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Oil Dispute Threatens Iraqi Economy

Qassim Khidhir Hamad
Fears are rising that parliament’s failure to pass an oil law may worsen the effects of the global economic crisis on Iraq. Without a law the development of the country’s oil capacity remains restricted, limiting…
16.04.2009  |  Erbil

Continued disputes between the Kurdish regional government and the central government over the level of regional control over oil resources and revenues are blocking the passage of the law.

“If the oil price remains the same, US $50 per barrel, the Iraqi budget will be cut by about 50 percent next year,” Ali Hussein Balo, a Kurdish MP and chairman of parliament's Oil and Gas Committee told Niqash, pointing to the potential for severe strains on the economy.

In March parliament passed a US $58.6 billion budget after agreeing to sharp cuts amid falling oil prices. The government's original budget for 2009 was US $79 billion but it was cut as oil prices fell from a high of US $150 to their current price of US $45.

Oil exports constitute 86 percent of the country’s overall revenues. Currently, the country produces 2.5 million barrels per day, well below the country's capability of more than four million.

Iraq’s draft oil law has been stuck in parliament since 2006 as a result of disagreements between the Kurdish region and the central government. Baghdad wants the oil issue to be centralized while the Kurdish region is calling for a decentralized system with federal regions controlling their own oil fields.

At one point a draft law was agreed upon, only for the Kurds to say that changes were introduced behind their back reducing the control of regions over oil revenues. As a result the Kurdish leadership vowed to block approval of the law in parliament.

While the draft law was still with parliament the Kurdish Parliament passed its own regional Oil and Gas Law, increasing tensions with the central government Oil Ministry. The Regional Higher Oil and Gas Committee, headed by the Prime Minister Nechirvan Barzani, subsequently signed dozens of Production Sharing Contracts (PSCs) with international oil companies.

According to the Kurdish Region’s Minister of Natural Resources, Ashti Hawrami, it is time for the Kurds to enjoy the benefits of oil after years of suffering. In recent remarks he said that the Kurdish region is now ready to export 100,000 barrels a day, but that “an Iraqi Oil Ministry decision hinders exportation.”

The central government denounced the move as illegal and Iraq’s Oil Minister, Hussain al-Shahristani, warned foreign oil companies against cooperating with the KRG. The Ministry halted cooperation with an Austrian oil company that signed a KRG contract.

In response the KRG claims that the Oil and Gas Law and the PSCc are legal and comply with the Iraqi constitution.

Negotiations between Baghdad and the KRG to resolve the crisis have been ongoing with Barzani and Iraqi Prime Minister, Nouri al-Maliki, meeting on several occasions to discuss the issue. But to date none of the parties have been willing to compromise on their key demands.

Nonetheless, according to Balo, the Kurdish MP and chairman of parliament’s Oil and Gas Committee, Baghdad will soon accept that KRG’s oil contracts are legal.

“Soon the dispute between Baghdad and the Kurdish region over oil will end and Baghdad will agree to legalize KRG’s contracts,” he said.

According to former Iraqi Oil Minister, Ibrahim Bahr al-Ulum, Baghdad and the Kurdish Region need to reach a quick settlement in order to create a legal frame work for the country’s oil and gas activities.

“Foreign oil companies are not not investing in Iraqi because of the bad security situation, but the fact is that foreign companies do not see a legal frame work,” al-Ulum told Niqash during meetings with Kurdish officials in Erbil to discuss the distribution of oil wealth.

Observers say the disagreement over oil and gas draft law can only be solved outside of parliament once the main political parties reach consensus over the issues.

“Approving the Iraqi oil law needs an agreement outside of parliament,” said Bayazid Hassan Abdullah, a parliamentarian and member of the Oil and Gas Committee.

Abdullah pointed to the issue of Kurdish demands, as well as the level of control exerted by foreign oil companies within Iraq as the key issues requiring agreement.