Iraq oil law will deter foreign investment

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Iraq desperately needs foreign investment in its oil industry, but experts say the current law is standing in the way.

Iraq's draft oil law has gaping holes that must be filled before multinationals will invest their capital or technology, one of its authors said on Friday.

Tariq Shafiq, together with two other oil experts, spent months last year drawing up the rules Baghdad hopes will lure major oil companies that have waited for years to tap the world's third-biggest oil reserves.

The law, which parliament could pass by the end of this month, has been threatened by Kurds in the north who say they are not getting their fair share.

"Technically, the law leaves much to be desired," said Shafiq, a founder of the Iraq National Oil Company (INOC) in 1964. He left Iraq a few years later and returned in 2003 after the U.S.-led invasion ousted Saddam Hussein.

"Why would a respectable major oil company go to Iraq? If they get a contract, what would they use it for? They can't operate under the current circumstances and this is neither in the interest of the companies nor the country."

The biggest problem is the federal versus the regional government of Kurdistan and, even after months of wrangling, the legislation before parliament can offer no protection to a company that has only secured a regional deal.

"There are many procedural things that can go wrong -- and that will cost time, effort and money," said Shafiq, who directs oil consultancy Petrolog & Associates.

Backed by Washington, the law is vital to securing the billions of dollars needed to boost Iraq's oil output -- now stuck at 2 million barrels a day -- and rebuild its economy.

But some of Iraq's law-makers still resent the British, U.S. and French companies that controlled their oil industry for half a century through the Iraq Petroleum Co (IPC).

From the time it struck oil at the huge Kirkuk field in 1927 until nationalism forced it out in 1972, IPC -- made up of BP, Exxon, Mobil, Shell, CFP (Total) and Partex -- was in charge.

Shafiq said Baghdad should not let foreign companies regain the upper hand.

"We learned our lessons from the concession era before nationalisation in the 1970s. We lost a lot of money and the draft law calls for a newly-created INOC to control the country's coveted, already-producing oilfields and creates a federal oil and gas council, which will be the ultimate policy-setter.

Shafiq said the oil and gas council, which would draw representation from across the regions, would lack the required managerial competence to run an industry battered by years of chronic mismanagement, wars and sanctions.

"The decision-making process has got to be corrected," he said. "You can't ensure capable management and decision-making from them."

As for INOC, Kurdish officials say annexes in the draft are unconstitutional because they wrest oilfields from the regions and place them under a state firm.

Politics aside, Shafiq said some of the oil legislation was ambiguous. Its terminology and style of agreements lack clarity.

"We must be clear and honest about what type of contract we want," he said.

Major oil companies -- keen to get drilling, especially in southern oilfields such as Bin Umar, Majnoon and West Qurna -- could have their own reservations about the terms.

Shafiq said these already-producing fields earmarked for INOC should be awarded by the national company on terms similar to those on offer in neighbouring Iran.

"These are known, producing fields. The risk is gone. I strongly believe they should be service contracts," he said.

Oil companies regard this type of short-lived deal as too restrictive. They prefer production-sharing agreements that span 20 to 30 years and give them more control.

What Iraq desperately needs from the international oil companies is their technical expertise.

"That's the strongest card they have," Shafiq said. "Middle East producers today need technology, not capital."

When passed in February by Iraq's cabinet, Shi'ite Prime Minister Nuri al-Maliki hailed the draft oil law as a pillar of Iraqi unity.

But Shafiq was doubtful. "It's very difficult to predict whether the oil law will pass or not. If I were to make a guess -- perhaps it will after an uproar," he said.

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