BAGHDAD/DUBAI, 9 September 2005 — A federal Iraq is likely to plunge the country’s vital oil sector into disarray and hamper much-needed investment if decision-making is decentralized, oil officials and analysts said. Iraq’s interim constitution, due to be put to a referendum next month, could lead to several autonomous zones under which a central government in Baghdad would not have complete control over oil resources.
Multinationals would then have to negotiate about developing fields in the country with the third largest crude reserves in the world with provincial governments, which want a greater share of oil revenues, and the central government.
“Unless there is some central control, like a national oil company, there is going to be chaos, especially if preference is given to regional laws that would override federal laws,” said Muhammad-Ali Zainy, senior energy economic and analyst at London-based Center for Global Energy Studies.
Majority Shiites have called for an autonomous region in the south, on which Baghdad has relied almost exclusively for oil exports since saboteurs have kept Iraq’s northern export route nearly idle since the 2003 US-led war. But Sunnis, who lost most of their powers after the fall of Saddam Hussein, have rejected the federal system and threatened to work on failing the draft. Kurds, who emerged as a powerful faction in postwar Iraq along with the Shiites, have enjoyed de facto autonomy in the north since 1991.
“I am against federalism, it will not be good for the oil sector. It will only put it back instead of developing it,” said Shamkhi Faraj, director general of Economics and Oil Marketing. Former senior Iraqi oil official Saadallah Al-Fathi said governorates would be too preoccupied with security and political problems to run the oil sector well. “The governorates are hardly able to take care of their local affairs let alone run an industry and negotiate contracts,” he said from the United Arab Emirates. “I am certain that oil companies have been taken aback by this, but there are some opportunistic companies that are trying to work out an arrangement,” he added.
Analysts said that taking decision-making out of the hands of an experienced Oil Ministry with technical staff, combined with the vagueness of the draft constitution on oil policy, would deal a blow to development of the energy sector. “The constitution does not have a clear, detailed or mature vision about the issue of oil. This is a recipe for chaos,” said Mustafa Alani, an Iraqi expert at Dubai-based Gulf Research Council.
“We will not only lose central decision making in the process but also the question of legislation. Companies will face huge legal problems. If they sign with a political entity, their contract may not be protected in the long term,” he added. The current wording of the charter left the door open to interpretation, competition by various provinces and a weakening of the central government’s role in tapping new oil resources.
“When the constitution says the central government is in charge of currently producing fields, it is already limiting the authority of the central government and we know that currently producing fields are old and not the best of Iraq’s assets, Fathi said. “All the future development would not be in the hands of the central government in a matter of practicality,” he said, adding that the job of developing new fields, standards of negotiation and an oil resource law would be an overwhelming one.
Oil multinationals are waiting until a new investment code with a legal and regulatory framework is in place. International oil firms are eyeing the giant largely undeveloped oilfields. “Unless they are going to be very clear about management and ownership of resources then this will open the doors for delay and discourage international oil companies,” said Zainy. “But if you have a vague constitution and a law which distributes responsibility right and left, then it may be difficult for international oil companies to hammer out agreements,” he added.
Any new policies will be set against the backdrop of growing sectarian tensions. An Iraqi oil official in Baghdad said that in such an environment there was always fear that the distribution of oil would be dependent by the mood of the governors who may stop providing the rest of Iraq with enough oil. Oil exports are Iraq’s sole independent source of hard currency needed for rebuilding after crushing sanctions and three wars in the last quarter of a century.
“They need to recognize the importance of oil revenues to the federal government. It needs not only to rebuild Iraq’s infrastructure but also to plan for economic development, repay foreign debt and finance the government budget which includes allocating money to various ministries,” Zainy said. “For the next 10-20 years the government will depend on oil revenues until Iraq can diversify its economy and become a tax-based economy instead of an oil-based economy. Then it would be okay if oil revenues are distributed but for now dependence will be on oil and they cannot really escape this,” he added.