Why Baghdad isn't pumping more of its oil

On a sizzling afternoon near the southern Iraqi town of Basra, the air was heavy with the smell of chemicals, while oozing black patches stained the tinder-dry marsh grass.

“Oil,” said a local sheikh. “After so many years of sanctions, the infrastructure is ruined. It’s just trickling away.”

That was late 2002, a few months before the U.S.-led invasion of Iraq. Today, with the country still under occupation, little has changed in the dilapidated oil fields suffering from years of neglect and warfare.

Meanwhile, world oil prices have reached historic highs, spiking above $145.

Reacting to domestic and international pressure, Baghdad has moved to restore Iraq’s oil infrastructure and give production a badly needed boost.

But the government’s plans depend on a long-stalled oil law that is both crucial to future development and so contentious that critics say it would mean open season on Iraq’s economic crown jewels.

“It’s a dramatic change of course after years of national control,” says Antonia Juhasz, author of the forthcoming The Tyranny of Oil. “It would be perceived negatively by the majority of Iraqis, and that’s not what Iraq needs just now.”

Urged on by Washington, Baghdad has tried to pass the law, which would allow foreign companies production-sharing agreements for oil and gas exploration, a seismic shift from more than three decades of national control.

But the legislation has run up against strong public opposition, as well as disputes with the Kurdish north on how much control central and regional authorities would have over oil deals, and disagreements among political factions on rights and revenues.

The Kurdistan Regional Government has passed its own oil law and made production-sharing deals with international companies, over protest from the central authorities.

The splits reflect Iraq’s damaged social fabric and the difficulties the strife-torn country will have in finding stability.

With the oil law still in dispute, Baghdad last month opened international bidding for long-term contracts to help rejuvenate some of its main oil fields.

It is also finalizing short-term, no-bid – and controversial – consulting contracts with major U.S. and European firms with long histories of involvement in Iraq’s oil pre-dating the Saddam Hussein regime.

The efforts are expected to raise Iraq’s oil production by 60 per cent – or 1.5 million barrels a day – a rare hint of relief from prices that are delivering pain at pumps around the globe.

But energy critics, including some U.S. legislators, are wary of deals announced without an Iraqi agreement on how revenues will be divided among ethnically and religiously diverse regions.

“Signing these deals without a revenue-sharing law is like putting the cart before the horse,” said Democratic Senator Chuck Schumer of New York, who called for an assessment of risks to Iraq’s fragile political process.

There is also a risk for the oil companies, says Michael Klare, author of Rising Powers, Shrinking Planet: The New Geopolitics of Energy.

“It depends on how much authority is given to the central government and the regions, and how much opportunity is given to foreign companies for undeveloped `green fields.’

“If the law is written to facilitate foreign companies coming in and developing them, that would be very promising. But they won’t want to come in unless it’s written in a way that gives them an equity stake. It’s unclear that will happen.”

Oil companies in a number of countries have been squeezed out when governments suddenly nationalized their energy supplies. But in Iraq, the danger to foreign oil companies is more than political and economic.

Even if a law were passed to safeguard foreign firms’ rights, they could become high-profile targets for sectarian insurgents whose turf wars have torn the country apart since the fall of Saddam.

“It would worsen the conflict in Iraq,” says Greg Muttit, co-director of Platform, a London-based oil industry watchdog. “First, it would create a conflict between oil companies’ defenders and Iraqis critical of what they were doing. Second, it would increase the current sectarian conflict.”

In some unstable countries, international oil companies hire private security firms to protect their interests, sometimes sparking conflicts with local communities.

“The security situation is very important, because companies aren’t going to move into dangerous areas as though they’re in Texas,” says Klare. “They want to make sure they will get round-the-clock protection.”

In Iraq, oil companies look to the American military.

But the future of U.S. forces in Iraq will depend on another stalled agreement, one laying out future security arrangements between Baghdad and Washington.

A UN mandate authorizing the presence of American troops in Iraq expires at the end of this year, but Washington plans to maintain its forces at present levels until mid-2009.

If a new deal is reached, the troops could remain in Iraq years longer, an insurance policy for oil companies with large sums at stake. But with a U.S. presidential election and an Iraqi vote pending, negotiating the agreement is hanging fire.

As for the stalled oil law, debate continues on the effect it would have on the global oil-price crisis.

“There is no correlation or guarantee that Iraqi contracts would mean lower prices for North Americans,” says author Juhasz. “It’s a global market, and companies like Exxon will ship oil to wherever they get the most money.

“An increased supply from Iraq could not have any meaningful effect on the price of oil.”

And, she adds, a law that allows big oil companies to control Iraqi energy stocks would increase resentment against the United States and confirm many people’s suspicions – long denied by Washington – that the 2003 invasion was really about oil.

Others take a more positive view.

Increased Iraqi output could have “a very positive effect on the oil market and therefore on the global economy,” says Robert Hormats, vice-chairman of Goldman Sachs International.

It also could be good for Washington, according to an essay by the Council on Foreign Relations non-partisan think tank.

“Among many other side effects, higher output levels could help mitigate concerns about the total economic cost of the Iraqi war by tapping one of the largest – and most underutilized – national reserves in the world.”

But, the council admits, “for all the potential gains … the effort to open up Iraqi oil may well prove a hornet’s nest, both politically and logistically.”