Mortgaging Iraq’s oil wealth

31 January 2007

versión en español

As a “key ingredient” of IMF lending and debt relief, Iraq’s government has just presented a new draft petroleum law to its cabinet that could permit up to two-thirds of Iraq’s known reserves to be exploited by multinational oil companies under contracts lasting for 20 years.

The law could also dictate the future of the country’s oil sector and determine the future shape of the Iraqi federation, as regional governments battle with Baghdad over resource revenues. Approval by parliament is expected in the coming weeks. Quietly negotiated outside of the country by the IMF, government ministers, US officials and multinational oil companies, this policy would be a radical change for Iraq’s oil industry, which has been in the public sector for more than three decades. It would also break from normal practice in the Middle East.

the IMF and World Bank are forcing a policy on Iraq which favours the interests of oil multinationals

The ‘Standby Arrangement’ (SBA) signed between Iraq and the IMF in December 2005 (see Update 49) committed Iraq to draft a new petroleum law by end 2006 to allow foreign investment in the country’s oil industry. The arrangement was signed before the new Iraqi government had been appointed and one week after the December 2005 elections thus denying Iraqi voters a chance to react through the ballot box. It provided a future financing facility, allowed the cancellation of 30 per cent of Iraq’s debt owed to the Paris Club of creditor nations and included requirements for the controversial and sudden slashing of public fuel subsidies. The latter led to a hike in fuel prices, subsequent street protests and the resignation of the oil minister. After his appointment in May 2006, the new oil minister, Husayn al-Sharistani, began drafting legislation to govern Iraq’s oil sector.

Provisions of the draft law are based around a system of long-term contracts with international companies – they would invest in infrastructure and operation of the wells in exchange for a significant share of revenues, as well as control over production and development decisions.

The precise details of the draft law are yet to be made public, but most policymakers have referred to a type of contract known as production sharing agreements (PSAs) – the form favoured by multinational oil companies. PSAs are legal agreements, designed to replace a weak or missing legal framework as in the case of Iraq. PSAs have recently generated headlines in Russia for the unfavourable economic deal the government received in relation to the Sakhalin 2 oil and gas project, signed in the mid-90s when the country was undergoing rapid economic liberalisation and political turmoil.

According to Greg Muttitt, a researcher for UK-based oil industry watchdog PLATFORM, “Along with the US and UK governments, the IMF and World Bank are forcing a policy on Iraq which favours the interests of oil multinationals at the expense of the Iraqi people.”

The degree of regionalisation in the control of oil and resulting revenues is crucial to the country’s future stability and national cohesion. While the Kurdish and Shia populations want independent control of their oil-rich territories, Sunni Arabs located in the oil-poor centre of the country want the federal government to guarantee they’re not excluded from the profits. The Kurdish Regional Government has already signed agreements of its own with oil companies which have since been declared invalid by Baghdad.

The UK newspaper The Independent, which obtained an earlier copy of the draft, stated in a January editorial that the draft law was presented to parliament in December 2006 following three consultations – with the US government and major oil companies in July and with the IMF in September. The Iraqi people and parliamentarians were not given the same opportunity to scrutinise it. As late as December, Muttitt asked at a meeting of Iraqi MPs how many of them had seen the draft oil law: “Out of twenty, only one had seen it.”

At a meeting in Jordan, also in December, leaders of Iraq’s five trade union federations — between them representing hundreds of thousands of workers — called for a fundamental rethink of the forthcoming law. They criticised the major role for foreign companies in the draft law and rejected “the handing of control over oil to foreign companies, whose aim is to make big profits at the expense of the Iraqi people, and to rob the national wealth, according to long-term, unfair contracts, that undermine the sovereignty of the state and the dignity of the Iraqi people”. Angry at their exclusion from the drafting process, they called for a delay to the law, to allow proper consultation and public debate. “The Iraqi people refuse to allow the future of oil to be decided behind closed doors”.

Bank-Fund collaboration

The World Bank is also heavily involved in Iraq’s petroleum sector strategy. Appendix III of Iraq’s request for an SBA from the IMF clearly states that the World Bank is the lead institution for sectoral strategies including the petroleum sector. In violation of the World Bank’s good governance and anti-corruption rhetoric, PSAs could prolong and exacerbate poor governance by allowing investors in the oil and gas sector to effectively bypass the weak or absent legal and regulatory frameworks. Heike Mainhardt-Gibbs, consultant to US-based NGO Bank Information Center said “”PSA-driven development of the oil sector stands to make it even more difficult to ensure that the necessary changes will be made to improve overall governance, such as the creation of checks and balances across government agencies and economic and social sectors. Given this potential, the PSA contract model promoted by the World Bank may lead Iraq down the path of the resource curse”.