Coalition of the Extra Willing: Transnational Oil, Iraqi Government, and the Occupation Regime

The draft Iraq Oil and Gas law integrates the Iraqi oil sector into transnational oil market.

The draft Iraq Oil and Gas law integrates the Iraqi oil sector into transnational oil market.

By Yousef K. B.

This is a draft section of a larger project on the political economy of the invasion and occupation of Iraq, and the imposition through it of neo-liberal policies.  The section will address the following questions:

  1. Why is the Iraq Oil law so controversial?
  2. Why has the Oil law not been passed so far?
  3. What are key features of the Oil law?
  4. Does the Draft Oil law effectively privatize the Iraqi oil sector, and if so how?

The Coalition Provisional Authority (CPA) ostensibly left the oil sector out of its regulations.  This was not due to lack of interest in privatizing the oil sector as is apparent in the work of the Future of Iraq Project in the state department (Hassen 2006) that was later scrapped and reconfigured within the Defense Department by the White House (Ferguson 2008: 66).  Rather the CPA was aware of the fact that restructuring the oil sector in Iraq would be an obvious affront to Iraqis and would arouse a lot of resistance that they would not be able to manage.  Instead they left the restructuring to be done by subsequent Iraqi governments who would be under their pressure.  A top U.S. official commented upon the transfer of sovereignty in 2004 that “we’re still here.  We’ll be paying a lot of attention and we’ll have a lot of influence.  We’re going to have the world’s largest diplomatic mission with a significant amount of political weight” (Krane 2004).   These pressures have been successful in producing an oil law in the Kurdistan region of Iraq and have been able to push an Iraqi oil law past the Iraqi cabinet.

The draft oil law of 2007 opens up Iraq’s oil sector to transnational oil companies (Steward 2007). It was being worked on by the Bush administration as early as 2004, when it hired the consulting firm BearingPoint -the same people who drafted the Iraq National Development Strategy- to help write the law that was approved by the Iraqi cabinet in February of 2007, but failed to pass the council of representatives (Foley 2007; Juhasz 2006).  The oil law represents the incomplete task of creating a neo-liberal hegemony in Iraq.  The competing ideological sides as it relates to this policy are that of complete privatization and complete nationalization. The Kurdish parties lead a more organized group advocating for complete privatization as well as generally being supportive of the ideological logic of the occupation forces as well.   On the other hand the group opposed to the privatization is a less solidified group made up of actors such as the Sadrists and Iraq National Dialogue Party of Saleh al-Mutlaq.  This group varies from those wary of giving up control over the Iraqi oil and gas resources to those with nationalist ideological position.

In addition to this ideological split there is also a tension between the Iraqi Central Government and the Kurdistan Regional Government, which passed its own regional oil and gas laws in June of 2007, the Petroleum Law of the Kurdistan Region (2007a; Senanayake 2006).  This tension is based on different interpretations of articles 111 and 112 of the Iraqi constitution regarding the power to exploit and share natural resources with the Kurdish Regional Government (KRG) asserting that oil found in Kurdistan is the “property of the people of Kurdistan and not as an undivided asset of the whole Iraqi nation” (2005; 2007b; Shafiq 2007).  The KRG further claims that “it has the authority to negotiate contracts with companies independently of the Federal Petroleum Commission and without the need to seek its approval” (Shafiq 2007).   The draft federal oil law however sees it as the role of the federal government to coordinate and develop a central strategy for developing its oil and gas resources (Shafiq 2006; Shafiq 2007).  As of March of 2009 the federal oil law has only been able to pass the Council of Ministers and has been stymied in the Council of Representatives where it was submitted on May and July 2007(Rubin 2007).  The inability to reach a compromise on revenue sharing and specifically the issue of rights over exploitation of oil resources by the KRG is the main reason why the oil law has not been passed (AFP 2008; Glanz 2007; Rubin 2007; Senanayake 2006; Wolfe 2007).  The debate between privatization and nationalization seems to have been overcome with a largely privatized sector being proposed.  Therefore even if the oil law is amended and passed, it is likely that the changes will be made to mechanisms of revenue sharing and control over exploration and extraction, rather than the fundamental mechanisms of the sector itself.

Tariq Shafiq one of the authors of the law states that the “law is investment friendly.  It encourages private enterprise and welcomes international oil companies to work in partnership with the Iraq National Oil Company” (Shafiq 2007).   The draft oil law gets the legitimacy to privatize the oil industry from article 110 of the Iraqi constitution that calls for oil policies to be developed relying “on the most modern techniques of market principles and encouraging investments” (Constitution 2005: Article 110).  The draft law moves to implement this by allowing authorities to develop contracts with transnational oil companies (Iraq Oil Law 2007: Article 5.F.2) and repatriating their profits (Article 33.D).  The contracts that would be signed with the transnational oil companies under the draft law would be based on a Product Sharing Agreement, where the holder of the “exploration and production contract” would have “exclusive rights to conduct petroleum exploration and production in the contract area” for two to four years, and be able to have a contract for fifteen to twenty years for purposes of field development (i.e. extraction) (Article 13).  One of the stated objectives of the contract is to ensure “an appropriate return on investment to the investor,” while ensuring “solutions which are optimal to the country in the long-term” (Article 9.4.4).  Based on these new contracting regulation and rights for oil companies the law calls for a restructuring of the Oil Ministry.  Article 39 states that if there are disputes between the government and transnational oil companies, they are to be resolved through international arbitration tribunals and based on international law rather than national law.  These tribunals do not consider the public interest of the Iraqi people in their arbitration, effectively taking away democratic accountability over oil development in Iraq.  The draft oil law creates the Iraq National Oil Company (INOC) as an independent entity running “on commercial bases,” (Article 6) thus making it harder for the government to influence strategic economic policies, much like provisions of the banking laws passed by Bremer (order 56).  The INOC is designated as the entity responsible for operating pipeline network as well as the export ports for Iraqi oil for only two years, after which there is room in the law for it to be further privatized if the Federal Oil and Gas Council so decides (Article 5.C.6).  The Federal Oil and Gas Council which is set up to develop much of the oil policy relies on the assistance of a panel of “Independent Advisors that include oil and gas experts, Iraqis or foreigners” (Article 5.C.6).  Thus foreign entities are not only allowed to have exclusive rights to the oil fields, but are also integrated structurally into policy development.  The need for foreign capital and expertise is justified by saying that foreign capital would free Iraqi capital to be spent on social programs (Behn 2007).  In this case Iraq is an exception amongst its neighbors that share with Iraq one of the lowest costs for oil extraction, which enables them to invest in their own oil industries in return for much higher profits (Muttitt 2005).  The draft oil law however goes beyond simply attracting foreign capital and expertise to full integration of the Iraqi oil sector with transnational energy sector.

A privatized oil sector was successfully pushed through the draft oil law because there was a weak ideological position against those advocating market oriented restructuring as we have seen in other sites as well such as the constitution and the national development strategy.  Moreover the draft oil law attempts to preempt opposition to its neo-liberal paradigm and privatization policies by pushing through those policies while using the rhetoric of preserving national interests and sovereignty.  One economist put it this way, “There is this fine line, that the wording is seeking to draw, that allows companies to claim that the oil is still Iraqi oil, whereas the extraction rights belong to the oil companies” (Steward 2007).  The draft law is able to do this by not speaking about privatization at all, but rather installing the type of contract that will effectively usher in privatization if implemented. The framework developed in the law, albeit not named as such is a type of contract referred to as a Product Sharing Agreement (PSA).  Even though Buy-Back Contracts and other technical service contracts are not outlawed under the law, transnational oil company will most certainly pick a Product Sharing Agreement since it has more control and more possibility over profit than other forms of contract (Behn 2007).  The two polar opposites of oil contracts are a nationalized industry where the state has total control over its oil resources and controls the decision making structure (this was the case in Iraq starting in 1961 and culminating in 1972), and a concession model where the government gives a private company the right to the oil fields, their extraction, and their sell, in return for a tax or a royalty (this was the case in Iraq from 1925 up to the 1960s).  The concession arrangement in Iraq was a result of heavy British intervention after they installed King Faisal following the League of Nations Mandate, which ended when popular movements in Iraq pushed through the nationalization of the oil sector in an effort to control their countries’ resources.  The PSA is a new strategy by transnational oil interests to attain similar material benefits as those attained under a concession arrangement without provoking nationalist fervors against them:

“PSAs shift the ownership of oil from companies to state, and invert the follow of payments between state and company.  Whereas in a concession system, foreign companies have rights to the oil in the ground, and compensate host states for taking their resources (via royalties and taxes), a PSA leaves the oil legally in the hands of the state, while the foreign companies are compensated of their investment in oil production infrastructure and for the risks they have taken in doing so” (Muttitt 2005).

The PSA in theory leaves ultimate control of oil in the hands of the state while in practice the power of the state is curbed by stipulations within the contract.  In a PSA a company puts the initial money into exploration (2-4 years according to article 13 in the case of Iraq), and extraction (15-20 years according to article 13).  If oil is not found then the company looses the initial investment, but if oil is found then the profits made will first be used to pay back the company’s initial investment (cost oil) and the remaining sum (profit oil) is divided between the state and the company in agreed upon proportions (Paliashvili 1998).   These contracts are long term ones that make changing them by the government difficult.  It can be argued that PSA if negotiated rigorously by the state can theoretically be done in a way to protect the rights of the state.  However this requires the state to have the institutional capacity and know-how to negotiate with transnational oil companies who have “the advantage of employing hundreds of well-skilled legal representatives” (Radon 2005).  Iraq as it currently stands would be in this type of predicament if the draft oil law is to become law with little institutional capacity to speak of to safeguard itself from long-term parasitic arrangement with transnational oil companies veiled under the rhetoric of saving capital.  Therefore the actual outcome of the PSA is very much like the concession agreements of the past, with minor changes and concessions.  Daniel Johnston an industry consultant comments in this regard:

“At first [PSAs] and concessionary systems appear to be quite different.  They have major symbolic and philosophical differences, but these serve more of a political function than anything else.  The terminology is certainly distinct, but these systems are really not that different from a financial point of view” (Muttitt 2005).

The draft Iraqi oil law was always a controversial policy and tackling it meant dealing with many schisms within Iraqi political matrix.  At the time of writing this document, the law is being held up in the council of representatives over differences in the way that control is divided between the central and regional governments and how oil and natural gas revenues is to be allocated.  The draft law was able to marginalize those who pushed for a non-privatized sector, effectively silencing those actors.  This was done by the law not using the terminology of privatization, emphasizing ownership over the oil by the state and the people of Iraq.  Meanwhile the law develops contractual frameworks based on the Production Sharing Agreement model where transnational oil interests heavily influenced oil policy as well as exploration and extraction.  Therefore much like the National Development Strategy the Iraqi government through the fractions within the government allied with the transnational economic interests that were operating within the occupation regime, was able to effectively fulfill the neo-liberal agenda being pushed in Iraq within its most crucial and strategic sector of all, namely the petroleum and natural gas industry.   Even if passed, the work of hegemony is never done, and factions such as the Sadrists and Iraqi oil employee unions, as well as others are still tenaciously opposed to such policies and continue to voice their opposition (Escobar 2007; Moberg 2007).

References:

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