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The First Licensing Round Gets off the Ground: The Politics of Oil in Iraq

By Reidar Visser (www.historiae.org)
28 June 2009

On 29 and 30 June, major international oil companies are expected in Baghdad for the “first licensing round”, where they will submit bids for 20-year technical service contracts for some of Iraq’s biggest existing oil fields (including West Qurna, Rumaila and Zubair in the Basra area, as well as Kirkuk and Bai Hassan in Tamim governorate) and gas fields in Diyala and Anbar. The awards will be announced shortly after the IOCs have presented their bids.

The awards procedure itself has been designed to be an auction that can be immune against the criticism about corruption and lack of transparency that often accompany no-bid contracts. The oil majors participating have been prequalified and will submit bids indicating simply what sort of rise in production levels they can offer and at what price per barrel. The Iraqis will then, on the bases of purely mathematical criteria, identify those companies that present the best bids. In isolation, at least, it looks good: The IOCs will compete on few and readily-understandable variables directly related to price and output; Iraq will select those IOCs that can provide the best services for Iraq.

Also the very nature of the deals on offer should in principle serve to shelter the licensing round from criticism. For, with the exception of the two gas fields, the contracts pertain to already-producing “brownfields”, and the IOCs will be paid fees for their work instead of acquiring oil shares of the kind associated with the more lucrative “production sharing agreements” (PSAs). For the oil companies, this is like investing in dilapidated real estate with only limited options for making changes to the overall direction of the project – and also with the significant risk of unpleasant surprises (such as technological problems) that comes with investment in old and dated installations. Iraq, for its part, can triumphantly say that it has avoided the politically controversial PSAs, for now at least, while at the same time enhancing the prospect for a much-needed boost of Iraqi oil production, which has been at substandard levels for most of the post-2003 period. Still, it has to be added that the reason many IOCs bother to take part in the contest for these somewhat rusty fields at all is the need to position themselves ahead of possible bilateral negotiations with Iraq for other fields as well as a second licensing round (possibly to be finalised towards the end of 2009, but more likely later) that could offer unexplored “greenfields” with greater potential for serious gains on investments. Here, the PSA debate is likely to resurface.

These positive aspects notwithstanding, resistance towards the deals is now becoming stronger in Iraq. Interestingly, much of the opposition is quite similar to that which transpired earlier concerning the PSA concept: The lack of national Iraqi control, and the scale of sudden foreign involvement in the country’s oil sector. Even if the service contracts in theory should offer the Iraqi government more influence than PSAs, many Iraqi oil experts are concerned that such a huge quantity of oil is offered for such long-lasting contracts (20 years) and with relatively few bidders (only 35 were pre-qualified, some have dropped out, and there is suspicion that others may have agreed anti-competitive measures). The process will take place all at once, and, perhaps most importantly, at a time when no meaningful steps have been taken to reconstitute a national Iraqi oil company. It is feared that even though each individual contract may appear comparatively innocuous, their cumulative effect and the sudden emergence of a high number of IOCs on the Iraqi scene could mean that a fragmentation of national Iraqi oil policy becomes the net result.

What has happened here on the Iraqi side relates to politics. The first licensing round is the brainchild of the oil minister, Husayn al-Shahristani, an independent member of the Shiite-dominated United Iraqi Alliance (UIA) who is thought to have good relations with the Grand Ayatollah Ali al-Sistani. For the past year or so, Shahristani and his independent bloc of UIA members (which also includes figures like Khalid al-Atiyya, the deputy parliamentary speaker) have been important allies for Prime Minister Nuri al-Maliki in his endeavour to push through a centralist agenda in Iraq, which has also involved challenging key partners in the Maliki government that favour a federal or even confederal state structure for Iraq (such as the two biggest Kurdish parties, KDP and PUK, as well as the only decentralist Shiite party, the Islamic Supreme Council of Iraq or ISCI). When it comes to oil, this struggle has been reflected in the fierce battle over the oil law and particularly the issue of central versus regional control of the signing of contracts with foreign oil companies, where Shahristani has been the protagonist of the central government view against strong Kurdish opposition. Indeed, the very menu on offer in the first licensing round seems to reflect Shahristani’s desire to centralise control of Iraq’s oil industry in Baghdad as much as possible and thereby emerge as a nationalist, with key fields in the south and the north included alongside gas fields in two Sunni-dominated regions. (Whilst Kirkuk oil is not disputed as such due to the “already-existing” status of the relevant fields and hence the clear constitutional role of the central government in administering them, the singling out of two oil contracts covering the area near this city seems symbolic in the context of persistent Kurdish demands for administrative control of the area.) In line with this, on 18 June, in the specific context of the licensing round, the Iraqi oil ministry revealed its interpretation of centre–periphery relations in the non-federated parts of Iraq in unabashedly centralist terms: To a request by the Kurdish-dominated provincial leadership in Kirkuk to be consulted with regard to the prospective contracts affecting the Kirkuk area, Asim Jihad, the ministry spokesman commented, “We welcome the comments and point of views from any affected party precisely because it is the goal of the ministry to preserve the higher national interest and put it above any narrow and particularistic interests.” Or, in plain English, the oil ministry would be delighted to receive a statement of the grievances of the Kirkuk provincial government in order that their concerns can be immediately shelved, utterly ignored and entirely subordinated to the ministry’s own plans.

In theory, then, the logical course for Shahristani would have been to ensure strong, centralised and national control of the oil sector, with an Iraqi national oil company and its Iraqi subsidiaries in the lead, and with international companies only as secondary players – perhaps avoiding the major IOCs altogether and having smaller companies doing service work such as drilling and maintenance. In fact, a plan along such lines appeared to be in the making in early 2008 in the shape of no-bid service contracts with a series of foreign companies (albeit major ones). However, this scheme was abandoned for reasons that still seem unclear, but at least partly are thought to relate to Shahristani’s preference for a more transparent process. Another reason for the absence of a stronger Iraqi role in the current policy could be that Shahristani, himself a nuclear scientist with no particular background in the oil sector, has from the very start been on a collision course with many of the existing entities in Iraq’s oil sector, not least the technocrats of the powerful South Oil Company (SOC) which historically handled all the fields in the south of the country. The SOC and the trade unions are traditionally the fiefs of southerners from Basra and the far south who often express a distaste for people from the oil-deficient centre of Iraq telling them what to do, and who, confusingly perhaps, and in a somewhat uneasy coexistence with local regionalist tendencies, on many occasions assert their particularisms in a language that is just as centralist and nationalist as that emanating from Baghdad.

Shahristani’s way of handling this issue has been to attack the SOC by trying to remove influential local bosses (in particular Jabbar Luyabi), breaking up the SOC by establishing new local companies (Maysan; Dhi Qar has also been under discussion), and marginalising it by bringing in foreign hands (most conspicuously in the case of the contract with Shell for gas flaring in the Basra governorate). To the SOC, the avalanche of foreign contracts implied by the first licensing round could be yet another manifestation of this kind of attack by Shahristani, as the company is offered a continued but probably more fragmented role. At the same time, though, opposition from the other end of the scale – decentralisation demands by the Kurds – is preventing Shahristani from making progress on re-establishing the Iraqi national oil company under tight ministry control because the Kurds prefer any centralised entity to be governed by political appointees on a future national oil and gas council and not by ministry officials. Hence, when it comes to the first licensing round, through confronting the SOC while at the same time refraining from getting an Iraqi national oil company back on its feet, Shahristani has actually moved quite far away from the centralist ideals that form the core of the political programme of the “all-Iraq” Shiite Islamists among the Daawa and the UIA independents. Instead, on this issue he now resembles an economic liberalist and even a de facto decentraliser. His moves have been done mostly in the name of transparency, but it seems likely that his concerns about the SOC getting too strong may have influenced his decisions too, directly or indirectly. Still, it should be added that there are other voices in the oil ministry who agree with him simply because of the need to kick-start the Iraqi economy, and it is notable that the northern counterpart of the SOC – the North Oil Company which handles fields such as Kirkuk – in this case appears to be somewhat less politicised, more supportive of the bid round, and in some cases has actually acted as a bridge between the central government and Kurdish interests.

The South Oil Company (SOC) in Basra has become the point of gravity for both nationalist and regionalist opposition to the first licensing round

To the IOCs involved in this, the main question today is probably two-fold: Firstly, will the new deals meet with any significant opposition in the Iraqi parliament? Secondly, if they do emerge unblemished from any confrontation on that scene, will there be lingering legitimacy issues connected with the deals that could create extra-parliamentary protests or even acts of violence or terrorism against the IOCs and their staff in Iraq? With respect to the parliamentary situation, the frontlines are beginning to crystallise. For a long time, ISCI was allied with the Kurds in attacking Shahristani from a decentralist position; however, the ongoing effort to re-establish the UIA with a more “national” appearance (a project strongly favoured by ISCI which lost badly in the January local elections) would be hurt by continued opposition along these lines, not least because some of Shahristani’s allies, such as Khalid al-Atiyya, seem to share ISCI’s preference for making the “new” UIA a Shiite-led project in everything but the name. In this context, it does seem significant that some of the support from ISCI and other UIA independents for a vote of no confidence in Shahristani appears to have faded over the past months, possibly as an attempt at improving sectarian Shiite unity behind the new “national” UIA. On the other hand, parliamentary resistance to the deal has been voiced by both the Sadrists (quoting the absence of an oil law), Fadila (which has ties both to the SOC and regional Basra interests, but which also spearheaded the recent removal of the trade minister, Abd al-Falah al-Sudani, and initially focused on his dealings with foreign companies that got involved in the oil sector), nationalists and secularists (including Hiwar as well as Iraqiyya representatives like Aliyya Nusayf) and even some UIA members of the independent bloc that would normally support Shahristani (Shuda al-Musawi is one example). Shiite independents currently being targeted for co-option by the “reformers” of the UIA, such as the former oil minister Ibrahim Bahr al-Ulum, have voiced scepticism too.

In sum, the number of representatives involved on the “nationalist” side of the opposition is perhaps not terribly impressive in this case (maybe adding up to 60 or 70 representatives). However, the challenge to Shahristani is an unholy alliance that also includes Kurds who attack him from the opposite perspective and will normally try to derail any project that could strengthen the oil ministry in Baghdad. Among the dozen or so reasons quoted for the failure of the previous attempt in 2008 to bring in the IOCs (but through more limited contracts and with greater roles for Iraqi players) was the fierce opposition voiced by pro-Kurdish Democratic politicians in Washington – including most prominently Chuck Schumer, but also receiving the support of people like John Kerry. In undisguised terms – their press release dated 24 June 2008 is perhaps the clearest articulation of the argument for tripartite soft partition that ever manifested itself in high politics in the US – this group  referred to “tension between Shiites, Sunnis and Kurds” to argue strongly against a package of deals that would strengthen the central government in Baghdad. Today, with 53 Kurdish anti-centralist votes from KDP and PUK on top of the nationalist opposition to the licensing round, we are getting closer to the majority threshold of 138 votes that could make things a little more uncomfortable for Shahristani than anticipated. Still, it has to be said that the Kurds are under more pressure right now and running out of time faster than many outside observers seem to realise. Often forgotten in the West is the fact that many of the consociational and power-sharing aspects of the current Iraqi political system simply expire in 2010, because the institution of a tripartite presidency to be elected on a single list and with a two thirds majority was a last-minute addition to the 2005 constitution that was only adopted for the first (2005–2009) parliamentary cycle, and it was this particular procedure and the demand for a supermajority that made coalition-forming so difficult back in 2006. Accordingly, without any requirement for constitutional reform, a somewhat more majoritarian logic in Iraqi politics will almost automatically ensue after the next parliamentary elections, and it is entirely conceivable that a government could be formed without any representation from the two biggest Kurdish parties at all (although any such government would probably make a point of reaching out to prominent Kurds from outside KDP and PUK, as in fact Maliki is already doing). Also, even if their erstwhile UIA allies should end up doing only a symbolic facelift of their list and run it as a Shiite list with a purely nominal “Iraqi orientation”, the UIA–Kurdish axis is in deep trouble these days because of the decline of ISCI’s fortunes (many of the Shiite centralisers around Maliki have been quite explicit in their rejection of Kurdish claims on article 140 about disputed territories and so on). It is this context that may lead Kurdish politicians to at least think twice before they make up their mind if matters should come to a head in the parliament. Additionally, at least some of the natural members of the nationalist camp (including parts of the Iraqiyya list) have in the past shown liberal inclinations in the economic sphere and may be prepared to sacrifice their centralist ideals for the sake of immediate economic gain for Iraq, even if this should come at the expense of long-term Iraqi control.

Even if the deals should pass unopposed by the Iraqi parliament (the most likely scenario is that they will not be submitted for approval unless a majority of MPs demand that they be presented), opposition outside parliament, at a variety of levels, can be expected to persist. To begin with, it does seem remarkable that three successive heads of the SOC – the last two of whom, Kifah Numan and Fayyad al-Naama, had been specifically chosen by Shahristani in an attempt to subvert the independent-mindedness of previous SOC chiefs and their local connections in Basra – have publicly come out against the deals. The SOC, in turn, is part of a wider conglomerate of local southern interests that talk Iraqi nationalism and Basra regionalism interchangeably. For example, the Fadila party last year tried to mobilise opposition to the Shell deal using both the regionalist argument (“Shell is being used by Baghdad to sideline the SOC and Basra interests”) as well as the nationalist one (“Iraqi control in general is weakened by the deal”). Whilst the failure of the “Basra region” initiative in December 2008 and January 2009 showed that this regionalism is not currently reflected in any strong pro-federal movement, the fact that even a centralist like Nuri al-Maliki recently saw the need to offer Basra a special half-dollar per-barrel share from the oil income generated in the governorate suggests that one way or another Basra regional sentiment remains a powerful force in Iraqi politics. (The arrangement is a clear concession to a demand that had been originally framed by Fadila leaders in Basra; it has since, and apparently somewhat reluctantly, also been extended to Kirkuk and other producing governorates in a draft law. Predictably, perhaps, Kurdish local politicians have more recently asked for the extension of the principle to Kurdistan.) Also, from the point of view of security in a more physical sense, the oil majors should probably take note of the fact that both Basra regionalism and its cousin, “southern” regionalism (not to be confused with Shiite sectarian sentiment as it is limited to the oil-producing governorates of Basra, Maysan and Dhi Qar), historically have been accompanied by a ragtag of far more radical and sometimes violent groups that have other agendas and speak different political languages, but which share the characteristic of being protest movements with strong and sometimes exclusive links to the oil-rich far south. Such groups include Sadrist splinter factions as well as the Mahdist movement of Ahmad al-Hasan.

Finally, on a more general level, as they circumvent the Iraqi parliament (as they most probably will do) IOCs will have to ask themselves whether contracts framed in the current environment – without any oil law, with constitutional amendments still pending, and in partnership with a dysfunctional government that was elected on sectarian bases in a different climate four years ago and which since has become infested with corruption and the now universally abhorred system of ethno-sectarian sinecure-sharing – is truly representative of the Iraq of tomorrow. Might not the rout of the forces of 2005 and the emergence of entirely new ones seen in places like Mosul and to some extent Karbala during the local elections last January be repeated at the national level next year? Or, conversely, if the current government becomes sufficiently scared of these trends and try to suppress them instead of starting a dialogue with them, are we not getting into a Nigeria-like situation almost from day one? The atmosphere of the January local elections revealed unambiguous support for a centralist and nationalist agenda among the Iraqi public, and it is this agenda that is perceived by many as being challenged by the procedures of the first licensing round. Iraqis ask themselves why so many deals have to be cut, for such a long period, and in such a rush. Many question whether Iraq, with some of the world’s biggest energy reserves, should really have to resort to what some observers describe as a panic-induced stop-gap measures for the Iraqi economy. Is it not the case that the IOCs will always be interested in Iraq given the size of its reserves, and that in a worst-case scenario globalising state oil companies from China to Brazil would be perfectly happy to step in to do technical-service work should the oil majors become exasperated? These are themes from the current Iraqi debate that could become a lot more pronounced as the 2010 parliamentary elections come closer and Iraqi political parties begin their attempts to make capital of the rising nationalist trend that was highlighted in the January local elections.

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More on the politics of oil in Iraq from historiae.org:

The Sadrists of Basra and the Far South of Iraq: The Most Unpredictable Political Force in the Gulf’s Oil-Belt Region? (May 2008)

Suffering, Oil, and Ideals of Coexistence: Non-Sectarian Federal Trends in the Far South of Iraq (November 2007)

Is Statoil Getting It Wrong in Iraq? (June 2007)

Basra Crude: The Great Game of Iraq’s “Southern” Oil (February 2007)

Ottoman Provincial Boundaries, Shiite Federalism, and Energy Conflict in Iraq (November 2006)

Norway's Oil Industry and the Partitioning of Iraq (7 December 2005)

 

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