Thursday, November 01, 2007

The Oil Law

Today the price of oil reached $96 per barrel, and the Iraqi government is feeling huge pressure to pass an oil law that will allow Iraq to sign contracts with foreign oil companies.  Also today I received a summary of an article written by an Iraqi oil expert in London.  He sent me the link to his article a few days ago, but I could not translate it, so he was kind enough to find the time in his busy schedule to summarize in English his article about the Iraqi oil law.  His summary is below in blue.

I have been trying to convince the Iraqi parliament to not ratify the law right now for several reasons:

1)       This is the most important law that Iraq can promulgate and comes in terms of importance right after the constitution. This is because almost everything got destroyed in Iraq during three wars, a long period of economic sanctions and now the ongoing present state of violence, destruction, corruption and occupation. Oil is the only asset that remains for the Iraqi people and should not be jeopardized under such conditions with over 4 million Iraqis now living as refugees inside and outside, over and above the millions that left Iraq before the collapse of Saddam's regime.

2)       Oil's importance emanates from the fact that it finances over 90% of the government's annual budgets and is almost the sole source of hard currency that allows Iraq to import food, medicine, manufactured goods and services. Besides oil revenues are used to support the Iraqi Dinar, without which the Iraqi currency will collapse. Also because the Iraqi economy is producing almost nothing of value except for oil, then oil will be the major source of finance to rebuild Iraq and its economy, helped to a smaller extent by foreign direct investment.

3)       There is no need to rush this law and start contracting with foreign oil companies. I gave an example of trying to double the present oil production of 2 million barrels per day (mbpd) to 4 mbpd. To increase production by 2 mbpd using foreign oil companies, their cost will be around $30 billion and will take almost 7 years to complete. In contrast, if the Iraqi National Oil Company (INOC) were to be revived (Saddam abolished it in 1987) then INOC can do the same job at half the cost because there are already 60 fields discovered with huge oil reserves and need only to be developed. Also the infrastructure is already there and it only needs rehabilitation and some expansion to handle the bigger capacity. As a matter of fact INOC has done that in the past, back in 1979, when the production capacity reached 3.9 mbpd with the help of French, Brazilian and Indian companies and using SERVICE CONTRACTS. The foreign oil companies, on the other hand, will have to explore for oil, find it, develop it and also build the necessary infrastructure, and that will take twice the cost and twice the time. Besides, the contracts will be Production Sharing Contracts (PSCs) which mean these companies will share with Iraq in the oil produced and also operation of the fields will remain under the control of the oil companies for at least 30 years.

4)       The Kurds are making PSCs with small foreign oil companies and, so far, have made 9 and their target is 15 PSCs. They want to produce one million barrels per day within 5 years. This is bad for Iraq, because although the Kurdish region is a federal region, Iraq is supposed to be one country and the Kurds should not behave as if they are independent. Since Iraq now has 115 billion barrels of reserves housed in 80 fields, only 20 of them are developed and 60 fields need development and exploitation, then the Kurdish PSCs are redundant if they if they consider the Kurdish region as part of Iraq. The remaining 60 discovered fields must be developed first at much lower cost as I said and without foreign sharing as the Kurdish PSCs dictate.

5)       I also demanded the Article 112 of the constitution be amended because it deprives the federal government from overseeing exploration works, given that what is to be discovered through exploration is more than twice the present Iraqi reserves of 115 billion barrels. All of these future fields are given, according to article 112, to the Kurdish Region (KRG) and to the provinces such as Basrah and Amarah and others. The constitution also gives the Iraqi provinces the right to form regions on federal basis just like the Kurdish region. If this regionalisation and federalisation takes place, then Iraq will disintegrate, and such disintegration will plague the rest of the Middle East. This is true, because there will be disagreements and fights between the regions themselves regarding ownership of the fields, especially since many of them lie in two or more provinces. Also there will be disagreements between the provinces and the federal government, as it is going on now between the KRG and the federal government. Shiites are fighting each other in Basrah, and militias there, together with gangs of crime, are now fighting each other to control as much stolen oil as they can and also control oil smuggling, as reported recently by the International Crisis Group (ICG) after making a visit to the Basrah region.

6)       In a nutshell, I advised parliament to postpone ratifying the oil law until better times because there is no need for it right now as long as INOC can do the job cheaper, better and with no foreign company sharing production and controlling the operations. Also the constitution must be amended in order to avoid disintegration of Iraq.

--Dr. Muhammad Ali Zainy

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