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Apr 20, 2017 | 09:20 GMT

Reform Eludes Iraq's Oil Sector

Iraq's lawmakers have been discussing measures to reform the vital energy sector for more than a decade. But so long as the divisions between and within the country's political groups persist, the reforms will be stuck in a legislative stalemate.
(HAIDAR MOHAMMED ALI/AFP/Getty Images)
Forecast Highlights

  • Divisions between and within Iraq's Sunni Arab, Shiite Arab and Kurdish populations will continue to thwart efforts to reform the country's oil and gas sector.
  • A bill proposing to reinstate the Iraqi National Oil Company will be the least contentious of these measures.
  • Still, as elections approach, leaders from Iraq's various Shiite political factions will try to jockey for influence in the country, compounding the legislative gridlock. 

After just over 10 years of debate, amendment and repeated rejection in Parliament, Iraq's landmark oil bill is no closer to passing. The Cabinet first introduced the draft law in February 2007 to revamp and jump-start the country's crucial oil and gas sector after the fall of longtime leader Saddam Hussein. And though the intervening decade has done little to address the underlying factors that paralyzed Baghdad's attempt at reforming the energy industry, that hasn't stopped the country's leaders from trying. Since taking office in August, for instance, Oil Minister Jabbar al-Luaibi has steered Iraq's energy policy in a more pragmatic direction. The legislature will soon debate the latest iteration of a bill to reinstate a national oil company to oversee the country's smaller, regional firms, and al-Luaibi recently announced that Baghdad is exploring new contract models for foreign investors. Leaders such as Shiite National Alliance head Ammar al-Hakim, meanwhile, have proposed various plans to reconcile Iraq's different stakeholders to end the country's political gridlock. Even so, the differences between and within Iraq's Sunni Arab, Shiite Arab and Kurdish communities will continue to undermine progress in the oil and gas sector, particularly with elections looming on the horizon.  

Mapping Iraq's Discord

If a picture is worth a thousand words, a map is just as valuable in assessing the challenges facing the Iraqi government. The country's oil production, which even at today's depressed oil prices generates roughly 30 percent of its gross domestic product, is concentrated in just a handful of areas. In southern Iraq, the predominantly Shiite province of Basra alone accounts for roughly two-thirds of the country's oil production; were it a country, Basra would be among the world's top 10 oil producers. The Kurdistan Regional Government (KRG) in northern Iraq, along with the nearby disputed territories under Kurdish control, produces another 13 percent of the country's oil. And the Sunni-majority regions in central and western Iraq produce little oil to speak of.

The uneven distribution has made oil a perennially contentious issue among the country's three major ethno-sectarian groups. Following the United States' invasion, however, the situation deteriorated. Iraq's Shiite and Kurdish communities, newly empowered after decades under Hussein's Sunni Baathist administration, intimidated Sunni Arabs out of politics. The ruling coalition then drafted the 2005 Constitution with minimal input from the Sunni community — and without clarifying which powers fell to which regions under Iraq's new federalist model of government.

For the oil and gas industry, this oversight has proved a critical problem. The Constitution grants the federal government control of oil fields already producing oil. But it makes no mention of fields not yet in production, beyond stipulating that Baghdad must work with regional and provincial governments to devise a strategy for developing Iraq's oil industry. Consequently, many Kurds argue that the KRG rightfully controls production in the region under the oil and gas law it passed in 2007, since several of the fields there were not yet producing when the Constitution was enacted. Baghdad, on the other hand, maintains that under the Constitution, the Kurdish oil and gas law needed approval from the Iraqi federal government to take effect. All the while, the country's Sunni Arabs have advocated centralized control and even distribution of the country's oil and gas revenue, hardly a surprising stance given their dearth of energy resources. 

As troublesome as the dispute between Arbil and Baghdad has been for Iraq's oil sector, divisions in the country's Shiite Arab community are perhaps even more difficult to overcome. Iraq's various Shiite parties have always held diverse views on a range of issues, including oil. Having won most of the Shiite vote in the first provincial elections after Hussein's ouster, for example, the Islamic Supreme Council of Iraq (ISCI) called for the creation of a nine-province Shiite region, modeled after the KRG. The proposal aimed to give Iraq's Shiites greater control of production in their oil-rich provinces. But it interfered with the plans of then-Prime Minister Nouri al-Maliki, leader of the Shiite Dawa Party, who needed a tighter grip on Iraq's oil revenues to effectively rule. To make matters even more complicated, Basra has at times proposed forming its own region, a move that would cut the rest of Iraq's Shiite population off from the province's substantial oil production.

Iraq's sectarian and political divisions have led to a decadelong political stalemate over the oil reforms. And though the country's energy sector currently has other problems to contend with — such as the KRG seizure of two oil fields previously under Baghdad's control during the battle for Mosul — the legislation is no less important. The Constitution grandfathered in existing oil and gas laws when it took effect, meaning that Baghdad is still offering foreign investors outdated contract terms put in place when it nationalized its energy sector. Without passing a new upstream oil and gas law, Iraq will struggle to entice more foreign companies to invest into its oil and gas industry (a contentious issue in itself).

Iraqi Oil Deposits Map

A Reformed Strategy

This reality has become more glaring for Iraq's politicians over the past few years, especially as tumbling oil prices strained the federal and regional governments' finances. Combined with the Islamic State's rise, which brought the country's competing factions together against a common enemy, and the fall of al-Maliki, who had steadily increased his control over oil revenues, the price drop encouraged Iraq's leaders to reconsider their approach.

Prime Minister Haider al-Abadi has had to prioritize more inclusive reforms to preserve the country's fragile unity against the Islamic State. Along the way, Iraq's provinces have gained autonomy, however slight, in some aspects of governance, and the federal government has slowly relaxed its hold on the oil and gas industry. In early 2016, Baghdad approved a measure to split the country's South Oil Company into two entities, the Dhi Qar Oil Company and the Basra Oil Company, each of which would oversee oil operations in its respective province. The prime minister, facing pressure from Shiite leaders such as Muqtada al-Sadr, also reshuffled his Cabinet in favor of a more technocratic administration last year to combat the rampant corruption plaguing Iraq's government. As part of the shake-up, al-Abadi considered appointing a Kurd as oil minister — perhaps the most powerful position in Iraq's oil industry — before settling on al-Luaibi, the ISCI's nominee.

His final choice for the post has so far continued the trend toward reform. Prior to taking over the Oil Ministry, al-Luaibi was known as a technocrat who had guided the South Oil Company from 2003 to 2008, its first years working with international oil companies after Hussein's government collapsed. (Rumor has it that al-Maliki removed al-Luaibi as head of the company to reassert central control over it.) He is also the first Basrawi oil minister in recent years. But more important, al-Luaibi has acted pragmatically since assuming the post. He announced shortly after taking office that he intended to broker a deal with the KRG; within a month, Arbil and Baghdad arranged to jointly export oil produced in Kirkuk through the North Oil Company, splitting the proceeds. More recently, he finalized the South Oil Company's split and advanced the measure to reinstate the Iraqi National Oil Company.

Relative to other proposed reforms, the national oil company bill may be the least contentious. Iraq has not had a unified national oil company since 1987, and its regionally focused oil firms, such as the North Oil Company, currently fall under the Oil Ministry's purview. Resurrecting the Iraqi National Oil Company would likely distance the ministry from the country's oil firms, enabling it to focus on regulation; beyond that, the change would not be terribly dramatic. Nevertheless, the last time Iraq debated a draft of the legislation, in March 2016, Kurdish politicians opposed the measure because of the number of oil fields it would turn over to the national company's control.

Furthermore, whether Iraq's political groups share the prime minister and oil minister's zest for energy reform is unclear. The country's Kurdish, Sunni and Shiite populations are still divided, not only among but also within themselves. And their differences often play out on the national stage. In March, for example, the Patriotic Union of Kurdistan tried to stymie the rival Kurdistan Democratic Party's cooperation with Baghdad over energy production and increase its share of revenues by seizing control of oil facilities in Kirkuk. The degree to which Iraq should be federalized, moreover, is a subject of fierce debate between Iraq's Kurdish and Sunni Arab communities.

More of the Same

Still, some politicians seem to be on board with change. Al-Hakim, leader of Iraq's National Alliance as well as the ISCI, announced a framework in October, proposing a dialogue to reconcile Iraq's various groups. One of the main components of his plan, dubbed the "historic settlement," is to discuss expanding and formalizing federalism in Iraq, something he and the ISCI have long advocated. Al-Hakim has reached out to Kurdish leaders to drum up support for his dialogue, leading a high-level delegation to the KRG earlier this month to meet with its president, Masoud Barzani. Not to be outdone, al-Sadr — an ideological rival — released his own framework in February. Compared with al-Hakim's proposal, al-Sadr's plan envisions a solution more in line with the Sunnis' interests, including a more centralized government and the disbanding of the Shiite-majority Popular Mobilization Forces.

Notwithstanding their stated goal of national reconciliation, both leaders devised their frameworks with Iraq's upcoming legislative elections in mind. The country's Shiite groups lack cohesion. (They will retain the most important positions in government regardless, however, if only because Iraq is a Shiite-majority country.) Besides al-Sadr and al-Hakim, al-Maliki also has strong support in predominantly Shiite areas, even though he is a divisive figure. As the vote approaches, and the fight to retake Mosul winds down, each leader is trying to influence the country in a way that will best serve his political goals. They're not alone, either. Foreign powers such as the United States, Iran, Turkey and Saudi Arabia are also working to shape Iraq's future to suit their own agendas, further complicating the country's reconciliation process.

Iraq's political gridlock looks sure to continue. For the country's oil and gas sector, this means more of the same: The energy reform that has eluded Baghdad for the past decade will stay at bay, even if Parliament manages to pass the national oil company bill. And the country's leaders will have to keep relying on executive and ministerial authority to try to make piecemeal reforms in the meantime. 

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