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Iraq's Draft Hydrocarbon Law Recommends PSAs

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AMMAN, Dec 06, 2006 (Dow Jones Newswires)

Iraq's first postwar draft hydrocarbon law recommends the government sign production sharing agreements and other service and buyback contracts to upgrade the country's war-ravaged oil industry.

The draft, a copy of which has been obtained by Dow Jones Newswires, states the Oil Ministry should set up a committee consisting of highly qualified experts to speed up the process of issuing tenders and signing contracts with international oil companies to develop Iraq's untapped oil fields.

The draft law states all decisions concerning Iraq's oil and gas exploration, production and transportation should be handled by the federal government in Baghdad, which is likely to anger Kurdish officials in northern Iraq.

The law is necessary for international companies to begin investment in Iraq's oil sector, which needs up to $20 billion to raise crude oil production to 3 million barrels a day from below 2 million b/d at present.

The new law could trigger the start of massive development of the country's oil fields, home to the world's largest reserves after Saudi Arabia and Iran.

"It is possible that the contractual formula is based on service contract, buyback contract or production sharing contract," the draft law states.

"These contractual formulas should be adjusted in a way that should serve the interests of the Republic of Iraq," the draft said.

The draft, which is still under debate by Iraqi officials, said "qualified Iraqi or non-Iraqi oil companies or individuals who possess suitable financial resources" should be allowed to bid for Iraq's oil contracts to carry out exploration or to develop oil fields.

The draft recommends 15 to 20 year contracts to develop Iraqi oil fields, including production sharing contracts. It states the contracts could be extended by five years if the government found it necessary in order to achieve better technical and financial returns.

The draft law also calls for the formation of an Iraqi National Oil Company to handle the country's oil production, exports and exploration.

"The cabinet should submit to the council of deputies (parliament) a draft resolution together with this oil law...that would establish the Iraqi National Oil Company. It should be owned by the government of Iraq," the draft states.

The law also calls for changes to the oil ministry's structure "to a manner that would enable the ministry to shoulder its new responsibilities stated by the law."

An Iraqi oil ministry official told Dow Jones Newswires Wednesday the new law proposes allowing - for the first time - local and international companies to carry out oil exploration in Iraq.

During the rule of ousted president Saddam Hussein exploration activities used to be carried out by the government only, he said.

The draft law is being debated by senior government officials before it is submitted to the parliament for final approval, the official added.

He named the officials discussing the final draft of the law as Deputy Prime Minister and head of the cabinet energy and oil committee Barham Saleh, Oil Minister Hussein al-Shahristani and the prime minister's adviser and former oil minister Thamer al-Ghadhban.

He said some of the articles of the law could be changed either by government officials or lawmakers.

It isn't known yet when exactly the law would be approved by the parliament. Oil Minister Shahristani had said it should be ready by the end of this year, but differences between Baghdad and the Kurdistan Regional Government, or KRG, on who should handle oil operations in Kurdistan could delay acceptance, oil analysts said Wednesday.

The Kurds are pressing for control of oil resources in their territories and a significant share of oil revenue, which has provoked anger in Baghdad.

"The powers of taking decisions on oil and gas exploration, development, production and transportation should be handled on behalf of the Iraqi people by the federal Iraqi government," the draft law stated.

The KRG - which estimates its resources total 45 billion barrels of oil equivalent - has already drafted its own hydrocarbon law that officials there say would trump Baghdad's version should the KRG not win at least the measure of authority over its resources it's seeking.

The Kurdish authority has already signed agreements with several small oil and gas companies, including U.S.-based Calibre Energy Inc. (CBRE), Norway's DetNorske Oljeselskap (DNO.OS) and Turkey's Petoil and has signed memoranda of understanding with Australia's Woodside Petroleum Ltd. (WPL.AU), Canada's Heritage Oil Corp. (HOC.T) and the U.K.'s Sterling Energy PLC (SEY.LN).

But oil officials in Baghdad have declared these agreements null and void and, without the hydrocarbon law, many oil majors have been reluctant to make deals, despite huge prospects and relative security in North Iraq.

However, contracts the Oil Ministry in Baghdad has already signed with international companies will remain valid, although they will need to be reviewed, the draft law stated. This will affect contracts to develop the Khormala Dome, Hemrin and Subba/Luhais medium-sized oil fields.

The draft law didn't spell out clearly if this article also covers contracts signed during Saddam Hussein's regime such as Lukoil's (LKOH.RS) deal to develop the giant West Qurna-2 oil field.

Copyright (c) 2006 Dow Jones & Company, Inc.

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