The last two weeks saw a number of risks to business environments around the world.
Vladimir Putin announced his intention to return to Presidency, even promising to cut down the state’s interference in business. Meanwhile, Chinese companies have begun pulling out of Pakistan over security concerns. And Iraq passed a new oil and gas law that is threatening political stability at a time when U.S. troops are withdrawing from Iraq.
Below the map we’ve included an article from Maplecroft on the increasing governance and business environment risk in Iraq:
On 28 August 2011 Iraq’s Council of Ministers approved a draft Federal Oil and Gas Law (FOGL) and requested it be sent to Parliament for debate. Changes to the FOGL from its 2007 iteration include giving the Iraqi executive greater power, providing the Baghdad oil ministry with the authority to hold bidding rounds for most oil and gas fields (including those located in Iraqi Kurdistan), the creation of an Iraqi National Oil Company with control over major oil fields and the creation of a federal oil and gas council that would be the arbiter of any disputes between Baghdad and the regions.
In parallel to the cabinet-approved version, on 17 August, Iraq’s Oil and Energy Committee (OEC) also submitted a draft FOGL for reading in parliament– both bills are now under consideration. On 27 September, Adnan al-Janabi, Chairman of the OEC, said that a new law would arise from the two drafts and that “we can pass the law by the end of the year”.
The passage of the draft FOGL through the cabinet in the absence of Kurdish representatives led to immediate condemnation and a threat to boycott the parliament from the Kurdistan Alliance (comprising the Kurdistan Regional Government’s two main parties). As key partners in Prime Minister Nouri al-Maliki’s ruling State of Law coalition, such a debacle not only threatens to further strain relations within the ruling coalition, but raises broader questions about the future of federalism in Iraq, the long-term tenability of the 2005 Iraqi Constitution and the prospects for stability following the 31 December final draw-down of US troops. For international oil companies currently or potentially operating in Iraqi Kurdistan, the investment climate remains highly uncertain.
Between OPEC and autonomy
The need for a final FOGL to be agreed upon is urgent, and closely tied to Iraq’s ambitions to dramatically increase oil production. On 3 October it was reported that production for September hit 2.9m b/pd – its highest level since the 2003 invasion. Beginning with the signing of twelve long-term technical service contracts between November 2008 and May 2010, Iraq’s ‘Grand Upstream Opening’ envisages production surging from its current level to 11.815m b/pd in 2017 and plateauing between 2017-2022 before it begins to decline. Whilst for technical, geopolitical and infrastructural reasons the achievability and sustainability of these targets is highly questionable, the latest licensing round (auction scheduled for January 2012) could dramatically alter Iraq’s position within OPEC and lead to a production quota being imposed.
Although a founding member of OPEC, Iraq has been exempt from conforming to the OPEC quota system due to a history of sanctions and war. The 12 exploration blocks up for grabs could add 29tr cubic feet of natural gas and 10bn barrels of oil to Iraq’s reserves and place Iraq on a par with Saudi Arabia in terms of reserves. Whilst OPEC countries regularly fail to meet (or alternatively exceed) their quotas, for Iraq to be able to keep within the reasonable bounds of any future OPEC quota it quickly needs IOCs to confirm its reserves. The implication for IOCs is that if they produce at the rate the Government of Iraq (GoI) is currently demanding (and which is also built into the service contracts), then they could exploit the oilfields faster than their optimal depletion rate and thereby cause damage to them, for which the IOC would then be liable. To avoid this ‘catch-22’ situation, it is becoming increasingly inevitable that the GoI will have to renegotiate contracts with IOCs in the near future.
The issue of oil production is therefore intimately linked to the Kurdistan Regional Government and its own aspirations for increasing political and economic autonomy. With increasing reserves in federal Iraq, and officials in Baghdad cognisant of the many domestic and international limitations on achieving their production targets, it is possible that production from the oil fields in Iraqi Kurdistan could be seen as surplus to requirements. This is despite the KRG signing approximately 40 Production Sharing Contracts (PSCs) with IOCs and producing an average of 130,000 b/pd following the brokering ofan un-disclosed agreement between Erbil and Baghdad brokered in January 2011. Baghdad still considers the PSCs signed by the KRG with IOCs as illegal, and continues to blacklist IOCs who sign them.
In this respect, although the KRG is still dependent on the Baghdad government to provide its budget (and the operating costs of IOCs), and relies on federal Iraqi infrastructure and the State Oil Marketing organisation (SOMO) to export its crude, the underlying concern is that the KRG seeks to leverage its oil resources to finance its own drive for autonomy. Should this happen, Baghdad fears other oil-rich parts of Iraq, such as Anbar province in the south, could request ‘regional’ status under the constitution and seek more negotiating rights over resources which would lead to further disintegration of the Iraqi state and complicate Iraq’s regulatory framework.
The KRG flexes its muscles
For Iraqi Kurdistan, the issue of the FOGL is just one (albeit highly important) issue amongst others they seek progress on. Indeed, the KRG continue to demand the implementation of the ‘Erbil Agreement’ which Maliki’s government acquiesced to in return for the Kurds providing his bloc with their 57 seats in order to form a government in November 2010. The weakness of the coalition government has meant however that key tenets of the Erbil Agreement which include the resolution of internal boundary disputes and contested areas (such as oil-rich Kirkuk), and the funding and arming of the Kurdish guards (Peshmerga) as part of Iraq’s Defence System, have not been implemented.
Consequently, whilst the stoppage of oil exports from the KRG on 11 September was seen as a ‘warning shot’ to Baghdad over the FOGL (doubt alsoremains over the veracity of the KRG’s claim that the stoppage was due to technical difficulties), the moving of Peshmerga forces into the disputed Khanaqin district of Diyala province in late August must be seen as acts of potentially greater importance and concern. These moves by the Kurds, which have provoked strong criticism from political leaders in Baghdad, are particularly worrisome in the light of the draw-down of troops from Iraq by year-end 2011. Without the moderating presence of the US troops in the disputed border areas, there is a genuine risk the current tensions could turn increasingly violent. The passage of the FOGL by Baghdad has therefore further antagonized the Kurds and made similarly provocative moves more likely.
The passage of the FOGL must be understood as a clear statement by Baghdad that it does not support Kurdish aspirations for greater autonomy and further decentralization of power to the regions. However, the Kurds are highly unlikely to accept the terms of the draft FOGLs without substantial re-drafting. A new FOGL by the end of 2011 would therefore seem overly optimistic. In the meantime, with Baghdad and Erbil relations at their lowest ebb since late 2010, further acts by Baghdad and Erbil aimed to provoke and pressure the other can be expected. Nevertheless, despite their threats, it is unlikely the Kurds will withdraw from the ruling coalition as they would be unable to form a new majority government with Maliki’s political opponent, Ayad Allawi, as they do not carry sufficient seats.
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