Iraq delays vital oil law again

Oct. 7, 2009 at 12:34 PM
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BAGHDAD, Oct. 7 (UPI) -- The Iraqi government has again postponed debate on a much-stalled hydrocarbons law until after parliamentary elections slated for Jan. 15, according to legislative sources, further complicating efforts to attract major oil companies to invest in Iraq's rundown oil industry.

That means the government's plans to ramp up oil production to bankroll reconstruction following the U.S.-led invasion of March 2003 have been suspended, a critical setback as the country faces political uncertainty and internal disorder as U.S. military forces withdraw.

The proposed law, which would regulate the all-important oil sector and define foreign participation in what has been a nationalized industry since 1973, has been repeatedly held up for three years.

The main reason has been intense feuding between Iraq's majority Shiites and the minority Sunnis and Kurds over who controls the country's energy riches and how oil revenue should be divvied up.

Two-thirds of the country's known oil reserves -- and probably vast new deposits as yet unexplored -- lie in the Shiite-dominated south.

The other third, in the northern Kirkuk fields, is at the center of an increasingly explosive territorial dispute between the Sunnis and Kurds.

The proposed law is arguably the most crucial piece of legislation currently before Parliament. U.S. Vice President Joe Biden visited Baghdad in mid-September in a vain bid to persuade Iraqi leaders to push the law through Parliament.

The reported suspension of any discussion on the legislation bodes ill for a new Oil Ministry auction of oil contracts scheduled for the first half of December.

Baghdad estimates it needs as much as $100 billion in investment to upgrade the oil industry, battered by years of war and U.N. sanctions, to boost production and open up new fields.

Much of that is expected to come from foreign oil companies that want to get back into Iraq, where before nationalization in 1973 they pretty much called the shots.

Current production is around 2.5 million barrels per day, well below the average output before the U.S.-led invasion of March 2003. The government wants to boost that to 6 million bpd within the next five or six years.

So far, Iraqi efforts to lure Big Oil back to Iraq have been undercut by demands by Baghdad that the oil companies say are too costly and provide them with poor returns.

At the first contracts auction in June, only one foreign consortium -- British energy giant BP and China's CNPC International -- made a deal for the vast Rumaila field in southern Iraq, which has known reserves of 17.7 billion barrels of oil.

The two companies agreed to Baghdad's offer of only $2 for every barrel of oil they produced. The foreign bidders all demanded $4 per barrel, but Baghdad would not budge. BP-CNPC was the only bidder to cave in.

Iraqi officials say the Oil Ministry has lowered its demands for the December auction, although no details have yet been disclosed.

But the absence of an oil law, the growing political uncertainty following the breakup of the ruling, Shiite-dominated alliance, and the danger of renewed sectarian conflict is likely to make potential investors think twice about moving into Iraq.

Still, the Middle East Economic Survey, a widely respected energy industry newsletter published in Cyprus, reported this week that BP and CNPC have agreed commercial terms for a 20-year joint venture that seeks to triple production at Rumaila.

MEES said the plan is to boost output from the current level of 1 million barrels a day to around 2.85 million daily for the duration of the contract, the first major upstream deal between Baghdad and a foreign oil group since nationalization.

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