Positive Signs for Award of Enhanced Iraqi Oil Contracts Before Controversial Hydrocarbon Law In Place

Individual Contracts

Iraq's Oil Minister Hussein al-Shahristani has given his backing for a proposal to award oil and gas contracts under enhanced individual contracts, ahead of debate on a more controversial hydrocarbons law.

The proposal was previously advanced by influential oil official, Shamkhi Faraj, currently acting as director-general of marketing and economics at the Oil Ministry, after his tenure at the head of the State Oil Marketing Organisation (SOMO, see Iraq: 24 April 2006: Iraq Considers All-in-One Oil Contracts to Overcome Political and Regulatory Uncertainty). In theory, it would enable Iraq to move forward with oil and gas development deals on less controversial projects, without the necessary legal framework in place, on the promise that any future law would not affect contracts awarded in this manner.

Al-Shahristani said on a trip to the United States that some companies had already expressed their willingness to enter into discussions and even conclude agreements on this basis before a more far-reaching hydrocarbon law is enacted by parliament. A framework hydrocarbons law has already been drafted by parliamentary committees, but is expected to be the subject of fierce debate, concerning as it does the division of oil resources, management of existing and new acreage and the distribution of oil wealth.

During his U.S. visit, al-Shahristani met with a number of oil companies and said that initial talks focused on technical assistance, rather than specific oilfields. He added that he hoped for Iraqi production of 3 million b/d by the end of the year, from current figures of 2.5 million b/d, with a target of 4.5 million b/d in the next three to four years.

Outlook and Implications

The idea of enhanced one-off contracts is a good one for Iraq, and one that has already worked well in Libya, which has moved forward with its exploration on this basis in the absence of any up-to-date hydrocarbons legislation.

Nevertheless, the political uncertainty in Iraq, combined with atrocious security conditions in the centre of the country in particular, means that most investors are unlikely to willing to embark too far along this course, until it is clear that an overall hydrocarbons law will meet their requirements and answer outstanding concerns over ownership and management. As yet, al-Shahristani hopes that a hydrocarbons law will be in place by the end of the year, although his warmth towards these enhanced contracts suggests a more realistic streak, given the likelihood of deep-rooted divisions in the debate on an energy law and lack of consensus to date, particularly with the Kurds.

Progress on concluding a foreign investment bill in recent weeks gives ongoing hope that foreign companies will be an important factor in Iraq's economy in the future, although on the energy side, some major obstacles remain, most notably on the federal issue, but also on the revival of a state-backed Iraqi NOC, the form of which has still to be agreed (see Iraq: 20 July 2006: Foreign Investment Law Rushed Through in Iraq; Ex-Oil Minister Says Energy Deals Some Way Off).

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