Order Code RL34064
Iraq: Oil and Gas Legislation,
Revenue Sharing, and U.S. Policy
Updated July 2, 2008
Christopher M. Blanchard
Analyst in Middle Eastern Affairs
Foreign Affairs, Defense, and Trade Division
Iraq: Oil and Gas Legislation, Revenue Sharing, and
U.S. Policy
Summary
Iraqi leaders continue to debate a package of hydrocarbon sector and revenue
sharing legislation that would define the terms for the future management and
development of the country’s significant oil and natural gas resources. The package
includes an oil and gas sector framework law and three supporting laws that would
outline revenue sharing, restructure Iraq’s Ministry of Oil, and create an Iraqi
National Oil Company. Both the Bush Administration and Congress consider the
passage of oil and gas sector framework and revenue sharing legislation as important
benchmarks that would indicate the current Iraqi government’s commitment to
promoting political reconciliation and long term economic development in Iraq.
Section 1314 of the FY2007 Supplemental Appropriations Act [P.L.110-28]
specifically identified the enactment and implementation of legislation “to ensure the
equitable distribution of hydrocarbon resources of the people of Iraq without regard
to the sect or ethnicity of recipients” and “to ensure that the energy resources of Iraq
benefit Sunni Arabs, Shia Arabs, Kurds, and other Iraqi citizens in an equitable
manner” as benchmarks. The Administration reported to Congress on these
benchmarks in July and September 2007. A draft framework law approved by Iraq’s
Council of Ministers (cabinet) in July 2007 did not include revenue sharing
arrangements. Iraq’s Council of Representatives (parliament) has not taken action to
consider the legislation to date because of ongoing political disputes.
The central importance of oil and gas revenue for the Iraqi economy is widely
recognized by Iraqis, and most groups accept the need to create new legal and policy
guidelines for the development of the country’s oil and natural gas. However, Iraqi
critics and supporters of the proposed legislation differ strongly on a number of key
issues, including the proper role and powers of federal and regional authorities in
regulating oil and gas development; the terms and extent of potential foreign
participation in the oil and gas sectors; and proposed formulas and mechanisms for
equitably sharing oil and gas revenue. Concurrent, related discussions about
proposed amendments to articles of Iraq’s constitution that outline federal and
regional oil and gas rights also are highly contentious.
The current military strategy employed by U.S. forces in Iraq seeks to create a
secure environment in which Iraqis can resolve core political differences. However,
it remains to be seen whether the package of hydrocarbon legislation under
consideration will promote reconciliation or contribute to deeper political tension.
Administration policymakers and Members of Congress thus face difficult choices
with regard to encouraging consideration of new hydrocarbon legislation and related
constitutional reforms while attempting to ensure that the content of proposed laws
and amendments reflects compromises reached by and acceptable to Iraqis. This
report reviews the package of legislation currently under consideration, analyzes the
positions of various Iraqi political actors, and discusses potential implications for
U.S. foreign policy goals in Iraq. The report will be updated to reflect new
developments. See also CRS Report RL31339, Iraq: Post-Saddam Governance and
Security, and CRS Report RS22079, The Kurds in Post-Saddam Iraq.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Draft Hydrocarbon Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Draft Hydrocarbon Framework Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Federal Oil and Gas Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contract Type(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Petroleum Revenues and Sharing Arrangements . . . . . . . . . . . . . . . . . . 6
Regional Authority and Oil Field Management Annexes . . . . . . . . . . . 6
Draft Revenue Sharing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Prospects for Future Revenue Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Ministry of Oil and Iraq National Oil Company Laws . . . . . . . . . . . . . . . . . 8
Prospects for Enactment and Implementation . . . . . . . . . . . . . . . . . . . . . . . . 8
Interim Arrangements and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
KRG Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Ministry of Oil Short-Term Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 11
Ministry of Oil Long-Term Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 12
Iraqi Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Core Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Iraq’s Constitution: Federal and Regional Authority . . . . . . . . . . . . . . 12
Revenue Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Foreign Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Players and Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Kurds: Regional Authority and Kirkuk . . . . . . . . . . . . . . . . . . . . 16
Sunni Arabs: Revenue Sharing and Foreign Participation . . . . . . . . . . 17
The United Iraqi Alliance: Investment and Development . . . . . . . . . . 17
Basrah: Industry Unions and the Fadilah Party . . . . . . . . . . . . . . . . . . 18
Sadr and Sunni Insurgent Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
International Energy Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Oil Revenue and Security Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Current Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Resources, Expenditures, and Corruption . . . . . . . . . . . . . . . . . . . . . . 21
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Infrastructure Attacks and Smuggling . . . . . . . . . . . . . . . . . . . . . . . . . 23
U.S. Policy and Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Frequently Asked Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Privatization and Foreign Participation . . . . . . . . . . . . . . . . . . . . . . . . 25
U.S. Advisors and Diplomatic Support . . . . . . . . . . . . . . . . . . . . . . . . 26
Congressional Benchmark and Other Legislation . . . . . . . . . . . . . . . . . . . . 27
List of Figures
Figure 1. Location of Iraq’s Oil Reserves and Infrastructure . . . . . . . . . . . . . . . . . 2
List of Tables
Table 1. Key Oil Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Iraq: Oil and Gas Legislation, Revenue
Sharing, and U.S. Policy
Background
Oil exploration and production in Iraq began in the 1920s under the terms of a
wide-ranging concession granted to a consortium of international oil companies
known as the Turkish Petroleum Company and later as the Iraq Petroleum Company.
The nationalization of Iraq’s oil resources and production was complete by 1975.
From 1975 to 2003, Iraq’s oil production and export operations were entirely state
operated. However, from the early 1980s until the toppling of Hussein’s government
in 2003, the country’s hydrocarbon infrastructure suffered from the negative effects
of war, international sanctions, a lack of investment and technology, and, in some
cases, mismanagement.
According to the Oil and Gas Journal, Iraq has 115 billion barrels of proven oil
reserves, the world’s third-largest. Other estimates of Iraq’s potential oil reserves
vary. In April 2007, oil industry consultants IHS estimated that Iraq’s proven and
probable reserves equal 116 billion barrels, with a potential additional 100 billion
barrels in largely unexplored western areas. The U.S. Geological Survey’s median
estimate for additional oil reserves in Iraq is approximately 45 billion barrels. In
August 2004, Iraq’s then-Oil Minister Thamer al Ghadban stated that Iraq had
“unconfirmed or potential reserves” of 214 billion barrels. Iraq’s proven reserves are
concentrated largely (65 percent or more) in southern Iraq, particularly in the
southernmost governorate of Al Basrah. Significant proven oil resources also are
located in the northern governorate of Al Tamim near the disputed city of Kirkuk.
(See Figure 1, below). Oil exports provide over 90% of Iraq’s government revenue.
Draft Hydrocarbon Legislation
Iraqis continue to debate a package of hydrocarbon sector and revenue sharing
legislation that would define the terms for the future management and development
of the country’s significant oil and natural gas resources. The centerpiece of the
legislative package is a draft hydrocarbon framework law that would create a
regulatory and policy development framework for future oil and gas exploration and
production in Iraq. Three companion laws would complete the package by
establishing terms and mechanisms for revenue sharing, creating the Iraq National
Oil Company, and reorganizing Iraq’s Ministry of Oil. Concurrent negotiations
regarding constitutional amendments may have direct implications for the package
of hydrocarbon legislation, particularly efforts to clarify the specific authorities
granted to federal and regional governments to regulate oil and gas development and
export activities under Articles 111 and 112 of the Iraqi constitution.
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Figure 1. Location of Iraq’s Oil Reserves and Infrastructure
Source: Adapted from U.S. Energy Information Administration (EIA), Energy Situation Analysis
Report, June 26, 2003. See also EIA, Country Analysis Brief: Iraq, August 2007, available at
[http://www.eia.doe.gov/cabs/Iraq/Background.html].
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Table 1. Key Oil Indicators
Oil
Oil
Oil Production
Oil
Oil
Exports
Oil
Oil
Revenue
(current weekly
Production
Exports
(pre-
Revenue
Revenue
(2008,
avg.)
(pre-2003)
(current)
2003)
(2006)
(2007)
to date)
2.5 million barrels
$31.3
$41
$33.1
2.5 mbd
1.74 mbd
2.2 mbd
per day (mbd)
billion
billion
billion
Note: Figures in the table from the U.S. Department of State “Iraq Weekly Status Report,” June 25,
2008. Oil export revenue is net of a 5% deduction for reparations to the victims of the 1990 Iraqi
invasion and occupation of Kuwait, as provided for in U.N. Security Council Resolution 1483.
Both the Bush Administration and Congress consider the passage of oil and gas
sector management and revenue sharing legislation as important benchmarks that
would indicate the current Iraqi government’s commitment to promoting political
reconciliation and economic development in Iraq. Iraqi critics and supporters of the
legislative package differ over the proper roles and authorities of federal and regional
bodies, the terms and extent of potential foreign participation in oil and gas
production and development, and potential formulas and mechanisms for equitably
sharing oil and gas revenue. The four elements of the package of hydrocarbon
legislation remain at different stages of development and negotiation.
Iraqi, U.S., and other international observers have expressed concern that the
atmosphere of violence and unresolved political tension prevailing in Iraq may not
be conducive to careful consideration of detailed hydrocarbon sector legislation.
Specifically, Iraqi labor groups have challenged the transparency and inclusiveness
of the drafting and negotiation processes thus far, and some blocs within Iraq’s
Council of Representatives have vowed to oppose or attempt to significantly amend
elements of the legislative package to reflect their priorities (see Players and
Positions below).
Draft Hydrocarbon Framework Law
Beginning in mid-2006, a three member Oil and Energy Committee working
under the auspices of the Iraqi cabinet prepared draft hydrocarbon framework
legislation to regulate Iraq’s oil and gas sector. A political negotiating committee
subsequently edited their draft. Following approval by the negotiating committee,
Iraq’s Council of Ministers (cabinet) approved a draft version of the hydrocarbon
framework law in February 2007.1 Subsequent negotiations among Iraqi leaders
sought to clarify the responsibilities of federal and regional authorities as well as
contracting procedures for oil fields. On July 3, 2007, Iraqi Prime Minister Nouri al
Maliki announced that the Council of Ministers had approved a final version of the
1 In response to a June 2007 CRS inquiry, the U.S. Department of State referred to an
English text of the draft legislation made available by the Kurdistan Regional Government
as an official English draft version. It is available online at
[ h t t p : / / w w w . k r g . o r g / u p l o a d s / d o c u m e n t s / D r a f t % 2 0 I r a q % 2 0 O i l % 2 0 a n d
%20Gas%20Law%20English__2007_03_10_h23m31s47.pdf]
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framework law and had forwarded the bill to the Council of Representatives for
consideration.
The Council of Ministers’ Shoura Council reportedly amended provisions of the
bill to ensure their consistency with provisions of the Iraqi constitution. However,
Kurdish officials protested the changes, arguing that they are substantive, rather than
semantic, and have tentatively withdrawn their support for the legislation. The
boycott of cabinet and parliamentary proceedings by various Iraqi entities at the time
of the cabinet’s approval of the law added to the controversy surrounding the
proposed legislation. Statements from Iraqi government officials and members of the
Council of Representatives suggest that parliamentary consideration of the legislation
continues to be delayed by disagreements between key political figures. According
to the latest Report to Congress prepared by the U.S. Department of Defense, the
Chairman of the Council of Representative’s Oil and Gas Committee will not
proceed with a first reading of the draft legislation until the federal government and
the Kurdistan Regional Government reach a political agreement on the hydrocarbon
sector.2 In the absence of a new legal and regulatory framework, the Baghdad
government has announced its intention to proceed with oil exploration and
production licensing under the terms of an interim registration process administered
by the Ministry of Oil (see Interim Arrangements below).
Federal Oil and Gas Council. The central element of the draft hydrocarbon
framework legislation is the creation of a Federal Oil and Gas Council (FOGC) to
determine all national oil and gas sector policies and plans, including those governing
exploration, development, and transportation. The FOGC would become the most
powerful body in Iraq’s oil sector, with the power to review all contracts, and would
operate according to a two-thirds majority decision-making system. The seats on the
FOGC are reserved for specific cabinet members, representatives of constitutionally
recognized regional governments, hydrocarbon experts, and “producing
governorates.”3 A “Panel of Independent Experts,” open to Iraqi and foreign
membership, would work with the FOGC in a nonbinding, advisory capacity. The
possibility that foreign energy experts or industry representatives could be chosen to
participate on this panel has alarmed some Iraqis and foreign observers.
Although the draft law stipulates that the formation of the FOGC “shall take into
consideration a fair representation of the basic components of the Iraqi society,”
some observers have warned that the makeup of the FOGC specified in the draft law
could potentially contribute to sectarian or regional tensions. Given the potential for
the majority Shiite Arab community to directly or indirectly control the makeup of
Iraq’s cabinet in Iraq’s democratic system and the ineligibility of Sunni Arab
governorates to qualify for FOGC seats based on the other specified terms, some
Sunni Arabs fear their interests may not be adequately represented in the powerful
2 U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2008, Report
to Congress in accordance with the Department of Defense Appropriations Act 2007
(Section 9010, P.L. 109-289), p. 3.
3 Article four of the draft framework law defines a “producing governorate” as “any Iraqi
Governorate that produces Crude Oil and natural gas continually on rates more than one
hundred and fifty thousand (150,000) barrels a day.”
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council. Other Iraqis may be encouraged to seek constitutionally recognized regional
status in order to ensure their representation in the council.
Contract Type(s). The draft hydrocarbon framework law establishes several
criteria that future “exploration and production contracts” must meet. The criteria are
designed to preserve Iraqi control and maximize the country’s economic return. The
draft law does not mandate the use of so-called “production-sharing agreements” as
the sole model contract for future oil development in Iraq. The law states that
contract holders may be given exclusive rights to exploration, development,
production, and marketing of Iraqi oil for specified periods, subject to approval of the
contract and a field development plan by Iraqi authorities. The law also outlines
general terms and conditions for evaluating contracts and development plans
designed to preserve the Iraqi government’s sovereign control of oil production,
economic returns to Iraq, and “appropriate returns” to potential investors.4 The
FOGC’s Panel of Independent Experts would use these criteria to evaluate contracts
signed by the Kurdistan Regional Government since 2003, and the Ministry of Oil,
and the FOGC would use the criteria to evaluate contracts signed by the former
regime with international oil companies (Article 40).
The contract provisions of the law have attracted significant attention because
they would allow foreign participation and therefore represent, in principle, a reversal
of the nationalization of Iraq’s oil sector. The specific details of model contracts
developed by Iraqis and the terms of specific individual contracts negotiated between
Iraq and potential foreign partners would determine the type of foreign participation
and the specific long term revenue benefits to Iraq or foreign companies. The draft
hydrocarbon framework law does not mandate a specific form of contract or
predetermine specific contract terms or details.5 The FOGC would develop model
contracts for use in Iraqi oil and gas fields and evaluate agreements with foreign
participants according to the stated criteria and the model contracts. According to
Revenue Watch6 Middle East director Yahia Said, “the aim of this law from
beginning was to promote foreign investment in Iraq’s oil sector. Yet while the law
4 According to Article 9 of the draft framework, “All model contracts shall be formulated
to honor the following objectives and criteria: 1- National control; 2- Ownership of the
resources; 3- Optimum economic return to the country; 4- An appropriate return on
investment to the investor; and 5- Reasonable incentives to the investor for ensuring
solutions which are optimal to the country in the long-term related to a- improved and
enhanced recovery, b- technology transfer, c- training and development of Iraqi personnel,
d- optimal utilization of the infrastructure, and e- environmentally friendly solutions and
plans.”
5 The law explicitly states in Article 9 that “Model Contracts may be based upon Service
Contract, Field Development and Production Contract, or Risk Exploration Contract.”
6 Revenue Watch is an independent operating and grantmaking 501(c) 3 organization that
monitors natural resource revenues and public expenditures and provides grants to local
partners to improve transparency in oil and gas producing countries. For more information,
see [http://www.revenuewatch.org/].
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opens the door for foreign companies, there are careful, deliberate mechanisms in
place to maintain control in the hands of national government.”7
Petroleum Revenues and Sharing Arrangements. The draft
hydrocarbon framework law states that Iraq’s oil wealth belongs to all of its citizens,
as reflected in the Iraqi constitution. However, the draft legislation does not contain
specific guidelines or mechanisms for revenue sharing. The draft would create two
funds for oil revenues: the first, an “Oil Revenue Fund,” and the second, a “Future
Fund” to hold an unspecified percentage of oil revenue for long-term development
goals. Both funds would be regulated and administered according to terms specified
in separate federal revenue legislation (see below). The U.S. Department of Defense
reported in March 2008 that the Iraqi government “continues to distribute oil
revenues equitably to the provinces in the absence of this comprehensive
legislation.”8
Regional Authority and Oil Field Management Annexes.
Constitutionally recognized regional authorities would automatically qualify for seats
on the FOGC under the terms of the draft oil sector legislation. The draft law
originally was structured to grant regional authorities licensing powers with regard
to oil fields specified in four annexes, subject to the terms of the draft law and in
conjunction with the plans and procedures of the FOGC.
Official versions of the
draft annexes were not published.9 However, Kurdish representatives made several
public statements following an April 2007 conference in Dubai expressing their
opposition to the draft annexes and threatening to withdraw support for the legislative
package in the Council of Representatives.10 The annexes reportedly were dropped
from the draft legislation prior to its approval by the cabinet. Under the new
arrangement — allegedly designed to meet demands of Kurdish negotiators — the
7 Yahia Said, Remarks at the United States Institute of Peace, May 18, 2007, as quoted in
Christina Parajon, “USIPeace Briefing: The Iraq Hydrocarbon Law: How and When?,” June
2007.
8 U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008,
Report to Congress in accordance with the Department of Defense Appropriations Act 2007
(Section 9010, P.L. 109-289), p. 4.
9 An unofficial transcript of the Dubai meeting is available at [http://www.revenuewatch.org
/activities/April18IRW/April%2018%20transcript.pdf]. According to press reports,
approximately 93 percent of Iraq’s proven oil reserves would have been subject to the
jurisdiction of the federal government (Annexes 1, 2, and 4), while the Kurdistan Regional
Government (KRG) would have exercised authority over the remaining seven percent
(Annex 3). Annex 1 listed 26 fields currently in production, Annex 2 listed 25 fields that
are “close to production,” Annex 3 listed 27 fields not near production and open to
international oil companies or the INOC, and Annex 4 delineated 65 exploration blocks.
The KRG posted its analysis of the draft annexes on its website, available at
[http://www.krg.org/pdf/Dubai_Oil_Law_Annexes_with_KRG_analysis.pdf].
10 For example, Ashti Hawrami, Minister of Natural Resources for the Kurdistan Regional
Government, said, “The annexes as they are written now will not be accepted by the KRG....
If I don’t get the lion’s share of fields (in the region) then it’s a bad law. If the law dilutes
regional control then it is unconstitutional.” Simon Webb, “Iraq Oil Law to Go to
Parliament, Kurds Wary,” Reuters, April 18, 2007.
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management of specific oil fields would be decided by the members of the FOGC.
Draft Revenue Sharing Law
Article 112 of the Iraqi constitution sets qualitative criteria for the distribution
of oil and gas revenues and requires the Iraqi parliament to pass a law regulating
revenue distribution. In February 2007, some officials in Baghdad and Washington
indicated that a broad agreement to share oil revenues among regions based on
population had been reached. However, Iraqi leaders continued to negotiate the terms
of the draft revenue sharing law through June 2007. In line with the constitutional
requirement, a separate draft revenue sharing law has been prepared as a component
of the hydrocarbon legislative package currently under consideration.
According to a draft of the revenue sharing law published by the Kurdistan
Regional Government on June 20, 2007,11 the federal government would be
empowered to collect all oil and gas revenue, with the stipulation that all funds be
deposited into external and internal accounts based on their source. The federal
government would have priority to allocate the funds in the accounts to support
national priorities such as defense and foreign affairs, “provided that this does not
impact the balance and needs of the governments of the Regions and the
Governorates which are not organized in a region.” The remainder of the accounts
would be distributed to regions and governorates automatically, on a monthly basis,
based on agreed population-density-based percentages until a census can be
completed. The Kurdistan Regional Government would receive a 17% share of the
remaining funds deposited in two accounts at the Central Bank of Iraq branch in
Irbil.12 No specific provision is made in the draft for addressing requirements to meet
the needs of “damaged regions” as required by Article 112 of the constitution.
The draft revenue law also would create a “Commission of Monitoring the
Federal Financial Resources” composed of central government officials, experts, and
representatives of each region and governorate. The Commission would monitor
deposits and allocations from the central revenue fund, in addition to facilitating
international audits and producing monthly, quarterly, and annual transparency
reports. Article 7 of the draft revenue law reiterates the call for the establishment of
a “Future Fund” for surplus revenue, but states that the operation of such a fund
should be defined in a separate piece of legislation following further negotiation
among federal, regional, and governorate representatives.
Prospects for Future Revenue Sharing. A number of outside observers
have emphasized the importance of proper oil revenue management and equitable oil
revenue sharing as requirements for economic development and political
reconciliation in post-Saddam Iraq. Some Members of Congress, such as Senator
Hillary Rodham Clinton and Senator John Ensign, have advocated for the creation
11 Available at [http://www.krg.org/pdf/English_Draft_Revenue_Sharing_law.pdf].
12 Ben Lando, “Iraqis Make Progress on Sharing Oil Sales,” United Press International
(UPI), June 21, 2007.
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of an “Iraq Oil Trust” to ensure that all Iraqis share Iraq’s oil wealth equitably.13 The
Iraq Study Group recommended that oil revenue accrue to the central government
and not to regions (Recommendation 28). This principle appears to have been
included in the draft hydrocarbon framework and draft revenue sharing legislation,
which would create central accounts for oil and gas revenues.
According to the drafts, revenue sharing will reflect a population-based system
for revenue allocation, with automatic monthly distributions to regional and
governorate authorities. Potential obstacles to revenue sharing on these terms include
the lack of recent, reliable national census data and uncertainty over the terms of
communal representation on hydrocarbon policy decision making and
implementation bodies. One Iraqi politician reportedly referred to the arrangements
agreed to in the draft revenue sharing law as the result of “political blackmail” by
Kurdish politicians.14
Ministry of Oil and Iraq National Oil Company Laws
The final two components of the hydrocarbon legislative package are proposed
laws that will reorganize Iraq’s Ministry of Oil and establish an Iraqi National Oil
Company (INOC). Under the hydrocarbon framework law, the responsibilities and
authorities of the Ministry of Oil and the INOC would be altered significantly, and
the draft Ministry and INOC laws are necessary to ensure proper oversight,
accountability, and separation of powers between the two entities. As of January
2008, drafts of these laws had not been published and public reporting on their
contents remains limited.
Prospects for Enactment and Implementation
Iraqi and U.S. officials hailed the Council of Ministers’ February 2007 approval
of the draft hydrocarbon framework legislation as an important step forward.
However, the draft legislative package remains the subject of intense scrutiny from
Iraqi and international observers: the draft framework law is imprecise on key issues,
including contract terms and revenue sharing, and political observers have warned
the legislation would create decision making structures that could contribute to
sectarian or inter-regional tensions rather than defuse them. Both the U.S. and Iraqi
administrations had hoped the hydrocarbon framework law would be approved by the
parliament by the end of May 2007. However, differences over oil field management
responsibilities and the revenue sharing formulas and mechanisms continue to
preclude parliamentary consideration.
On July 3, 2007, Iraqi Prime Minister Nouri al Maliki announced that the
Council of Ministers had formally approved a final version of the framework law and
had forwarded the bill to the Council of Representatives for consideration. Iraqi
13 Senators Hillary Rodham Clinton and John Ensign, “An Oil Trust for Iraq,” Wall Street
Journal, December 18, 2006.
14 Remarks attributed in an Iraqi press account to Usama al Najafi, a member of the Iraqiya
parliamentary coalition associated with former interim prime minister Iyad Allawi.
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officials stated that “linguistic” changes were made to the February 2007 draft, but
precise details on what changes may have been included have not been made public.
Kurdish leaders raised questions about the changes, and at least one Kurdish official
claimed that Kurdish representatives were not consulted on the final version of the
draft prior to its delivery to the parliament. On July 11, Kurdistan Regional
Government (KRG) Natural Resource Minister Ashti Hawrami stated that the
amendments to the draft law “reduce the powers of the (Kurdish) region and should
not be approved.”15 Political groupings that favor strong central government control
over production and revenue decision making also criticized the draft framework law.
The failure to achieve a regular quorum in the Iraqi Council of Representatives
complicated efforts to consider or adopt legislation from late 2006 through
September 2007.16
At present, the draft hydrocarbon framework law has not been placed on the
parliament’s legislative calendar, primarily because of continuing political
differences between the Shiite-led central government and the Kurdistan Regional
Government (KRG) over federal and regional oil-related decision-making powers.
Intense discussions among party leaders are ongoing, amid reports that some groups
may be seeking to revisit core compromises that enabled the draft legislation to move
forward in February 2007. In January 2008, the chairman of the parliament’s Energy
Committee stated that, “the Parliament awaits for the government’s approval of any
of the draft law’s four copies.”17 Kurdistan Regional Government Prime Minister
Nechirvan Barzani and Iraqi Prime Minister Nouri al Maliki met in April and June
2008 to negotiate terms for moving forward on the draft hydrocarbon laws and other
outstanding issues. According to Barzani, a political committee has been formed to
continue negotiations on the framework legislation.18
Within the parliament, criticism of a perceived fast-tracking of hydrocarbon
legislation because of U.S. demands is prevalent. Iraq’s ambassador to the United
States Samir Sumaidaie has questioned whether there was “too much emphasis
placed on the promulgation of these laws” by the United States and argued that
“sorting out the complex issues of legislation needs time.”19 Once the parliament
begins consideration of the legislation, potential amendments to the drafts could alter
or jeopardize core compromises reached by negotiators and cabinet officials. The
Iraqi government may face long-term challenges in implementing enacted legislation
in light of persistent security threats and the strong opposition to proposed
compromises voiced by some Iraqi groups (see Players and Positions below).
15 Associated Press, “Kurds Speak Out Against Key Oil Law,” July 11, 2007.
16 A quorum in the Council of Representatives consists of half the 275 members plus one —
a total of 139 members.
17 UPI, “Iraq MP: Kurds, Government Stall Oil Law,” January 10, 2008.
18 Kurdistan Regional Government, Press Release: “PM Barzani announces political
committee to discuss Iraqi federal hydrocarbons law,” June 28, 2008.
19 Jeffrey Bartholet, “Plain Speaking: Amb. Samir Sumaidaie” Newsweek Online, September
24, 2007. Available at [http://www.msnbc.msn.com/id/20958064/site/newsweek/page/0/].
CRS-10
Interim Arrangements and Contracts
In the absence of new oil legislation and regulation, the Iraqi Ministry of Oil and
the Kurdistan Regional Government have taken steps to move forward with
hydrocarbon sector investment and development. These steps have contributed to the
persistence of an atmosphere of controversy surrounding the draft hydrocarbon
legislation, and international oil companies have been forced to consider investment
decisions in an uncertain legal environment.
KRG Contracts. In late 2007, the KRG finalized its own regional oil and gas
investment law and signed new production sharing agreements with several
international companies, including U.S.-based Hunt Oil.20 Some analysts believe that
the Kurdish moves signal the KRG’s intention to begin large scale oil development
activities regardless of progress on federal legislation. The KRG opposes proposals
to require federal approval of its existing or future contracts, but notes that it is
committed to revenue sharing as defined in the constitution and the draft revenue
sharing law. In September 2007 a State Department spokesman stated the
Administration’s view that the KRG deals “elevate tensions between the Kurdish
regional government and the Government of Iraq,” and “aren’t particularly helpful”
to the extent that they hinder consideration of a national oil law.21
Government officials from other parties have reacted negatively to the impasse
and the KRG’s recent activities. On September 8, Iraqi Oil Minister Hussein al
Shahristani stated that the national government considers contracts signed by the
KRG to have “no standing” and threatened that “if for any political reason the
[hydrocarbon framework] law is delayed, we’ll go ahead and start discussions with
international oil companies” at the national level.22 The KRG responded by stating
that Al Shahristani’s views were “irrelevant to what the KRG is doing legally and
constitutionally in Kurdistan.”23
Tensions appeared to escalate further after Minister Al Shahristani warned
international oil companies that the national government would not allow the export
of oil produced under KRG contracts.24 The KRG responded by accusing Minister
Al Shahristani of mismanaging the Oil Ministry budget and restated its opinion that
20 Bloomberg News, “Dallas Oil Company Approved to Drill in Kurdistan,” September 10,
2007. The KRG law is available at [http://www.krg.org/uploads/documents/
Kurdistan%20Oil%20and%20Gas%20Law%20English__2007_09_06_h14m0s42.pdf].
21 U.S. Department of State Daily Press Briefing, Tom Casey, Deputy Spokesman,
Washington, DC, September 28, 2007.
22 Ben Lando, “Deeper Than an Oil Law in Iraq,” UPI, September 10, 2007.
23 James Glanz, “Compromise on Oil Law in Iraq Seems to Be Collapsing,” New York
Times, September 13, 2007.
24 Platts Commodity News, “Iraq’s Shahristani Says Hydrocarbon Law not Expected Soon,”
November 15, 2007.
CRS-11
its contracts were both constitutional and legal.25 In November 2007, 60 Iraqi oil
sector leaders wrote to the Council of Representatives to state that the KRG’s
unilateral signing of contracts constituted a “deliberate and dangerous action” and
had no “legal or political standing whatsoever.”26 At least 120 members of the
Council of Representatives from a wide range of political parties endorsed a January
2008 joint statement underscoring their opposition to the KRG contracts.27 The
Ministry of Oil has since refined its position slightly to emphasize its opposition to
contracts signed by the KRG after February 2007. Contracts signed before February
2007 with firms currently producing oil for domestic consumption would be
considered valid after review and potential amendments. According to Minister Al
Shahristani, oil produced or exported under post-February 2007 contracts “will be
confiscated.”28
Ministry of Oil Short-Term Contracts. In an effort to improve the output
of Iraq’s currently producing oil fields, the Ministry of Oil has negotiated with major
international oil companies on two-year technical service contracts (TSCs). Potential
partners reportedly include Royal Dutch Shell, Chevron, BHP Billiton, Anadarko,
ExxonMobil, BP and Total SA. Under the terms of the TSCs, international firms
would provide technology, equipment and services to increase the total output of
currently producing Iraqi oil fields by 500,000 barrels per day.29 These technical
contracts reportedly are to be based on studies that international oil companies
completed for the Iraqi government under the terms of existing memoranda of
understanding.30
According to Ministry of Oil officials, negotiations are in their final stages and
the contracts may be signed in July 2008. In June 2008, Minister Al Shahristani
responded to concerns expressed about the short term contracts by underscoring that
the technical service contracts under consideration “are not contracts based on
participation in production. This means these companies will not have a share from
Iraq's oil. Oil will remain completely under Iraq’s national control. All oil revenues
will go to Iraq.”31 Members of the COR have demanded the right to review the short-
term contracts before they are signed.32 The KRG has released a commissioned
25 Kurdistan Regional Government, “KRG responds to Dr Shahristani’s threats to
international oil companies,” November 20, 2007.
26 Radio Free Europe Documents and Publications, “Iraq: Baghdad, Kurds At Odds Over Oil
Deals,” November 30, 2007.
27 Ned Parker, “Iraqi Political Factions Jointly Pressure Kurds,” Los Angeles Times, January
14, 2008; and, UPI, “Iraq Factions Join Against Kurd Oil Deals,” January 15, 2008.
28 Ben Lando, “Wildcatters in Controversial Iraq Oil Deals Optimistic,” UPI, June 26, 2008.
29 Mariam Karouny, “Oil firms line up for contracts in Iraq,” Reuters, March 1, 2008.
30 Vahe Petrossian, “Iraq Opens Door to Foreign Input,” Upstream, March 28, 2008.
31 “Al Arabiyah Program Discusses Iraqi Oil Production, Interviews Oil Minister,” U.S.
Open Source Center (OSC) Document - GMP20080626693001, June 26, 2008.
32 Mustafa al Hashemi, “Parliament demands oversight of oil deals,” Az Zaman (Baghdad),
June 28, 2008.
CRS-12
report questioning the economic benefits of the service contract model.33 The report
expresses concerns about the misalignment of incentives for international consultants
and host governments whereby consultant companies may be rewarded regardless of
production results.
Ministry of Oil Long-Term Contracts. In January 2008, Minister Al
Shahristani directed the Ministry of Oil to begin preparation for an eventual
exploration and production licensing round by launching a pre-qualification review
process for potential international investors. Oil companies interested in bidding on
oil extraction and service licenses issued by Iraq’s national government were required
to submit a pre-qualification form to the ministry’s Directorate of Petroleum
Contracts and Licensing by February 18, 2008.34 In March 2008, Minister Al
Shahristani reported that approximately 150 companies had made submissions, and,
by June 2008, 35 companies had been pre-qualified to bid for long-term service
contracts. The contracts reportedly will cover Iraq’s main oil fields at Rumaila,
Kirkuk, Zubair, West Qurna, Bai Hassan, and Maysan. International firms reportedly
will be required to open offices in Baghdad and to have a local partner with a 25
percent stake in the operation.35 Contracts could be signed by mid-2009 and would
be based on the terms of the draft framework law. Cabinet approval may be sought
for long-term contracts if the COR has not approved the draft hydrocarbon
framework law.
Iraqi Perspectives
Core Issues
Iraq’s Constitution: Federal and Regional Authority. According to
Revenue Watch36 Middle East director Yahia Said, “the most contentious issue in the
legal framework is the division of authority between the federal center and the
regions.” The concept of federalism has been incorporated into Iraq’s constitution
and law, and Iraqi attitudes toward the draft legislative package often correspond
with regional differences of opinion about the proper role and power of the federal
government and regional and governorate authorities to make oil policy and revenue
decisions. However, the constitution’s ambiguity about the roles and powers of
federal, regional, and governorate authorities has contributed significantly to the
33 Available at
[http://www.krg.org/grafik/uploaded/Comparative-Analysis__2008_06_30_h13m28s23.pdf]
34 Faleh al Khayat, “Iraq Prepares Oil Licensing Round Without Federal Oil Law,” Platts
Commodity News, January 9, 2008. An Arabic and English version of the form is available
at [http://www.oil.gov.iq/pcld.pdf].
35 Dean Yates, “Iraq Throws Open Door to Foreign Oil Firms,” Reuters, June 30, 2008.
36 Yahia Said, Director, Middle East and North Africa, Revenue Watch Institute, “Iraq
Hydrocarbons Legal Framework,” Statement Submitted to the House Subcommittees on the
Middle East and South Asia and International Organizations, Human Rights and Oversight,
July 19, 2007.
CRS-13
ongoing impasse over these issues.37 Articles 111 and 112 of the Iraqi constitution
state that Iraq’s natural resources are the property of “all the people of Iraq in all
regions and governorates,” and that “the federal government, with the producing
governorates and regional governments, shall undertake the management of oil and
gas extracted from present fields (italics added).” These provisions were included
as a means of ensuring consensus among Iraqis and the adoption of the constitution.
Iraq’s Constitutional Review Committee (CRC) delivered its long-expected
recommendations for constitutional amendments in late May 2007, but left many
sensitive issues, including the distribution of oil revenue, to be decided by “the
political leadership in the country, to settle them for the interest of the nation and to
guarantee rights to all parties.”38 Reportedly, Kurdish representatives on the
committee pressed for regional power to distribute oil revenue, while Sunni and
Shiite Arab members supported central government control over revenue collection
and distribution.39 The CRC was expected to release a report with final
recommendations on these and other sensitive issues by the end of August 2007. In
September, the Council of Representatives extended the CRC deadline until
December 31, 2007.40 In December 2007, CRC Chairman Humam Hamoudi
requested and received a further six-month extension.41
The June 2008 Measuring Stability and Security in Iraq report to Congress states
that “the CRC continues to review almost 50 amendments addressing the authority
of the federal government and governorates,” including provisions addressing “the
extent of governorate powers under Article 115”42 and the “status and management
of oil and gas.”43 According to one analysis of the CRC recommendations relating
37 Further complicating matters are Article 115, which provides regional authorities the
power to override federal law in the event of conflicts with regional legislation, and Article
110, which grants powers to Iraq’s federal government to formulate “foreign sovereign
economic and trade policy” and regulate “commercial policy across regional and
governorate boundaries” similar to those granted to the United States Congress by the
commerce clause of the U.S. Constitution. For one analysis of these issues, see Joseph C.
Bell and Cheryl Saunders, “Iraqi Oil Policy — Constitutional Issues Regarding Federal and
R e gi o n a l A u t h o r i t y, ” M e mo r a n dum, J uly 7, 2006. A va i l a b l e a t
[http://www.iraqrevenuewatch.org/reports/MEMORANDUMConstitutional%20Interpret
ation.DOC].
38 Damien Cave, “Iraqis Are Failing to Meet U.S. Benchmarks,” New York Times, June 13,
2007.
39 Mariam Karouny, “Iraq Lawmakers Deadlocked over Constitution Reforms,” Reuters,
May 22, 2007.
40 U.S. Department of Defense, Measuring Stability and Security in Iraq - December 2007.
41 Tina Susman and Asso Ahmed, “Kurds Delay Vote on Fate of Kirkuk as Iraq Goals Slip,”
Los Angeles Times, December 27, 2007; and U.S. Department of Defense, Measuring
Stability and Security in Iraq - March 2008, p. 4.
42 Article 115 provides regional authorities the power to override federal law in the event
of conflicts with regional legislation.
43 U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2008, Report
(continued...)
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to Articles 111 and 112, the draft amendments would strengthen federal authority in
case of oil and gas related disputes with regions; provide for automatic distribution
of revenues according to legislated criteria; and clarify that provisions related to
revenue and certain management responsibilities apply to all fields, not just “new”
or currently producing fields.44
Some observers argue that without a mutually acceptable agreement on federal
and regional power sharing as reflected in a constitutional amendment, passage of the
current draft hydrocarbon framework and revenue sharing laws may not adequately
ensure equitable distribution or contribute to political reconciliation or economic
growth. To date, Iraqi Kurds, acting through their Kurdistan Regional Government
(KRG), have demanded the right to sign oil development deals without much
national government interference. Other sub-national groupings also may contest the
right of Iraq’s central government to control aspects of oil policy, including some
inhabitants of the oil-rich governorate of Al Basrah and members of the minority
Sunni Arab community who fear that a Shiite Arab and Kurdish dominated national
government may not administer hydrocarbon revenues fairly.
Revenue Sharing. The central role of the oil sector in Iraq’s economy, the
uneven geographic distribution of Iraq’s oil resources, and the legacy of communal
favoritism practiced under Saddam Hussein have created lasting concerns among
Iraqis about the future equitable distribution of oil revenues. These concerns have
deepened in the atmosphere of sectarian and ethnic violence that has gripped Iraq
since mid-2003. The principles and mechanisms by and through which Iraq’s oil
revenues are to be collected and distributed remain contested. Nevertheless, most
outside observers agree that an equitable revenue distribution formula will be
critically important to Iraq’s future economic health and political stability. Article
112 of Iraq’s constitution requires the Iraqi government to distribute revenues:
in a fair manner in proportion to the population distribution in all parts of the
country, specifying an allotment for a specified period for the damaged regions
which were unjustly deprived of them by the former regime, and the regions that
were damaged afterwards in a way that ensures balanced development in
different areas of the country, and this shall be regulated by a law.
Recent debate has centered on the content of draft revenue sharing legislation
that must be considered and approved as part of the hydrocarbon package. The
principal issues remain formulas for ensuring equitable distribution of revenues to
Iraq’s population and the mechanisms through which revenue will be collected and
distributed. Debate over distribution formulas reflects efforts to agree on quantitative
terms for ensuring equitable per capita distribution and providing for “damaged” and
“unjustly deprived” regions in line with Article 112 of the constitution. Debate on
43 (...continued)
to Congress in accordance with the Department of Defense Appropriations Act 2007
(Section 9010, P.L. 109-289), p. 3.
44 Joseph C. Bell, Hogan & Hartson LLP, “Iraqi Oil Policy - Proposed Constitutional
Amendments Regarding Federal and Regional Authority over Oil and Gas,” July 16, 2007.
CRS-15
distribution mechanisms focuses on whether or not regions or governorates should
retain the right to make decisions about revenue from oil and gas produced in their
territory and whether federal revenue distribution should be automatic and fixed or
whether the federal government should retain discretion over the allocation of
funding to regions and governorates. The U.S. Department of Defense reported in
March 2008 that the Iraqi government “continues to distribute oil revenues equitably
to the provinces in the absence of... comprehensive legislation.”45
Foreign Participation. The sovereign control of Iraq’s oil resources and
revenues remains a subject of intense scrutiny, debate, and sensitivity in Iraq. Iraq
completed the nationalization of its oil resources in 1975, and oil exploration,
production, and exports were managed subsequently by state-run entities that
employed thousands of Iraqis. Given the effects of war, sanctions, and
mismanagement of the country’s oil infrastructure since 1980, many energy experts
believe Iraq will need significant infusions of investment, technology, and expertise
in order to rehabilitate and eventually expand its oil production capacity in line with
the current government’s plans.46 Iraq’s own oil revenues may provide a significant
resource base for such investment and for attracting technology and expertise.
However, some observers have questioned the Iraqi government’s capacity to
effectively direct large amounts of its own resources toward hydrocarbon sector
rehabilitation in light of its past failures to manage and expend funds set aside in the
federal budget for those purposes (see Revenues below).47
Over the short-term, Iraq’s unstable security situation presents a significant
barrier to large-scale investment by most international entities. Over the medium to
long term, Iraqis face difficult choices about the character and needs of their oil and
gas industries: preserving full control over all investment and technological inputs
to the sector may not be compatible with its technical needs. Whereas some Iraqis
oppose foreign participation on any terms, others support foreign participation in the
form of technical service contracts, and still others favor production sharing
agreements (PSAs), which would grant international companies exploration and
production rights over specific areas for specified periods, subject to the terms of
negotiated contracts.
45 U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008,
Report to Congress in accordance with the Department of Defense Appropriations Act 2007
(Section 9010, P.L. 109-289), p. 4.
46 According to a May 2007 Government Accountability Office (GAO) report, “U.S.
officials and industry experts have stated that Iraq would need an estimated $20 billion to
$30 billion over the next several years to reach and sustain a crude oil production capacity
of 5 million barrels per day. This production goal is below the level identified in the Iraqi
2005-2007 National Development Strategy — at least 6 million barrels per day by 2015.”
GAO, “Rebuilding Iraq: Integrated Strategic Plan Needed to Help Restore Iraq’s Oil and
Electricity Sectors,” GAO-07-677, May 15, 2007.
47 See U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2007,
pp. 9, 11-12.
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Players and Positions
Iraqi attitudes on the future of the country’s oil industry are shaped by a number
of factors, including geography, ethnicity, political ideology, and party affiliation.
Sectarian identity politics undoubtedly is one important factor, particularly with
regard to the concerns of some members of the minority Sunni Arab community who
fear exclusion from decision-making bodies and inadequate revenue sharing.
However, viewing ongoing Iraqi debates over oil resources and revenue through a
purely sectarian lens obscures other important nonsectarian dynamics. Constitutional
questions relating to federal and regional authority concern many Iraqis, and
members of some ethnic and sectarian groups oppose positions and compromises that
their political leaders have suggested with regard to the package of draft hydrocarbon
legislation. Many Iraqi oil experts, technicians, and powerful unions also have taken
strong positions on the legislative package that do not correspond to apparent ethnic
or sectarian affiliations or interests.
The Kurds: Regional Authority and Kirkuk. The Kurdistan Regional
Government (KRG) has signed oil and gas production sharing contracts with several
small international companies since 2003. Under the draft oil sector law now before
Iraq’s Council of Representatives, these existing contracts would be subject to review
by the Panel of Independent Advisers of the Federal Oil and Gas Council (FOGC).
Regional authorities would retain the right to license future international participation
in oil and gas development in their region, subject to the terms of the hydrocarbon
framework law, the Iraqi constitution, and the review of the FOGC. In early July
2007, the four draft annexes to the hydrocarbon framework law that would have
divided Iraq’s oil fields for federal and regional management were dropped in favor
of future adjudication by the FOGC, reportedly in line with Kurdish demands. The
KRG favors the establishment of an automatic revenue distribution mechanism based
on a per capita formula in order to prevent political intervention at the federal
government level that would limit allocations to the Kurdish region.48 The KRG has
adopted legislation outlining a regional oil and natural gas framework and a model
contract for production sharing agreements with outside investors.
The Kurds, both through legal procedures as well as population movements,
also are trying to secure political control over the ethnically and religiously mixed
city of Kirkuk, which sits atop a large oil field in the northern governorate of Al
Tamim. The Kurds supported insertion of language in Iraq’s constitution (Article
140) requiring a vote by December 2007 on whether Kirkuk might formally join the
Kurdish-administered region. The Iraq Study Group report stated that this
referendum should be delayed (Recommendation 30). In June 2007, Kurdistan
Regional Government president Massoud Barzani stated that, “we will never delay;
we will never accept any delay in the implementation of Article 140.”49 However,
48 Yahia Said as quoted in Christina Parajon, “The Iraq Hydrocarbon Law: How and
When?,” United States Institute of Peace Briefing, June 2007.
49 On June 12, 2005, Barzani was named “President of Kurdistan” by the 111-seat Kurdish
regional assembly that was elected in January 2005. Articles 63 to 67 of the Iraqi
constitution set general rules for the creation of executive authority by regional
(continued...)
CRS-17
tensions revolving around the Kirkuk issue abated somewhat after Iraqi officials
agreed to a six-month extension of the deadline for a referendum “for technical
reasons.” According to the Department of Defense, the involvement of the United
Nations Assistance Mission for Iraq (UNAMI) in technical assistance related to the
Kirkuk question has opened the possibility of negotiation for a political agreement
on the issue rather than a referendum.50 However, in June 2008, the Department
reported to Congress that “the Article 140 process to settle disputes over internal
boundaries has made little headway.”51
Sunni Arabs: Revenue Sharing and Foreign Participation. The Sunni
Arab minority-dominated areas of Iraq have few proven crude oil or natural gas
deposits, although petroleum geologists differ as to whether substantial oil deposits
may be found in Iraq’s western Al Anbar governorate in the course of future
exploration. As such, the community’s concerns have focused on ensuring equitable
distribution of oil export revenues in the future. In some cases, Sunni parties also
have taken a hard-line position on preventing feared exploitation of Iraq’s oil
resources by international companies or other third parties. Sunni negotiators
opposed Iraq’s new constitution in part because it empowers regions in oil production
and revenue allocation policy. The Association of Muslim Scholars and the Iraqi
Accord Front [Al Tawafuq], both Sunni groups, have criticized the draft oil
legislation currently under consideration.52 Representatives of the Al Tawafuq party
have called oil and gas deals signed by the Kurdistan Regional Government with
foreign companies “illegal.”53
The United Iraqi Alliance: Investment and Development. The leading
parties of the ruling Shiite United Iraqi Alliance (UIA) — the Dawa Party and the
Supreme Islamic Iraqi Council (SIIC, formerly known as the Supreme Council for
Islamic Revolution in Iraq, or SCIRI), have supported the adoption of the
hydrocarbon legislative package as a means of reviving Iraq’s oil sector and
increasing government revenues. To date, ministries led by members of these parties
have faced mounting criticism over allegations of oil-related corruption and
mismanagement of export revenues. According to some analysts, differences within
the UIA with regard to principles of federalism could have important implications for
future oil sector decisions, particularly the SIIC’s reported preference for establishing
a large federal region encompassing all of the Shiite Arab majority governorates of
49 (...continued)
governments. Radio Free Europe/Radio Liberty, “Iraq: Kurdish Official Says Kirkuk
Normalization To Proceed,” June 22, 2007.
50 U.S. Department of Defense, Measuring Stability and Security in Iraq-March 2008, p. 3.
51 U.S. Department of Defense, Measuring Stability and Security in Iraq-June 2008, p. v.
52 Sabah Jerges, “Iraqi Sunni Faction Calls for Ban on PSAs,” Platts Oilgram News, Volume
85, Issue 81, April 25, 2007.
53 James Glanz, “Compromise on Oil Law in Iraq Seems to Be Collapsing,” New York
Times, September 13, 2007.
CRS-18
southern Iraq.54 However, at present, both the Dawa Party and the SIIC reportedly
favor the centralization of authority in federal decision making bodies likely to be
dominated by Shiite parties under Iraq’s democratic system. The UIA also reportedly
supports the creation of a strong Iraq National Oil Company to limit the influence of
potential political challengers affiliated with Iraq’s Southern Oil Company, the Iraq
Federation of Oil Unions, and the Fadilah (Virtue) party.
Basrah: Industry Unions and the Fadilah Party. Al Basrah governorate
holds most of Iraq’s proven oil resources and, as such, local political actors exert
influence over the hydrocarbon sector and consideration of the legislative package.
Press reports suggest that competition between local politicians, militia groups, union
members, and federal ministry representatives is fueling conflict that has intensified
since mid-2007.55 The 26,000 member Iraq Federation of Oil Unions has voiced its
members’ strong opposition to the current draft of the hydrocarbon framework
legislation and has demonstrated a capacity to disrupt oil production and refinery
operations with strikes.56
In May 2007, oil unions demanded participation in discussions of the draft
hydrocarbon legislation with Prime Minister Al Maliki, who reportedly agreed to
include the unions in future talks. By June 2007, the unions stated that Maliki’s
failure to do so was one contributing factor to their decision to launch a strike that
halted oil operations in southern Iraq for days. In response, the federal government
dispatched troops to the south, issued arrest warrants for union leaders, and
ultimately agreed in negotiations to establish a formal mechanism for union input
into the legislative drafting process.57 Subhi al Badri, chairman of the Iraqi
Federation of Union Councils, has described the draft framework law as “a bomb that
may kill everyone,” and vowed that “if the Iraqi parliament approves this law, [union
members] will resort to mutiny.”58 In September, the Iraqi Federation of Southern
Oil Unions (IFOU) vowed to shut down oil pipelines in southern Iraq if the
parliament passed the draft hydrocarbon framework legislation in its then-current
form.
The Fadhila (Virtue) party holds about 15 seats in Iraq’s Council of
Representatives and split from the ruling UIA coalition earlier this year. The
Governor of Al Basrah governorate and the director of the influential Southern Oil
54 Reidar Visser, “Basra Crude: The Great Game of Iraq’s ‘Southern’ Oil,” Norwegian
Institute of International Affairs, March 2007.
55 Sam Dagher, “Basra Oil Fuels Fight to Control Iraq’s Economic Might,” Christian
Science Monitor, September 19, 2007.
56 In June, the Iraqi Federation of Oil Unions led a two-day strike against the Southern
Pipeline Company over working conditions and threatened to spread the action to other
unions and facilities. The Iraqi government responded by deploying military forces to the
Company facilities and issuing arrest warrants for union leaders. See also, Ben Lando,
“Unions Could Sway Iraq Oil Law,” UPI, March 28, 2007; and Associated Press, “Iraqi Oil
Workers Threaten Open-Ended Strike In South,” June 6, 2007.
57 Ben Lando, “Iraq Oil Strike on Hold, Troops Remain,” UPI, June 8, 2007.
58 UPI, “Iraq Unions Vow ‘Mutiny’ Over Oil Law,” July 23, 2007.
CRS-19
Company are both Fadhila party members.59 Fadhila leaders have voiced similar
opinions to those of some oil union members and may support efforts to secure
regional status for Al Basrah and adjacent oil producing governorates of Maysan and
Dhi Qar that would increase southern Iraqis’ influence over national oil and gas
policy. Both the oil unions and the Fadhila party reportedly oppose the use of
production sharing agreements with international companies and may support the
introduction of foreign investment and technology on the basis of technical service
contracts similar to those used by other Gulf region producers.
Sadr and Sunni Insurgent Groups. The Shiite Arab political faction
associated with Moqtada al Sadr and at least two Sunni insurgent groups also have
expressed their opposition to the draft legislation. Sadr-affiliated cabinet members
continue to boycott cabinet proceedings, and, following the announcement of the
cabinet’s approval of the draft bill on July 3, Sadr representatives vowed to oppose
the bill in parliament unless an amendment is passed precluding the signing of
production sharing agreements. In September 2007, Sadr affiliated parliamentarians
quit the ruling United Iraqi Alliance in protest over the government’s policies. Since
mid-June 2007, insurgents affiliated with the 1920 Revolution Brigades and the Jihad
and Reform Front have released communiques condemning the draft legislation as
a mechanism for foreign exploitation of Iraqi natural resources and threatening
attacks against cabinet members and parliamentarians who vote for or otherwise
support the bill.
International Energy Companies. The absence of an accepted
hydrocarbon framework presents a procedural obstacle to international investment
in Iraq’s oil and natural gas sector. Some energy experts argue that the persistence
of insecurity has been a more fundamental concern to international energy
companies. However, in December 2007 a U.S. Deputy Treasury Secretary Robert
Kimmitt identified the lack of progress on the oil law as a primary barrier to
investment by international oil companies and encouraged U.S. oil companies to
refrain from signing contracts in Iraq until a new oil law is passed.60 While some
small international energy companies have signed limited production sharing
agreements in the Kurdish-controlled region of northern Iraq, significant international
investments in oil exploration and production elsewhere in Iraq have not been made
since 2003. This may change in light of the licensing pre-qualification process
currently being administered by the Ministry of Oil and the announcement of the
completion of negotiations with oil majors for technical service contracts on existing
fields.
Saddam Hussein’s government signed contracts with several major international
oil companies, and under the draft hydrocarbon legislation currently under
consideration, these contracts must be evaluated and re-approved by the Federal Oil
59 In May 2007, the Al Basrah provincial council voted to remove Governor Mohammed Al
Waili, a Fadhila party leader, from office. He has refused to vacate the office and Prime
Minister Maliki has declined to intervene.
60 Bradley Brooks, “A top US Treasury Official Says Stalled Oil Law, Not Insecurity,
Hampering Iraq Oil Investment,” Associated Press, December 4, 2007.
CRS-20
and Gas Council.61 In June 2007, Iraqi Oil Minister Hussein al Shahristani told
reporters that a 1997 contract signed by the Saddam Hussein regime and China
National Petroleum Corporation to develop the Al Ahdab oil field in Wasit
governorate “is still valid” and that the current Iraqi government “will honor it,”
pending the resolution of ongoing technical discussions.62 The president of Russian
oil company Lukoil stated in January 2008 that his company is continuing its
discussion with Iraq to resume operations in the West Qurna oil field.63 Reportedly,
the two sides agreed to establish a working group on the matter following a visit to
Iraq by Russian Deputy Foreign Minister Alexander Sultanov and Lukoil president
Vagit Alekperov.64
While the risks associated with investment in Iraq’s established producing oil
fields are relatively low, potential future investments in discovered but undeveloped
or exploration blocks could carry more significant risks. Investors are therefore likely
to seek contract terms that would provide adequate return and compensation,
particularly terms that would allow for production sharing. According to some
observers, concerns about corruption and the potential opacity of Iraq’s regulatory
and contracting processes may also deter some outside investment over the long term,
particularly if key decision making powers are delegated to regional or governorate
authorities.65 Nevertheless, recent reporting suggests that there is significant interest
among international oil companies to begin operations in Iraq, even subject to terms
and conditions being set on an interim basis by the Iraqi Ministry of Oil.
Oil Revenue and Security Concerns
Revenues
Current Arrangements. Iraq’s State Oil Marketing Organization (SOMO)
remains responsible for the sale and export of Iraqi crude oil. Under the terms of
United Nations Security Council resolution (UNSCR) 1483 (and renewed through
subsequent Security Council resolutions), revenue from Iraq’s oil exports is deposited
into an Iraq-controlled account held at the Federal Reserve Bank of New York
(FRBNY). Five percent of the funds are reserved for a United Nations Compensation
61 Some of the presumptive contracts for oil exploration in Iraq, signed with the government
of Saddam Hussein, include the following: Al Ahdab field — China National Petroleum
Corporation (China); Nassiriya field — Agip (Italy) and Repsol (Spain); West Qurna —
Lukoil (Russia); Majnoon — Total Fina Elf (France); Nahr Umar — Total Fina Elf
(France); Tuba — ONGC (India) and Sonatrach (Algeria); Ratawi — Royal Dutch Shell
(Britain and the Netherlands); Block 8 — ONGC (India). Dan Morgan and David Ottaway,
“In Iraqi War Scenario, Oil Is Key Issue,” Washington Post, September 15, 2002.
62 Jamil Anderlini and Steve Negus, “Iraq Revives Saddam Oil Deal with China,” Financial
Times (UK), June 23, 2007.
63 Interfax, “Lukoil Continuing Talks with Iraq to Resume Operations There — Alekperov,”
January 12, 2008.
64 Vahe Petrossian, “Iraq Opens Door to Foreign Input,” Upstream, March 28, 2008.
65 Oxford Analytica, “Iraq: Oil Law Necessary but not Sufficient for IOCs,” March 6, 2007.
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Fund for reparations to the victims of the 1990 Iraqi invasion and occupation of
Kuwait. The remaining 95% is deposited into a Development Fund for Iraq (DFI)
account at the FRBNY and is then transferred to an Iraqi Ministry of Finance account
at the Central Bank of Iraq for further distribution to Iraqi government ministries.66
Under the terms of UNSCR1546 (and renewed by subsequent resolutions), the DFI
is monitored by an International Advisory and Monitoring Board (IAMB), which
provides periodic reports on Iraq’s oil export revenue, Iraq’s use of its oil revenues,
and its oil production practices.67 According to the IAMB, as of December 31, 2007,
$23.43 billion had been disbursed from the United Nations Compensation Fund; Iraq
owes $28.95 billion to the Fund. The IAMB estimates that “at the present rate of
Iraqi oil sales, it would take approximately 17 years for the compensation award to
be fully paid.”68
UNSCR 1790 of December 18, 2007, extended the IAMB monitoring of the DFI
until December 31, 2008, subject to Iraqi government review by June 15, 2008. In
October 2006, the Iraqi cabinet approved the creation of an oversight body known as
the Committee of Financial Experts (COFE) to monitor oil revenue collection and
administration. The president of the COFE inaugurated its activities in April 2007,
and it currently is working alongside the IAMB on audit procedures. The
establishment of an audit oversight committee for the DFI and oil export revenues
is a structural benchmark under Iraq’s Stand-by Arrangement (SBA) with the
International Monetary Fund currently satisfied by the extension of the IAMB
arrangement and the creation of the COFE. The signing of the SBA was a
requirement for Iraq’s debt reduction agreements with the members of the Paris
Club.69
Resources, Expenditures, and Corruption. From its creation in May
2003 through December 31, 2007, the DFI had received over $121.7 billion in oil
proceeds and other deposits.70 Periodic audits conducted under the auspices of the
IAMB have routinely found irreconcilable discrepancies in oil production and export
figures and DFI account receipt and distribution amounts. A lack of reliable oil
output measurement has proven to be a fundamental and persistent problem. Oil
production and exports were conducted without metering equipment throughout the
Coalition Provisional Authority (CPA) period. A May 2007 GAO report confirmed
that reliable metering in Iraq’s oil fields remained lacking and contributed to the lack
66 Ernst & Young, Development Fund for Iraq — Statement of Cash Receipts and Payments
for the period from 1 July 2005 to 31 December 2005, September 19, 2006, p. 6.
67 The IAMB homepage is available at [http://www.iamb.info/.]
68 Ernst & Young, Development Fund for Iraq — Summary of Audit Results for the year
ended December 31, 2007, May 12-13, 2008.
69 See International Monetary Fund, Country Report No. 07/115, Iraq: Third and Fourth
Reviews Under the Stand-By Arrangement, March 2007; and, CRS Report RL33376 - Iraq’s
Debt Relief: Procedure and Potential Implications for International Debt Relief, by Martin
A. Weiss.
70 Ernst & Young — Summary of Preliminary Findings for the year ended December 31,
2007, published on January 14, 2008.
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of reliable data on Iraq’s oil production and related revenue.71 A January 2008 IAMB
report stated that Iraq’s Ministry of Oil “does not have in place a full operational
loading and metering system at production and loading points in order to determine
produced and loaded quantities [of oil] accurately.”72 A June 2008 IAMB report
confirmed that “some metering has been installed at oil terminals, but there continues
to be no metering in the oil fields.”73
Completed financial audits through December 2005 found that “no
comprehensive financial and internal controls policies and procedures manuals” were
present in Iraqi ministries that were spending oil export proceeds delivered through
the DFI system. On June 12, 2007, the IAMB released a statement on its 2006
findings, noting that the audits demonstrated that “the overall financial system of
controls is deficient.” The audits found that there was “no overall comprehensive
system of controls over oil revenues,” and that “basic administrative procedures”
were “outdated and ineffective.”74 These conditions may have facilitated the type of
widespread corruption that has been alleged against a number of Iraqi ministries
spending distributed oil export revenue, often associated with weak contracting and
cash management policies. The IAMB’s preliminary findings for 2007 recognized
Iraqi government’s efforts to respond to IAMB recommendations, but found that “the
overall financial system of controls in place in the spending ministries, the U.S.
agencies in respect of outstanding commitments using DFI resources, and the Iraqi
administration of DFI resources remain deficient.”75
The United States has spent $1.6 billion in appropriated reconstruction funding
on efforts to repair and secure Iraq’s hydrocarbon production and export
infrastructure since 2003.76 In addition, as of December 2005, the United States had
administered over $2.8 billion in Iraqi funds from the DFI for oil infrastructure
projects.77 The June 2007 U.S. Department of Defense Measuring Stability and
Security in Iraq report stated that the Iraqi government’s “failure to execute several
billion dollars of its own funds in oil sector capital investments” had limited the
overall recovery of the sector.78 Although capital investment rates have increased
71 James Glanz, “Billions in Oil Missing in Iraq, U.S. Study Finds,” New York Times, May
12, 2007; and, GAO, GAO-07-677, May 15, 2007, pp. 26-7.
72 Ernst & Young — Summary of Preliminary Findings for the year ended December 31,
2007, published on January 14, 2008.
73 Ernst & Young, Development Fund for Iraq — Summary of Audit Results for the year
ended December 31, 2007, May 12-13, 2008.
74 Statement by the International Advisory and Monitoring Board on the Development Fund
for Iraq, June 12, 2007.
75 International Advisory and Monitoring Board on Iraq, “Third Interim Report Covering the
Year 2007,” February 28, 2008.
76 For more information about U.S. reconstruction spending and programs, see CRS Report
RL31833 - Iraq: Reconstruction Assistance, by Curt Tarnoff.
77 GAO, GAO-07-677, May 15, 2007, p. 15.
78 According to the report, Iraq's Ministry of Oil expended only $90 million of its $3.5
(continued...)
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since mid-2007, the March 2008 report stated that “a difficult security environment,
fear among Iraqi officials of corruption charges and a lack of technical expertise
prevented full execution of the budget in 2007 (resulting in lower total capital
investment, particularly in oil and electricity infrastructure).”79 The June 2008 report
confirmed that “the [government of Iraq’s] inability to execute its capital budget
remains a concern.” According to the June report, the Ministry of Oil executed $1.1
billion of its $2.2 billion 2007 capital budget, and may face continuing challenges
because of a lack of administrative capacity and international firms’ reluctance to
engage in long-term, multi-year development projects.80
Security
Infrastructure Attacks and Smuggling. Iraq’s oil infrastructure suffered
little damage during the U.S.-led invasion (an estimated nine oil wells were set on
fire), but insurgents and smugglers have targeted oil infrastructure for political and
financial reasons since 2003. Iraq’s total pipeline system is over 4,300 miles long,
and most insurgent groups have focused their attacks on pipelines in northern Iraq
that feed the Iraq-Turkey oil export pipeline as a means of reducing government
export revenues.81 Highly organized smuggling operations have leveraged supply
and price imbalances in the Iraqi refined fuel market to create lucrative profit
opportunities, some of which may benefit Shiite political parties and militia groups.
In particular, smugglers have targeted pipelines in southern Iraq to force refining
operations to transport fuel products using more vulnerable tanker vehicles that can
be stolen, diverted, and manipulated.82 The June 2007 Measuring Stability and
Security in Iraq report stated that “as much as 70% of the fuel processed at Bayji was
lost to the black market — possibly as much as US$2 billion a year.”83
In response, the Iraqi government and Coalition forces have launched several
initiatives to improve the security of Iraq’s oil infrastructure. Pipeline Exclusion
Zones have been established between Kirkuk and the main refining center at Bayji,
and new zones are planned to link Bayji, Baghdad, and Karbala by October 2008. In
January 2008, the command of the 32,000-member Ministry of Oil Protection Force
78 (...continued)
billion capital budget in 2006, and the Ministry’s 2007 allocation of $2.2 billion was less
than half of the ministry’s own estimated maintenance and growth needs. U.S. Department
of Defense, Measuring Stability and Security in Iraq - June 2007, pp. 9, 11-12.
79 U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008, p.
9.
80 U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2008, p. 10.
81 See Michael Knights, “Iraqi Critical Infrastructure Faces Sophisticated Threat,” Jane’s
Intelligence Review, January 1, 2006.
82 The Iraqi government imports refined fuels because it lacks sufficient refining capacity
to meet local demand. Saddam-era price subsidies also remain in place, making Iraqi fuel
products cheaper than those found in neighboring countries. See James Glanz and Robert
F. Worth, “Attacks on Oil Industry in Iraq Aid a Vast Smuggling Network,” New York
Times, June 4, 2006.
83 U.S. Department of Defense, Measuring Stability and Security in Iraq, June 2007, p.13.
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(OPF) was transferred to the Ministry of Interior.84 According to the Department of
Defense, “increased security efforts, such as the construction of pipeline exclusion
zones and the use of the oil protection force... enabled an increase in total exports
for the year by 10% over 2006” in 2007.85 Increased security has enabled continued
production and repair on older infrastructure that had been delayed by persistent
attacks.
U.S. Policy and Issues for Congress
Both the Bush Administration and Congress have identified political
reconciliation and long-term economic development as key policy goals and
benchmarks for the progress of U.S. efforts in Iraq. The current military strategy
employed by U.S. forces in Iraq seeks to create a secure environment in which Iraqis
can resolve core political differences. In Iraq, the ongoing debate over a package of
four draft hydrocarbon laws reflects Iraqis’ unresolved political differences over the
powers reserved for federal and regional authorities, proper means for ensuring
equitable distribution of hydrocarbon revenues, and longstanding, shared concerns
about preserving Iraq’s unity and sovereignty.
In light of the U.S. military commitment and persistent Iraqi political
differences, Members of Congress and U.S. policymakers face a number of
challenging questions: To what extent does the U.S. investment in improving Iraq’s
security permit the United States to influence either the pace or content of Iraqi
debates over the future management of Iraq’s sovereign economic resources? Should
the United States encourage Iraqis to complete constitutional reforms that will
resolve core political differences before promoting the adoption and implementation
of hydrocarbon legislation? How can the United States most effectively ensure that
Iraqis adopt equitable revenue sharing mechanisms? Should the U.S. government
promote international investment in Iraq’s oil and gas sector and, if so, in what form
and on what scale?
To the extent that Iraqi factions perceive the United States to be promoting
legislative solutions or processes opposed to or supportive of their interests, they may
oppose or support the hydrocarbon legislation and U.S. preferences and policy goals.
If constitutional disputes over federal and regional authority remain unresolved, the
durability of compromises reached with regard to the hydrocarbon legislation may
be undermined. Revenue sharing mechanisms based on per capita population
formulas may ensure formerly disadvantaged regions receive adequate shares of oil
and gas proceeds, but could create new resentment in less populous governorates,
including areas inhabited by Iraq’s minority Sunni Arab population. International
investment and technology may be necessary in light of the current Iraqi
84 The U.S. military has reported that some members of the Iraqi Ministry of Defense
Strategic Infrastructure Battalions and the Ministry of Oil Protection Force are “sometimes
suspected of being complicit in interdiction and smuggling.” U.S. Department of Defense,
Measuring Stability and Security in Iraq, June 2007, p.13.
85 U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008, p.
11.
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government’s ambitious plans for the expansion of Iraq’s oil and gas production.
However, the terms and conditions of international participation are likely to remain
highly controversial, with powerful Iraqi interest groups taking opposing positions.
The public positions that Members of Congress and Administration officials take on
each of these questions will likely influence Iraqi attitudes toward the U.S. presence
in Iraq, toward the draft legislative package, and toward each other.
Frequently Asked Questions
Privatization and Foreign Participation. Some U.S. and international
press coverage of Iraq’s draft hydrocarbon framework legislation has alleged that the
draft law would require the Iraqi government to use contracts known as production
sharing agreements in future dealings with international oil companies. While the
draft legislation represents a reversal of the nationalization of Iraq’s hydrocarbon
sector insofar as it allows foreign investment and participation in exploration,
production, and development, the legislation does not mandate the use of production
sharing agreements or any other type of model contract. Rather, the legislation would
require the Federal Oil and Gas Council to develop model contracts subject to terms
of the law that seek to preserve economic return for Iraq, the sovereign control of oil
and gas resources, and production plans in line with Iraq’s long-term development.
While Iraqis may choose to use production sharing agreements or service contracts
in the future, the legislation currently under consideration would not require them to
use one specific type or to agree to specific revenue, tax, or ownership terms with
potential international partners.
Interim investment arrangements being implemented by Iraq’s Ministry of Oil
will offer “Long Term Improved Service Contracts” rather than production sharing
contracts, which Natiq al Bayati, director general of the body implementing the
licensing has called a “red line.”86 Contracts signed by the Kurdistan Regional
Government with international companies have used a production sharing
arrangement, offering a 12 to 15% production share to participants.
The broader questions of whether and on what terms international investment
would be necessary or useful for Iraq remain open. Some Iraqis swift favor the
development of unexplored oil fields as a means of maximizing potential revenue,
while others, such as draft framework law co-author Tariq Shafiq have argued that
“new oil is indeed not needed for over a decade,” because Iraq’s currently producing
and discovered but nonproducing fields can provide adequate revenue if properly
managed.87
86 Platts Commodity News, “Iraq not Seen Offering Production-sharing Contracts:
Document,” January 10, 2008.
87 Tariq Shafiq, testimony Before a Joint Hearing of the Subcommittee on the Middle East
and South Asia and the Subcommittee on International Organizations, Human Rights, and
Oversight of the House Committee on Foreign Affairs, July 18, 2007.
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U.S. Advisors and Diplomatic Support.88 Several press reports have
alleged that U.S. government personnel, U.S. contractors, or international oil
executives may have had a role in drafting or otherwise contributing to the creation
of the draft hydrocarbon framework legislation. Administration officials deny that
any U.S. official drafted any component of the legislation. At the direction of the
United States Agency for International Development (USAID), the U.S. contractor
BearingPoint prepared a study of potential oil management models for Iraq in
December 2003 entitled, “Options for Developing a Long Term Sustainable Iraqi Oil
Industry.”89 In addition, a number of U.S. advisors, some of whom have been former
international oil company executives, have worked closely with Iraq’s Ministry of Oil
and other energy officials in various capacities since 2003. Current advisory efforts
with the ministry are focused on budget planning and outlay processes in light of the
Iraqi government’s difficulties in allocating its oil investment budgets over the last
two years.
From mid-2006 to April 2007, USAID also funded a Baghdad-based Petroleum
Legal and Regulatory Advisor on a contract basis.90 The advisor worked with the
U.S. Embassy and coordinated with five other contracted lawyers affiliated with the
U.S. Department of Commerce (DOC), and the U.S. Department of Energy (DOE).
Together the lawyers worked to “assist the Iraqis by providing commentary and case
studies,” which, according to USAID, were designed to “help lay the foundation for
a legal, regulatory, and tax environment conducive to domestic and foreign
investment in [Iraq’s] energy sector.” The legal advisory effort concluded in April
2007. In response to a March 2007 CRS inquiry, the Administration reported that
the “U.S. Government did not provide any drafting input to the recent hydrocarbon
law; the Iraqis have not asked for that kind of assistance on that law or on the revenue
sharing law.”
According to the U.S. Department of State, an “Energy Fusion Cell” made up
of U.S. Embassy personnel, representatives of Multinational Force-Iraq (MNF-I), and
Iraq’s Ministry of Oil and Ministry of Electricity also is working to develop an
integrated national energy strategy to better coordinate Iraqi budget allocations,
reconstruction plans, and production goals.91 In September 2007, the Washington
Post reported that the Commerce Department has sought to hire an international legal
adviser fluent in Arabic “to provide expert input, when requested” to “U.S.
government agencies or to Iraqi authorities as they draft the laws and regulations that
will govern Iraq’s oil and gas sector.”92
88 This information is drawn from an interagency Administration response to a CRS inquiry,
drafted by the U.S. Department of State Bureau for Near Eastern Affairs on March 19, 2007.
89 Available at
[http://www.platformlondon.org/carbonweb/documents/Bearing_Point_Iraq_oil.pdf.]
90 BearingPoint held the contract for this advisory coordinator position.
91 GAO, GAO-07-677, May 15, 2007, p. 45.
92 Walter Pincus, “Commerce Seeks Adviser for Iraq Oil Interests,” Washington Post,
September 10, 2007.
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In July 2008, the New York Times cited unnamed U.S. officials in reporting that
U.S. advisers and contractors provided advice to Iraqi officials considering short-
term technical support contracts with a number of international firms, including U.S.-
based firms. According to the officials, they advised the Iraqis on the “technical and
legal details of the contracts”, but did not have any role in choosing which companies
would receive the contracts.93 U.S. Department of State spokesman Tom Casey
responded to the reports by stating that, “the United States was not involved in any
decisions to award contracts, to make determinations of what kinds of contracts
would be offered, [or] to provide advice over what kinds of contracts would be
offered.”
The United States also has provided diplomatic support to promote political
reconciliation among Iraqi leaders on oil-related issues and to facilitate contacts
between Iraqis and potential international investors. In July 2006, U.S. Secretary of
Energy Samuel Bodman visited Baghdad and expressed his support for the drafting
and passage of new legislation to govern Iraq’s oil industry and to facilitate
international investment. Later that month, Iraqi Minister of Oil Shahristani visited
Washington, DC, and met with executives from major international oil companies
at U.S. Department of Energy headquarters. In recent months, the U.S. Embassy in
Baghdad has hosted and arranged a number of meetings among key Iraqi political
figures to encourage discussion and compromise over outstanding legislative and
constitutional reforms, including the package of hydrocarbon legislation.
Congressional Benchmark and Other Legislation
Section 1314 of the FY2007 Supplemental Appropriations Act [P.L.110-28]
specifically identified the enactment and implementation of legislation “to ensure the
equitable distribution of hydrocarbon resources of the people of Iraq without regard
to the sect or ethnicity of recipients” and “to ensure that the energy resources of Iraq
benefit Sunni Arabs, Shia Arabs, Kurds, and other Iraqi citizens in an equitable
manner” as benchmarks on which the President was required to report to Congress
in July and September 2007. Section 3301 of the act states that no funds
appropriated by the act or any other act may be used “to exercise United States
control over any oil resource of Iraq.”
On July 12, the Administration released an interim report on the Iraq
benchmarks stating that progress toward meeting the revenue sharing benchmark “is
unsatisfactory,” and noting that the Administration remains “actively engaged” in
encouraging Iraqi leaders “to expeditiously approve the draft [revenue sharing] law
in the Council of Ministers and move it to the Council of Representatives.”
According to the report, “the effect of limited progress toward this benchmark has
been to reduce the perceived confidence in, and effectiveness of, the Iraqi
Government.”94
93 Andrew E. Kramer, “U.S. Advised Iraqi Ministry on Oil Deals,” New York Times, June
30, 2008.
94 The White House, Initial Benchmark Assessment Report, July 12, 2007. Available at
[http://www.whitehouse.gov/nsc/iraq/2007/FinalBenchmarkReport.pdf]
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The September 2007 report stated that Iraq’s government “has not made
satisfactory progress toward enacting and implementing legislation to ensure the
equitable distribution of hydrocarbon revenue.” The report also stressed that “it is
difficult to predict what further progress might occur” when Iraq’s parliament
reconvenes and considers proposed legislation.95
Section 8113 of P.L. 110-116, the Department of Defense Appropriations Act,
2008 (November 13, 2008) states that “none of the funds appropriated or otherwise
made available by this or any other Act shall be obligated or expended by the United
States Government... to exercise United States control over any oil resource of Iraq.”
Section 1222 of P.L. 110-181, the National Defense Authorization Act for Fiscal
Year 2008 (January 28, 2008) states that “no funds appropriated pursuant to an
authorization of appropriations in this Act may be obligated or expended... to
exercise United States control of the oil resources of Iraq.” Section 2913 of S. 3001,
the Senate version of the National Defense Authorization Act for Fiscal Year 2009,
contains similar language.
Other relevant legislation before the 110th Congress includes:
! Section 8 of H.R. 2574, the Iraq Study Group Recommendations
Implementation Act of 2007, includes a detailed statement of policy
on the oil sector in Iraq. The bill would require the Administration
to report on the implementation of the bill’s reformulation of the
Iraq Study Group recommendations (including Section 8) 90 days
after enactment.
! Section 4 of S. 670, the Iraq Troop Protection and Reduction Act of
2007, would prohibit the provision of appropriated funds to the
Government of Iraq for security purposes unless the President
certifies to Congress that the GOI “provides for an equitable
distribution of the oil revenues of Iraq.”
! S.Con.Res.37 states that the United States should encourage Iraqis
to adopt oil revenue sharing legislation as a “critical component of
a comprehensive political settlement based upon federalism.”
! H.Res.835 calls on Iraq not to reopen the Kirkuk-Baniyas oil
pipeline to Syria until Syria makes “significant progress” with regard
to support for Lebanese Hezbollah, nonproliferation, and other
issues.
! H.Res. 1205 calls on the Iraqi government to devote more of its own
financial resources to meeting the needs of displaced Iraqis in light
of its substantial oil revenue surpluses.
95 The White House, Benchmark Assessment Report, September 14, 2007. Available at
[http://www.whitehouse.gov/news/releases/2007/09/20070914.html]
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! Other resolutions and bills include statements of policy declaring
that it is not and shall not be the policy of the United States to
control Iraq’s oil resources. See H.Con.Res. 46 and H.R. 663.