The status of the draft Iraq oil and gas law.

• Author: Sakmar, Susan L.

1. INTRODUCTION II. IRAQ'S PETROLEUM AND GAS RESERVES A. How Much Oil and Gas Does Iraq Have? B. Challenges Confronting Iraq's Energy Infrastructure III. BACKGROUND OF IRAQ'S DRAFT HYDROCARBON LAW A. The Preamble, Iraq's Constitution and Chapter I B. Chapter II: Management of Petroleum Reserves C. Chapter III: Exploration and Field Development Operations D. The Annexes IV. THE MAIN ISSUES OF CONTENTION A. Federal and Regional Authority: The Preamble and Iraq's Constitution B. Management of Petroleum Reserves under Chapter H and Role of the FOGC C. Revenue Sharing D. Foreign Participation V. IMPACT OF IRAQ'S HYDROCARBON LAW ON IRAQ'S REDEVELOPMENT PLANS VI. RECENT DEVELOPMENTS AND FUTURE PROSPECTS I. INTRODUCTION

   If you've read Daniel Yergin's Pulitzer Prize winning book, The Prize, The Epic Quest for Oil, Money and Power, (1) you know that the ultimate prize in Iraq is OIL. And Iraq has lots of it. In terms of numbers, Iraq's proven oil reserves are estimated at 115 billion barrels, (2) although there is general agreement that the actual number could be much higher. (3) Even using a conservative estimate of an additional reserve base of 45 billion barrels, this would give Iraq total reserves of 160 billion barrels and would place Iraq's oil reserves second only to those of Saudi Arabia. (4)

   Given the vast reserves Iraq possesses, it is widely agreed that Iraq's oil industry will be the driver of Iraq's reconstruction and future economy. (5) Indeed, the Draft Iraq Oil and Gas Law (Draft Hydrocarbon Law) itself provides that "revenues from Oil and Gas represent the most important basis for redeveloping the country in general and the Iraqi economy." (6) This stated objective is perhaps the most important reason why the United States has been pushing for the Iraqi political structure to pass the Draft Hydrocarbon Law. (7)

   Although the Iraqi Cabinet approved the Draft Hydrocarbon Law in February 2007, disagreement over various provisions and among various parties has prevented the Iraqi Parliament from approving the law. (8) This Article analyzes the main provisions of the Draft Hydrocarbon Law and highlights the issues that must be resolved in order for the Iraqi government to pass the Draft Hydrocarbon Law.

2. IRAQ'S PETROLEUM AND GAS RESERVES

   1. How Much Oil and Gas Does Iraq Have?

      Due to years of conflict and underinvestment, much of the information about Iraq's oil reserves and the capacity of its oil industry is outdated. (9) Moreover, there appears to be a wide range of estimates about Iraq's known and potential reserves. (10) According to the Energy Information Administration (EIA), the statistical agency of the U.S. Department of Energy, Iraq currently has the world's third largest petroleum reserves, estimated at 115 billion barrels. (11) Iraq also has one of the lowest extraction costs in the world. (12) Iraq's production costs are less than $2 per barrel. (13) In 2001, the International Energy Agency (IEA) focused on Iraq's oil reserves in its World Energy Outlook (WEO) 2001. (14) The IEA's WEO 2001 indicated that Iraq had 78 billion barrels of proven reserves and 51 billion barrels of undiscovered reserves, for a total of 129 billion barrels. (15) At the time, OPEC estimated Iraq's proven reserves at 112.5 billion barrels. (16)

      Despite these differences in estimates, most "[e]xperts agree that Iraq may be one of the few places left where vast reserves, known and unknown, have barely been exploited." (17) For example, "[s]ome analysts [have] estimate[d] that exploration in the largely unexplored Western Desert could lift proven reserves to 180 billion barrels." (18) In April 2007, the "Colorado energy consultancy firm, IHS, stunned some of Iraq's politicians and oil engineers by declaring that the country's oil reserves were about 215 billion barrels--about double the estimates that have held for Iraq for years." (19) Some reports have even suggested that Iraq could have an additional 214 billion to 240 billion barrels not yet proven. (20) In short, the most recent projections have estimated that "Iraq's oil reserves could be nearly twice as large as previously estimated, containing more than 200 billion barrels." (21)

      Even if the low end estimate from the U.S. Geological Survey of 160 billion barrels (22) is used, Iraq would be a major oil power. Given the lack of available and reliable data and the underexplored state of Iraq's oil fields, it is difficult to assess the accuracy of all of the recent estimates. (23) Even if the low-end of the range (115 billion known, plus 45 billion estimated from USGS = 160 billion barrels) is used, (24) however, Iraq would be a major oil power. With potential reserves of 160 billion barrels, Iraq would rank second in reserves behind only Saudi Arabia's 260 billion barrels of proven reserves (25) and ahead of neighboring Iran, which has reserves of about 136 billion barrels. (26)

      In terms of the geographical location (see Figure 1) of Iraq's reserves, about 65% of Iraq's proven oil reserves are found in southern Iraq, primarily in the southernmost governorate of A1 Basrah. (27) Significant reserves are also "located in the northern governorate of A1 Tamim." (28) As stated above, the Western Desert is largely unexplored but could contain significant reserves. (29)

      [FIGURE 1 OMITTED]

   2. Challenges Confronting Iraq's Energy Infrastructure

      Although Iraq has significant oil reserves, Iraq faces numerous challenges turning these reserves into commercial production. As a result of two Gulf Wars and more than a decade of sanctions, the realization of Iraq's ultimate production potential will require much work in the oil fields and significant investment in new energy infrastructure. (31) Indeed, the amount of reconstruction efforts needed to boost Iraq's oil, gas, and electricity sectors could be well over $30 billion. (32) "In addition, the World Bank estimates that at least $1 billion in additional revenues needs to be committed annually to the oil industry just to sustain current production." (33)

      According to the Congressional Research Service (CRS), a think tank that provides reports to members of Congress, (34) before the current Iraq war, it was widely asserted by Administration officials that Iraq's vast oil and gas reserves (35) "would fund much, if not all, reconstruction costs." (36) Although Iraq's oil industry infrastructure suffered little damage during the initial days of the U.S.-led invasion, Iraq's oil facilities and pipelines have been the insurgency's main targets. (37) Additionally, there is a lack of information regarding the condition of Iraq's currently producing reservoirs and it is possible that these reservoirs have been damaged over the years by suboptimal production practices.

      According to U.S. military reports, other challenges to Iraq's oil industry (and development in general) include the smuggling of "as much as 70% of the output of the Baiji refinery, [which] cost[s] Iraq as much as $2 billion in revenue per year." (38) In addition, the northern export route is operating at only half its prewar capacity or about 300,000 barrels per day. (39) Although high oil prices have somewhat compensated for the shortfall, a Government Accountability Office (GAO) report released August 2, 2007 found that Iraq's oil production may be 100,000-300,000 below prior estimates due to "inadequate metering, re-injection, corruption, theft, and sabotage." (40)

3. BACKGROUND OF IRAQ'S DRAFT HYDROCARBON LAW (41)

   In 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." (42) "In February 2007, the Iraqi Cabinet approved a framework hydrocarbon law [Draft Hydrocarbon Law] that provides the structure and principles for foreign investment in Iraq's energy sector." (43) The Draft Hydrocarbon Law is part of a legislative "package" that also includes "three companion pieces of legislation addressing revenue sharing, creation of [the Iraqi National Oil Company (INOC)] and reorganization of the Iraqi Ministry of Oil." (44)

   Spanning thirty three pages, the Draft Hydrocarbon Law is the centerpiece of the legislative package and consists of a preamble, eight chapters, and forty-three articles. (45)

   1. The Preamble, Iraq's Constitution and Chapter I

      The Preamble of the Draft Oil Law sets forth broad statements of policy and includes numerous references to the Iraqi Constitution which was passed in 2005. (46) Perhaps most important of all is the following pronouncement:

      WHEREAS, Article 111 of the said Constitution declares that Oil and Gas are owned by all the people of Iraq in all the Regions and Governorates; (47) The Preamble recognizes Iraq's vast petroleum resources, both discovered and undiscovered, (48) and also recognizes the importance of those resources in terms of the future redevelopment of the Iraqi economy. (49) The Preamble further recognizes that Iraq's redevelopment will require substantial funding (50) and participation from the international sector. (51)

      Chapter 1 of the Draft Oil Law sets forth Fundamental Provisions such as Article 1 which states that "[o]il and gas are owned by all the people of Iraq in all the Regions and Governorates" (52) and Article 2 which provides that the Draft Oil Law "applies to Petroleum Operations in all the territory of the Republic of Iraq." (53) Article 3 provides that the Draft Oil Law seeks "to build upon existing co-operation between the relevant Ministries in the Federal Government" and enhance "coordination and discussions among the Federal, Regional, and Producing Governorates' authorities." (54)

   2. Chapter II: Management of Petroleum Reserves

      Chapter II is arguably the most important Chapter in the Draft Hydrocarbon Law, and it contains a number of important provisions. Article 5 sets forth the various governmental...