hand. For example, in May the federal government allowed the export of oil extracted from the Tawke and TaqTaq oil fields, despite oil being extracted from those fields by the KRG in accordance with the production-sharing contracts it prefers. A production of 40,000 barrels per day (bpd) from Tawke and 40,000 bpd from TaqTaq promises to provide a potential $5 million per day (at $50 per barrel).
More than 90 percent of Iraq’s development is dependent on oil revenues. Iraqi Oil Minister Hussain al-Shahristani has been lambasted by the parliament for his ministry’s failings and languishing production, currently 2.4 million bpd and lower than pre-war levels. The country has a dilapidated oil infrastructure in desperate need of rapid reconstruction; its state-owned oil companies are also in need of increased investment and trained staff. Some experts have suggested that more than $40 billion is needed to put oil infrastructure back on track. Pragmatism should therefore pave the way for increased investment.
Strategic nous dictates that international investors make it to Iraq before others, so all eyes will be on the next tender when more than 13 yet-to-invest companies will be invited to re-submit bids for the seven remaining contracts. Investors will also be closely watching the ongoing wrestling match between the KRG and Baghdad.
Ranj Alaaldin is a Ph.D. candidate at the London School of Economics focusing on post-invasion Iraq
