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The Stagnation of Iraqi Oil Production

November 03, 2015
Iraqi oil production has stagnated over the past decade-and-a-half, despite significant resources that should have driven growth in oil production. In this article, the legal challenges to oil production are explored.

In its second quarter review in 2012, The Iraq Oil and Gas Report predicted that Iraqi oil production would hit 6 million b/d by 2015. [1] However, production sat at around 4.15 million b/d by June 2015. [2] Security concerns are partly to blame for Iraq’s less-than-consistent production record. Back-to-back involvement in the Iran-Iraq War (1980-1988) and Persian Gulf War (1990-1991) devastated Iraq’s infrastructure. In 2001, Iraqi oil production sunk to 285,000 b/d. [3] More recently, Iraqi oil production held steady as ISIS pushed into southern Iraq in 2015, but the fighting led Iraq to lose control of a key oil refinery. [4]

However, Iraq’s still-stagnant oil production figures are also rooted in its embarrassing lack of organization. Twelve years after the end of Saddam Hussein’s regime, Iraq still lacks a hydrocarbon law that can provide a framework for oil production contracts. Moreover, the ad hoc system that has that has developed in its absence has increased the ethnic tensions already surrounding Iraqi resource wealth.

Considering the fact that revenues from crude oil exports account for 89% of Iraq’s total revenues, Iraq’s continued failure to pass through a hydrocarbon framework law is embarrassing. More importantly, the absence of a framework law has compromised Iraq’s relationship with international investors. [5] For example, Iraq did not deem oil contracts made during Saddam Hussein’s regime invalid until April 2008—five years after Hussein left power, and only after a public back-and-forth with Lukoil. [6] This kind of accident, however, is not completely unexpected. After all, hydrocarbon laws can establish the branch of government responsible for approving contracts and the mechanisms through which approval is sought and won, the limits of an international oil company’s (IOC) contracting rights, taxes on oil profits, and environmental standards for oil fields.

Oil Refinery

In the absence of such basic guidelines, it is no wonder that Iraq’s oil and gas licensing rounds have produced unpredictable results. In the first licensing round—held in April 2008—Rumaila oilfield was the only field to receive a contract. [7] The second licensing round, held in April 2009, was successful, and 7 out of 10 fields available for contract received contracts. [8] However, the third round in October 2010 was a failure. The three gas fields that were available for licensing bids in that round had all previously been up for bid and, in this round, only one field was successfully bid on. [9] After a five-month delay, the fourth licensing round in May 2012 also failed to attract investment and only three of 12 fields were contracted out to IOCs. [10]

Iraq has recognized that it needs to codify the standards and norms that govern oil production. In February 2007, the first proposed Iraq Oil and Gas Law was drafted. That version envisioned a system in which regional rights would be strongly subordinated to those of the federal government. At this point, it is worth noting that any system of Iraqi oil governance will run into conflicts related to the balance of power between regions and the federal government. In Iraq, a ‘region’ is a coalition of governorates that have more autonomy from the federal government than individual governorates do. Today, the only Iraqi region is the Kurdish Regional Government (KRG), which is located in northern Iraq and—given its history—is understandably unwelcoming of extensions of federal power. The 2007 draft law ignored that dynamic. Instead, it called for a system that required contracts between Iraq and foreign countries to receive the approval of Iraq’s parliament, the Council of Representatives. [11] It also planned for the creation of a Federal Oil and Gas Council that would play a role in creating petroleum policies and whose structure would give “Producing Governorate(s) not included in a Region” the same amount of representation as regions. [12]

The KRG’s disapproval doomed the February 2007 draft to fail. In August 2010, the KRG submitted additional amendments to the 2007 draft. The KRG-amended version of the draft passed through the Council of Ministers and was sent to the Council of Representatives in August 2011. The new version explicitly empowered regions to “negotiate and conclude contracts in accordance with the mechanisms provided for in article (18) of this law.” [13] However, the Council of Ministers also failed to pass this new version. [14]

Without a unifying framework, two distinct systems of contracts have developed in Iraq. The KRG has moved ahead in contracting IOCs independently, using Product Sharing Contracts (PSCs) as the dominant mechanism for contracting the development of oil fields. In contrast, the rest of Iraq has contracted oil solely through Technical Service Contracts [15]. The two systems are not entirely separate. Despite the fact that Iraq has taken a strong stance against the KRG’s actions—refusing to acknowledge its contracts as valid and declaring that it will not provide oil contracts to any IOC that has contracts with the KRG—the KRG has given 85% of the revenue it receives from oil to Baghdad to then re-distribute across the governorates. [16] (The remaining 15% of revenue is given to IOCs as payment.) However, the KRG—in choosing to reject Baghdad’s wishes—has restricted its own oil market. Because the Iraqi government has declared that it will blacklist companies who work with the KRG, the KRG has not received the competitive, larger bids that one would otherwise expect it to. In an article originally published in the Middle East Economic Survey, Tariq Shafiq describes this situation, noting:

An average oilfield discovery in Iraq houses a reserve of some 1-2bn barrels. None of the above oil companies [that have PSCs with the KRG] has total reserves worldwide that measures any where [sic] near this figure. [17]

The federal government has been able to attract sizable international investments, largely because oil fields as vast and accessible as those in Iraq are increasingly difficult to come by. For example, BP and the Chinese National Petroleum Company have contracted Rumaila oil field—which contains around 17 billion barrels of oil. [18] However, that rationale is unlikely to draw investments in oil exploration or in more technically-difficult production.

There is then an increasing imperative for Iraq to produce a framework for its oil resources. However, eight years after its first draft attempt, Iraq has both failed to pass a law and has adapted a system of norms that directly challenges the development of a centralized system.

References:

  1. “BMI Industry View,” Iraq Oil & Gas Report, no. 2 (April 2012): 5. Business Source Complete, EBSCOhost (accessed March 13, 2015).

  2.  Nayla Razzouk, “Iraq’s Oil Output Climbs to Record as South Escapes Fighting,” Bloomberg Business, August 12, 2015.

  3.  “Iraq Energy Market Overview.” Iraq Oil & Gas Report, no. 3 (2007): 10. Business Source Complete, EBSCOhost (accessed March 14, 2015).

  4.  Charles Kennedy, “ISIS Still Hampering Iraq Oil Industry Progress,” OilPrice.com, May 8, 2015.

  5.  “Iraq Energy Market Overview.” Iraq Oil & Gas Report, no. 2 (2008): 10. Business Source Complete, EBSCOhost (accessed March 14, 2015).

  6.  Ibid., 12.

  7.  Iraq Oil & Gas Report, no. 1 (2015): 61. Business Source Complete, EBSCOhost (accessed March 13, 2015).

  8.  Ibid., 61-63.

  9.  Iraq Oil & Gas Report, no. 1 (2015): 64-65.

  10.  Ibid., 66.

  11.  Council of Ministers Oil and Energy Committee, “Republic of Iraq: Draft Iraq Oil and Gas Law,” Feb. 15, 2007, art. 5, Section (a)2.

  12.  Council of Ministers Oil and Energy Committee, “Republic of Iraq: Draft Iraq Oil and Gas Law,” Feb. 15, 2007, Art. 5, Section (c).

  13,  The Parliamentarian Oil & Energy Committee, “The Federal Oil & Gas Draft Law: The Iraqi Parliament Version—Presented to the Council of Representatives on August 17, 2011,” trans. Iraq Energy Institute, Art. 14, Sec. 4.

  14. For a more detailed description of the changes made between the first and second draft, see: “Competitive Landscape,” Iraq Oil & Gas Report, no. 4 (2011): 48. Business Source Complete, EBSCOhost (accessed March 13, 2015). Also see Tariq Shafiq’s analysis on the differences between the two draft laws at: Tariq Shafiq, “Iraq Draft Petroleum Law: An Independent Perspective,” from Iraq Revenue Watch, February 17, 2007. Accessed March 23, 2015. (PDF).

  15. For a primer on the different types of oil production contracts and the controversies surrounding their implementation in Iraq, see: Rex J. Zedalis, The Legal Dimension of Oil and Gas in Iraq: Current Reality and Future Prospects (New York: Cambridge University Press, 2009).

  16.  “Competitive Landscape,” Iraq Oil & Gas Report, no. 4 (2008): 58. Business Source Complete, EBSCOhost (accessed March 14, 2015).

  17.  Tariq Shafiq, “Kurdistan Regional Government Hydrocarbon Law: A Commentary,” KurdishMedia.com, September 20, 2006, accessed April 10, 2015.

  18.  “BP, CNPC Raise Shares in Iraq’s Rumaila Oilfield – Iraqi Official,” Reuters Africa, September 7, 2014, accessed April 30, 2015.

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