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PETROL POLITICS
Terms Reached on Oil Revenue Law
Kurds Agree to Redistribution Plan, Much Work Remains to Complete Full Package
06/22/2007 1:45 PM ET
WASHINGTON, June 21 (UPI) -- While Iraqi negotiators have made a major breakthrough on sharing revenue from oil sales, the key issue of exactly how to govern the country's vast reserves is far from settled.

Negotiators from the Iraqi government and the Kurdistan Regional Government will now tackle that issue, having spent the past month working out a law whereby revenue from oil sales -- as well as other income -- would be collected into accounts and redistributed to the federal government, regions and provinces.

But control over Iraq's 115 billion barrels of oil reserves -- the third-largest in the world -- isn't easily decided; arguments that have held up negotiations and threaten approval evolve from the 2005 constitution and, when resolved, will determine who in Iraq has control over developing which oil fields and what access foreign oil companies will have.

The Bush administration has been pressing Iraq to decide revenue sharing as both a semblance of a bone to show for an occupation thus far gone poorly and a potential first step toward interfactional cooperation. The Democratic-led Congress included revenue sharing as a benchmark for success in its recent approval of Iraq war funding. (It should be noted, however, that both sides pressed Iraqi leaders not to pass the revenue-sharing law but the oil law that they mistakenly said would include revenue sharing.)

The negotiators have been holding discussions since August on a package of four bills, including the reorganization of the Oil Ministry and the Iraqi National Oil Company. They approved the proposed revenue-sharing law Wednesday night, KRG Minister of Natural Resources Ashti Hawrami, who led the Kurdish delegation in the talks, told United Press International from a mobile phone in Baghdad.

The law would allocate 17 percent of the revenues to be redistributed to the KRG, after the federal government gets what it needs. Now it must be passed by the council of ministers, which is likely, then the full Parliament.

And that's where the momentum stops, at least for now. The four bills are to be taken up as one package, not individually. The oil law, the common name for the hydrocarbons framework law, was approved by negotiators and the council of ministers in February. But in April, when the Oil Ministry unveiled four annexes to the law -- the breakdown of oil fields under central government versus regional/provincial control -- the Kurds protested and the law was kicked back to negotiations.

"Having agreed to the revenue sharing law, now our focus will go back to the remaining issues of the oil law, which is basically the annexes and the role of INOC," Hawrami said.

Per the constitution, any oil beyond what has already been discovered -- with Iraq underexplored, there is likely a lot to be found -- is given to the provinces and regions to develop. (Kurdistan is the only official region.) But the constitution is vague, and various sides have their own interpretations. The Kurds contend that too many producing and discovered oil fields have been designated to the federal government, via INOC.

"We all want to maximize revenues to the Iraqi people," Hawrami said, adding INOC doesn't have the technical capability to do that, though it deserves a role in the country's oil sector. "We should not tie ourselves down to a single entity and then regret it later on."

Tariq Shafiq, an Iraqi now working from London and Amman, Jordan, as an oil consultant and one of three authors of the oil law, argues for a strictly central control over the country's oil sector with regional and provincial participation in INOC.

He warns that outside the federal strategy the oil will be developed in haste, with provinces overly dependent on foreign oil companies. "They are so embryonic they have no institutions to take on oil and gas development projects," Shafiq said, adding "though the KRG may be approaching it."

Iraq's current infrastructure is in need of repair and modernization after decades of war, sanctions and mismanagement by Saddam Hussein. This could be funded by internal oil revenue as well as foreign investment, which is necessary at some level.

Iraq exports 1.6 million barrels per day of the average 2 million bpd it produces (though it dropped to 1.85 million bpd last week, according to the U.S. State Department). Last year exports brought in $31.3 billion, which funded 93 percent of the federal budget.

With this, Shafiq said, Iraq's reserves could handle a sustainable production level rivaled only by Saudi Arabia.

That's without bringing brand new fields online, which he said a regional/provincial control over the reserves will lead to, causing too much competition with INOC and flooding the oil market.

"Do we need to negotiate adding more reserves?" asked Shafiq, who now opposes the law. He's joined by members of Sunni political parties and the powerful oil unions, among others, who fear the law will allow for overly lucrative contracts with foreign oil companies. The unions, which went on strike for three days this month for a number of reasons including opposition to the law, support only limited foreign investment.

Passage by Parliament, racked by unstable political friction inside a country with a rapidly deteriorating security crisis, isn't guaranteed.

"The pledge by some Iraqi politicians to pass the new oil law by the end of June is not likely to be fulfilled," Greg Priddy, global energy analyst at the business risk consultant Eurasia Group, wrote Tuesday in the firm's Energy Trendwatch. "And Iraqi lawmakers are not expected to tackle this issue until after the parliamentary recess scheduled for the end of July."
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