The new position is a shift for the U.S. government, or at least a nuance in its stance, which has pressed hard for a new hydrocarbons legal regime and condemned deals signed between a regional government and private firms -- especially when it’s an American company.
“We would prefer these laws to be passed before any deals are signed,” Deputy Assistant Secretary for Near Eastern Affairs Lawrence Butler told United Press International. “However, in the absence of passage of the hydrocarbon law, Iraq as a sovereign state can continue to use the Saddam-era laws to manage the sector in the meantime.”
It’s not clear what effect the U.S. stance will have on the international oil industry, salivating at the prospect of entering the third-largest oil reserves in the world, as Iraq’s Oil Ministry says it will not wait forever for a new law before signing deals.
Iraq is underexplored and experts predict the country's reserve totals could be twice as much as the 115 billion barrels that have already been found.
Iraq’s Kurds, who control territory covering less than 1 percent of Iraq’s proven reserves, are signing oil deals to explore and develop an oil sector of their own, which Washington sees as exacerbating the already weighty wedge in Iraqi national politics.
“We have many opportunities to excite you,” KRG Natural Resources Minister Ashti Hawrami told UPI recently when asked what the "sales pitch" is to international oil firms. “And if you don’t come forward now, you will lose.”
India’s Reliance Industries will apparently be the latest to sign a production-sharing contract with the Kurdistan Regional Government. A company official confirmed the two are in end-stage talks for two exploration blocks, the global energy information firm Platts reports.
The KRG has signed nine deals since the fall of Saddam, most of which have been called “illegal” by Baghdad, which considers the Kurds’ unilateral moves unconstitutional.
Security is a major factor, but top officials from international oil companies told UPI on condition of anonymity they’re waiting for a law detailing their rights as investors before entering the Iraqi oil scene.
The sector is nationalized now and many Iraqis -- including the stronger workers’ unions -- fear opening it up to international investors will squander their resources.
The most recent draft of the hydrocarbons framework law, which is stuck in Parliament’s Energy Committee, would ease some restrictions. The production-sharing contracts, however, are controversial. The darling deals of the international oil industry, PSCs allow companies to recover their total cost for exploration and development, and then split oil proceeds after that; the percentage of that split is what drives Iraqi concerns. The company can include the reserves on its books, bolstering its value.
The law is also held up by disagreements between the KRG and Baghdad over how decentralized control over the oil fields and exploration blocks will be.
Separate laws governing revenue sharing, the Ministry of Oil and the Iraqi National Oil Co. round out the hydrocarbons package but are further behind than the oil law.
Iraqi Oil Minister Hussain al-Shahristani told potential investors at an Iraq oil conference held in Dubai nearly two months ago there is no “legislative vacuum” in Iraq. He said if there is no national oil law, the ministry would begin implementing its strategic plan for Iraq’s oil and gas reserves using the Saddam law.
The KRG passed its own oil law in August, which the region says the 2005 Constitution allows for, another dig at the slow pace of the national oil law.
Since passing the regional oil law it signed three production-sharing contracts: Heritage Energy Middle East Ltd., a subsidiary of the Canadian company Heritage Oil and Gas, and Perenco Kurdistan Ltd., a subsidiary of Perenco S.A. of France, earlier this month; Dallas-based Hunt Oil Corp. on Sept. 8.
The Hunt deal row spread to Washington, as the State Department became vocal and members of Congress raised red flags.
Prominent congressional committee chairmen have sent letters of query to the State Department, White House and Hunt Oil, asking what the government knew about the deal and what it told Hunt before it signed.
President Bush said he “knew nothing” but is concerned if it “undermines” national law efforts.
The State Department said it tells companies that approach it that such deals widen the gap between the federal government and the KRG, delaying resolution on a national package of laws governing the hydrocarbons sector.
Hunt Chief Executive Officer Ray Hunt told The Wall Street Journal there were no conversations with the U.S. government prior to signing the deal. The company admitted to the meeting after being confronted with internal State Department documents obtained by UPI that revealed a meeting in Irbil, the KRG capital. According to the document, the department gave Hunt its “do not sign” talking points.
Aside from monkey-wrenching U.S. plans to prop up a strong and stable central government, the department says companies signing deals with the region without a national law will be on shaky legal grounds.
“We continue to advise companies from outside of Iraq that they incur significant political and legal risk in signing any contracts with any party inside of Iraq before a national law package is passed by the Iraq Parliament,” the State Department’s Butler, who oversees Iraq policy, told a U.S.-Arab policymakers conference last week.
It appears most of the international oil community is listening to the State Department, especially the majors, fearing a deal with the KRG will blacklist them from the rest of Iraq’s black-gold bounty.
“We continue to encourage Iraq’s political leaders to agree on the passage of a national hydrocarbon law and companion legislation,” Butler told UPI. Washington says such a law will ease tensions and lead to reconciliation, and has been pushing the law and Iraqi legislators behind the scenes for years.
But if Baghdad joins the KRG in signing oil deals without a nationally approved strategy for the oil sector -- regardless of each government’s claim the Constitution allows it -- and international oil companies rush in, it could cause chaos in the Iraqi oil sector, exacerbating an already tense political standoff.