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New York Times: Iraqis Reach an Accord on Oil Revenues

February 27, 2007

BAGHDAD, Feb. 26 — The Iraqi cabinet approved a draft of a law on Monday that would set guidelines for nationwide distribution of oil revenues and foreign investment in the immense oil industry. The endorsement reflected a major agreement among the country’s ethnic and sectarian political blocs on one of Iraq’s most divisive issues.

The draft law approved by the cabinet allows the central government to distribute oil revenues to the provinces or regions based on population, which could lessen the economic concerns of the rebellious Sunni Arabs, who fear being cut out of Iraq’s vast potential oil wealth by the dominant Shiites and Kurds. Most of Iraq’s crude oil reserves lie in the Shiite south and Kurdish north.

The law also grants regional oil companies or governments the power to sign contracts with foreign companies for exploration and development of fields, opening the door for investment by foreign companies in a country whose oil reserves rank among the world’s three largest.

Iraqi officials say dozens of major foreign companies, including ones based in the United States, Russia and China, have expressed strong interest in developing fields or have done some work with the Iraqi industry. The national oil law would allow regions to enter into production-sharing agreements with foreign companies, which some Iraqis say could lead to foreigners reaping too much of the country’s oil wealth.

Iraqi officials say all such contracts will be subjected to a fair bidding process, but American inspectors have reported that the upper echelons of the government, including the senior ranks of the Oil Ministry, are rife with corruption. There are also fears among non-Americans that American companies could be favored.

But oil industry analysts in the United States say it is unclear whether companies will rush to sign contracts because the law is vague about what legal protections investors would be given.

The oil law and several related measures must still be approved by Parliament before they are enacted. Since the American-led invasion in 2003, Iraqi politics have often been split bitterly along ethnic and sectarian lines, and that kind of conflict could stall the law’s passage. Drafts were debated for months by a committee before the cabinet finally approved one.

“At the end of the day, we all supported this thing because it’s workable for all the parties,” said Barham Salih, a deputy prime minister and the head of the committee.

Distributing revenue by population is not guaranteed to placate the feuding parties because no accurate census exists. There is intense disagreement over demographics in Iraq — many Sunni Arabs insist they are the majority of Iraqis, even though Sunni Arabs are generally estimated to be 20 percent of the population, Kurds 20 percent and Shiite Arabs 60 percent.

If the law is passed, its effect on the oil industry could be enormous, assuming that foreign companies would be willing to work here despite the violence. Iraq has 80 known oil fields, 65 of which will be offered for bids for development contracts, said Hussain al-Shahristani, the oil minister.

Iraqi leaders say they want the 275-member Parliament to approve the law before May. The legislature is in recess but is expected to reconvene next month. American and Iraqi leaders had tried to get the law approved last year, but the effort bogged down at the drafting level. Before the cabinet vote on Monday, the main Sunni, Shiite and Kurdish political blocs agreed to work together to ensure that the law passes Parliament in an expeditious manner, Mr. Shahristani said.

Since last year, senior Bush administration officials and top American commanders here have said a new oil law is crucial to the country’s political and economic development, and they have pressured Iraqi leaders relentlessly to make passage of the law a priority.

In recent weeks, Ambassador Zalmay Khalilzad, the senior American envoy here, has been in intense talks with Kurdish leaders in the north to overcome their objections to the draft, which centered on the contracting powers given to the central government versus the regions. Iraqi officials say Mr. Khalilzad’s negotiations were crucial to winning unanimous cabinet approval on Monday.

“This is a significant political achievement because leaders representing all of Iraq’s communities have demonstrated that they can pull together to resolve difficult issues of vital national importance,” Mr. Khalilzad said in a written statement on Monday evening. “The drafting of this framework law was not easy. It presented special challenges for the Iraqi and Kurdistan regional governments, and the leaders of key political blocs.”

Several members of the committee overseeing the drafting said in interviews that they were confident that Parliament would ultimately endorse the law, but perhaps only after heated debate.

“It will be tough,” Mr. Salih said. “I want to admit it and I want to recognize that. It will be an interesting roller coaster, my friends.”

The writers of the draft law tried to balance the powers of regional and central governments, an issue that goes directly to the heart of the Iraq war.

The minority Sunni Arabs, who ruled Iraq for decades before the toppling of Saddam Hussein and are now leading the insurgency, have chafed at rule by the Shiites and Kurds partly because they fear that those two groups might hoard oil wealth for themselves. Sunni Arab leaders have resisted attempts by the Kurds and some Shiite politicians to create laws allowing for greater regional autonomy.

The draft law says that all revenues from current and future oil fields will be collected by the central government and redistributed to regional or provincial governments by population, in theory ensuring an equitable distribution of profits. That method could help assuage Sunni Arabs hostile to Kurdish and Shiite autonomy.

The attitudes of Sunni Arabs could also soften if more oil exploration is done on their land. Iraqi officials recently increased their estimates of the amount of oil and natural gas deposits in Sunni Arab territory after paying tens of millions of dollars to foreign oil companies to re-examine old seismic data across the country and retrain Iraqi petroleum engineers.

Industry and government analysts in and outside Iraq estimate the proven oil reserves at 115 billion barrels. Oil production peaked at 3.7 million barrels a day in 1979, according to the United States Department of Energy. Production stood at 2.6 million barrels a day before the 2003 invasion, but has dropped since.

The oil law’s drafters reached agreement on the principle of revenue sharing fairly early in the process. Much more contentious was the issue of signing oil contracts. The Kurds, who have enjoyed de facto independence in the mountainous north since the end of the Persian Gulf war in 1991, argued strongly for regional governments or companies to have full power in signing contracts with foreign companies to develop oil fields. Sunni Arab leaders insisted on keeping this power in the hands of the Oil Ministry. The Shiites fell somewhere in the middle.

The draft law has a compromise: regions can enter into contracts, but a powerful new central body, the Federal Oil and Gas Council, would have the power to prevent the contracts from going forward if they do not meet certain prescribed standards, Mr. Salih said. A panel of oil experts from inside and outside Iraq would advise the federal council on the contracts.

The draft law also re-establishes the state-run Iraq National Oil Company, which was founded in 1964 to oversee oil production but was shut down by Mr. Hussein in 1987. The company would operate separately from the Oil Ministry and use a business model. In addition, any region that can produce at least 150,000 barrels of oil a day can create its own operating company.

Energy analysts said the new law is unlikely to lead to a stampede by foreign companies anytime soon because it leaves too many unresolved issues, including the lack of a mechanism to settle potential disputes between the federal authority and local governments.

“I think the devil is going to be in the details,” said Fadel Gheit, an analyst with Oppenheimer & Company in New York. “Oil companies need governments that will honor the contracts they sign and they need a safe environment to operate,” he added.

While Mr. Gheit said he expected American and British oil companies to receive preferential treatment in the awarding of contracts, other analysts said Iraqis would be suspicious of awarding preferential deals to American companies.

“Iraqis are extremely protective of their resources,” said Rochdi A. Younsi, an analyst at Eurasia Group, a political risk consulting firm. “Given the level of anti-American sentiment, any major American oil company perceived to take advantage of their relations in government would be seen as being part of the so-called conspiracy to take over Iraq’s natural resources.”

Jad Mouawad contributed reporting from New York.

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