Iraq Constitution Reform Vital to Oil Companies, Despite Oil Law

Dow Jones Newswires

WASHINGTON, Dec 20, 2006 (Dow Jones Newswires)

Major international oil companies are unlikely to begin investing in Iraq for at least another year even if a new hydrocarbon law is passed in January, politicians and analysts warn.

In addition to improved security and a new hydrocarbon law, what's needed is a reformed constitution, Iraqi politicians, analysts and insiders say. Only an amended or new national constitution, they say, would create the necessary legal framework for international majors to start making deals to develop the country's vast oil reserves.

The escalating sectarian violence in Iraq continues to represent a bloody barrier to investment. In a report released Monday, the Pentagon concluded that an average of almost 960 attacks a week were waged against Americans and Iraqis this past summer and autumn, the largest number recorded since the Pentagon began issuing the quarterly reports in 2005, the New York Times reported.

But if a unified legal structure could be created, companies could sign deals and begin to work on project plans. They could wait out the violent spasms in the hopes of stability ahead, or even mitigate the risk with private security. Western oil companies have a history of working in battle zones such as Nigeria and Sudan.

Companies such as ExxonMobil Corp. (XOM), Royal Dutch Shell (RDSB.LN), Chevron Corp. (CVX) and CononcoPhillips (COP) have say currently, the country is too much of a security and legal quagmire for them to invest.

ExxonMobil would be interested in participating in Iraq, said spokesman Len D'Eramo. But only "after the establishment of a constitutional rule of law, a certain tax and regulatory regime, and a stable and safe working environment, and if the Iraqi people decide that they want international oil companies to partner with them in developing their resources."

Iraqi Oil Minister Hussein al-Sharistani said late last week the government expected to pass a new hydrocarbon law in January, which has been widely seen as a necessary step to enable the first national oil deals since Saddam Hussein was overthrown in 2003.

Legal Contradictions

But currently, Iraq's constitution is almost completely at odds with the draft hydrocarbon law on one fundamental issue: who has the authority to award exploration and development contracts.

"No reliable, well-known oil company has the courage according to the constitution to come to Iraq for investment," Iraqi Vice President Tariq Al-Hashemi said last week during a presidential visit here.

"There are major loopholes in the constitution...and there is a clear-cut contradiction in the authorities between the regions and the central government," Hashemi said. The vice president said he urged President George W. Bush to support his drive for a new constitution.

Because of the contradiction, some say a new hydrocarbon law will be essentially futile unless the constitution is changed to support it.

Even if an oil company did sign a contract with the central government, the deal would be on shaky legal footing, said Mishkat Al-Moumin, ex-Iraqi Environment Minister and former law professor at Baghdad University.

"If anyone wanted to legally object, they would win the case, because (the hydrocarbon law) will be based on the old constitution," Al-Moumin said.

Saad Rahim, a top energy analyst and Country Strategies Manager at PFC Energy, said the constitution's loopholes "certainly make it possible for companies to interpret it in a manner that they can go ahead and invest."

Many smaller companies, such as Norway's Det Norske Oljeselskap (DNO.OS) and Houston-based Calibre Energy (CBRE), have signed potentially lucrative deals with the Kurdish Regional Government on massive prospects in northern Iraq because of its relative safety. The central oil ministry says it views the contracts as invalid, but that it has little authority to enforce its position, and it's constitutionally debatable.

"One of the big reasons majors are holding off right now is precisely this worry that if they were to go ahead and invest under what they see as a legitimate opening, that could later then be challenged on the grounds of the constitution," Rahim said.

Investment Prospects

Iraq's oil sector needs up to $20 billion to raise crude oil production to 3 million barrels a day from below 2 million barrels a day at present. The country has huge reserves, third only after Saudi Arabia and Iran.

"Many companies feel that they can at least mitigate security concerns to a large extent," said Rahim, whose consultancy regularly provides risk assessment to international oil majors. "A lot of the hesitation is really about what is the lack of clear legal structure behind any investment."

"They wouldn't feel comfortable even with a hydrocarbon law," Rahim said.

Unlike the smaller independents, most of the large internationals are eyeing the bigger oil prospects further south in Iraq. Signing on with a regional government, they fear, would jeopardize their chances of getting into a bigger deal if they offended the central government.

The formation of a new political alliance block of both Sunni and Shia "moderates" might calm the sectarian violence and pave the way for a new constitution, said Louay Bahry, an adjunct scholar at the Washington-based Middle East Institute and a former political science professor at Baghdad University.

The Sunni Iraq Islamic Party is trying to form an alliance with the Shi'ite Supreme Council of Islamic Revolution in Iraq, Arab nationalists, Baathists and small Kurdish parties. The alliance is in an effort to centralize power, unify Iraq and sideline the radical Shi'ite leader Moqtada al-Sadr, whose Mahdi Army has been responsible for much of Iraq's sectarian violence.

The move toward a coalition is an attempt by Iraqis "to get together those like-minded people who want to move the process forward and deal with some of the tough issues that they have before them," said Scott McCormack, the U.S. State Department's top spokesman.

Centralization Versus Regionalism

Earlier this month, the Iraq Study Group recommended that the U.S. support centralization of power in Iraq and warned against regionalism.

Both Bahry and Rahim believe a new constitution that reduces regional authority might initially promote provincial separation, although it would be essential to longer-term stability in Iraq. But Al-Moumin believes increased international and domestic political will for a stable, unified Iraq has weakened the regionalists' position. Like the Kurds in the north who want to form their own autonomous state, al-Sadr wants to create a southern, Shi'ite province.

Rahim noted that Turkey's shared border in northern Iraq gives it the ability to block exports of oil from Kurdish Iraq, which would undermine any Kurdish stance toward separation. If the Kurds wanted to develop nearby oil reserves, their likely export route would be through Turkey. Turkey opposes Kurdish separation from Iraq because it fears that its own Kurdish population may join a national movement.

The U.S. State Department has suggested support for a revised Iraq constitution. Secretary of State Condeleezza Rice said the constitution "may in time need to be revised," she said in a recent interview. A department spokeswoman on the Iraq desk who declined to be named said oil companies had expressed concern that, "there needs to be one hydrocarbon law, rather than competing central and provincial government laws."

"In terms of specific issues, oil companies have indicated they're seeking a single, commercial legal environment with clear, enforceable rules," the spokeswoman said.

If the Bush Administration supports the drive for a new constitution, it would take at least six months to a year for the process, including ratification, to be accomplished, Rahim, Bahry and al-Moumin said.

"What we need is a comprehensive, brand-new strategy for everything," starting with a new constitution, Iraq Vice President Al-Hashemi said.

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