By Ronan McGee – Oil is pivotal to the long-term stability and prosperity of Iraq. Its estimated 115 billion barrels are the world’s third largest proven oil reserves, and Iraq hopes to raise its present output of 2.5 million barrels per day to 6 million barrels per day. Such efforts will likely be accelerated as foreign oil companies are beginning to work with Iraq to develop its oilfields. The revenue procured from oil production is largely responsible for financing Iraq’s reconstruction, and will continue to facilitate the country’s emergence as a major regional power.
When the Iraqi constitution was passed in 2005, it was deliberately vague on the issue of oil ownership and revenue sharing. The constitution currently grants the federal government exclusive power over the management of oil and gas in cooperation with the regions and governates, and affords the latter two “an equitable share of the national revenues sufficient to […] their resources, needs and the percentage of their population.”
An oil law was therefore proposed to clearly define and set the terms for foreign investment in the Iraqi oil sector and regulate revenue distributions. The so-called hydrocarbon law, however, has remained deadlocked in parliament since 2006 due to conflict over questions of centralization and private sector involvement. Nevertheless, a revenue-sharing agreement was drafted in June 2007 affording the Kurdistan Regional Government (KRG) 17 percent of oil revenues in exchange for all proceeds from oil production in its territory being strictly directed towards Baghdad. It was also agreed that the latter would have the sole responsibility of paying oil companies for their work.
Lacking coherent guidelines on oil ownership, the KRG passed its own Oil and Gas Law, and subsequently began awarding Production-Sharing Contracts (PSCs) to international oil companies. Baghdad agreed in May 2009 to allow the KRG to export oil from the Kurdish region’s Taq Taq and Tawke fields using the state-controlled pipeline running from northern Iraq to Turkey, but insisted that it would be the KRG’s responsibility to pay the companies involved, as all but 4 of the 25 PSCs were not federally approved.
This has recently culminated in a dispute between the central government and Irbil, the capital of the KRG. As it has no independent means of raising revenue, the KRG has been unable to provide remuneration to Norway’s DNO International, Switzerland’s Addax and Turkey’s Genel Enerji, the companies developing the region’s two oilfields. Kurdish officials have therefore called upon Baghdad to bestow payment. Baghdad refuses, arguing that it did not approve Irbil’s independently negotiated PSCs. Instead, Iraqi Oil Minister Hussain al-Shahristani maintains the KRG should use its 17 percent of national oil revenues to pay the companies.
In light of the disagreement, Irbil has suspended all oil exports from the Kurdish region and Baghdad has blacklisted certain companies who circumvent the federal government from conducting business in Iraq.
The dispute highlights the need for coherent oil legislation such as the proposed hydrocarbon law currently frozen in parliament, as the mistrust and uncertainty associated with oil production, revenue-sharing and private sector payment plans raise several concerns over Iraq’s future stability.
For one, a problematic oil sector will not attract the foreign investment Iraq so desperately needs to rebuild its infrastructure. This is especially true given last June’s events, when several major Western oil companies withdrew their bids for Iraqi oil contracts after Baghdad was willing to offer only half as much as demanded (In a subsequent round, however, U.S. oil giant ExxonMobil reached an agreement with Baghdad to develop the West Qurna oilfield).
Furthermore, the Kurdish-authorized PSCs partially pay companies in oil, allowing the private sector to drive up the value of shares. This has resulted in large resentment and outrage by nationalist factions, who perceive such agreements as foreign exploitation and a sellout of Iraq’s natural resources.
Questions also remain on the ability of Irbil and Baghdad to work together in the future, with the oil dispute inflaming already heightened tensions. The KRG accuses the central government of trying to pressure the Kurds into territorial concessions – most importantly the oil-rich city of Kirkuk – whereas Baghdad argues that Kurdish members of parliament are intentionally obstructing the passage of the hydrocarbon law as a “bargaining chip.” Political cooperation in parliament is already strained due to the divisiveness over the new Iraqi election law, which is needed to hold elections in early 2010, and these tensions could adversely affect the necessary resolution of oil policy and implementing legislation.
 Constitution of Iraq, Article 121(3), http://www.uniraq.org/documents/iraqi_constitution.pdf.
 Joost Hiltermann, “Kurdish crude bails out Baghdad,” Foreign Policy, May 13, 2009, http://experts.foreignpolicy.com/blog/3719.
 Charles Recknagel, “Iraqi Kurds Halt Oil Exports In Dispute With Baghdad,” RFE/RL, October 13, 2009, http://www.rferl.org/content/Iraqi_Kurds_Halt_Oil_Exports_In_Dispute_With_Baghdad/1850641.html.