Why Iraq's new oil law won't last

With considerable fanfare, Iraq's cabinet last week announced approval of a draft law that would permit foreign investment in the nation's oil industry and provide for distribution of oil revenues among the regions and thus the country's main sectarian blocs.

Details of the draft are tricky. Revenues from current oil fields are to be shared according to population. Yet no recent census has been taken. The Kurdish region in the north and the provinces can sign new oil contracts, but these must be reviewed by an independent federal committee, not yet appointed. There is concern that foreign oil companies might try to get better terms by playing the provinces against one another.

But some oil experts are skeptical of the significance of the measure.

"It will not mean anything on the ground," says A.F. Alhajji, an oil economist at Ohio Northern University in Ada. As long as Iraq suffers from political instability, major oil companies will shy away. "The situation is so bad no one in his right mind wants to go there to be attacked or nationalized a second time."

Fearing the consequences, "The oil companies never supported the invasion," Dr. Alhajji adds.

Iraq's oil remains important to a world highly reliant on petroleum and its byproducts. Iraq has proven reserves of 115 billion barrels and, according to Iraqi oil economist Muhammad-Ali Zainy, another 215 billion to 240 billion barrels not yet proven. Some of that new oil may cost as little as $1 a barrel to extract.

By comparison, Saudi Arabia has 264 billion barrels of proven reserves.

Because of sabotage by insurgents, Iraqi oil production has been running at less than 2 million barrels per day, down from 2.8 million barrels before the invasion of Iraq in March 2003, says Mr. Zainy, now with the Global Center for Energy Studies in London.

To Alhajji, the "rush" to approve the draft law reflects the need of the Iraqi government and the Bush administration to show some success – "even if it is as cosmetic as the new oil law."

Zalmay Khalilzad, US ambassador in Iraq, stated the draft was the "first time since 2003 that all major Iraqi communities have come together on a defining piece of legislation."

Iraq's government hopes the nation's 275-member parliament will approve the draft before the end of May.

The legislation will be extremely controversial. Opposition is expected from the powerful Oil Workers Union of Basra. It staged strikes in 2005 objecting to America's plan to privatize Iraq's oil industry. A reviving Communist Party will oppose it. Much of the Iraqi press also objects to aspects of the law.

One sensitive provision allows "production sharing agreements" (PSAs) with foreign oil firms. In theory, Iraq would retain ownership and ultimate control of the oil in such a deal. A PSA would merely grant the firm or consortium the right to explore, develop, and sell the oil, while getting a share of the oil extracted. History, however, is full of "unequal" PSAs highly favorable to oil companies and less favorable to oil nations.

Zainy says that details of an oil contract are more important than whether it is called a PSA, a "production and development contract," or a service contract. He fears "corruption, presently rampant in Iraq" could affect contracts, wasting much of the nation's main resource.

During the 20th century, oil became the fulcrum of politics in the Middle East, with countries nationalizing their oil resources and winning better oil deals. The draft law "reverses everything that has happened in the Middle East since 1901," charges Rashid Khalidi, director of the Middle East Institute at Columbia University in New York. Implying that American occupiers have had much influence on the measure, Mr. Khalidi asks: "Does [Vice President] Cheney think he can stand against history?"

Khalidi's latest book, "Resurrecting Empire," spells out the history of foreign exploitation of Iraqi oil, noting that resentment over "insufficient benefits" to Iraqis led to the popularity of the Baath government and nationalization of the oil industry in 1975.

Khalidi doubts the draft law will pass parliament. "It is so manifestly against the interests of Iraq," he says. If it does, though, he doesn't expect the law to last. Presumably, an Iraq no longer occupied would seek better terms for any deal reached under the proposed law.

Alhajji notes that contracts signed "under duress" are not legally binding. After Iran nationalized its oil industry in the 1950s, British lawyers for the Anglo-Persian Oil Company (now British Petroleum) contested the action in the International Court in the Hague and lost, despite Britain's superpower status then.

In the future, Iraqi lawyers could similarly argue that any oil deal signed while Iraq was occupied was done under duress and thus was invalid.

After reading the draft law in Arabic last week, Alhajji says, "It is so broad and loose, it has no significance." Often, he says, nationalism in oil-rich nations rises during and after occupation by foreigners. That "will cause problems."