Iraqi Cabinet Approves Draft Oil Law

AMMAN Feb. 26, 2007 (Dow Jones Newswires)

An Iraqi oil law deemed essential to helping allay the country's sectarian divisions and rebuilding Iraq's economy got a major boost Monday after Iraq's cabinet approved a draft of the measure, setting the stage for a key parliamentary vote in March that stands as the final barrier to the draft becoming law.

"The draft oil and gas law was ratified by the cabinet this afternoon," a senior cabinet official told Dow Jones Newswires.

The official added that the draft law, which has been delayed for months due to haggling between the federal government and the Kurdish Regional Government, will now go to the parliament for a vote that is likely to occur in March.

While a hydrocarbons law, once approved by parliament, should be a boon to attracting foreign investment, a big increase in Iraq's oil production won't happen for several years.

Many of Iraq's existing oil fields and facilities have suffered from poor maintenance and under-investment that will take years to overcome in order to increase Iraq's output. The country also has a serious shortage of skilled labor and oil workers are under constant threat of being kidnapped and killed by militants.

Iraq has the world's third-biggest proven oil reserves after Saudi Arabia and Canada, but only about 10% of the country has been explored, according to the U.S. Energy Information Administration.

The senior cabinet official said the cabinet approved the draft law after meeting with Kurdish and federal officials drafting it.

The official declined to elaborate on what, if any, changes were made to the draft law approved by the cabinet. KRG spokesman Khaled Salih said the Kurdish government supported the cabinet vote.

"We support this action. We had issues earlier today that we still disagreed on, but they've been resolved," Salih told Dow Jones by telephone from Erbil, the Kurdish capital. He also declined to elaborate on details of the draft law.

The cabinet vote comes after the U.S. had increased pressure in recent weeks on the federal government to reach a deal as part of the U.S. commitment to increase its troop presence in the country.

Parliamentary approval will lead to Iraq, which relies on oil revenues for about 90% of the federal budget, moving forward with plans to entice big foreign oil companies to invest in the country's oil sector, although those firms are likely to stay out of the country for the time being.

"This is all encouraging stuff to see this vote today. I'm sure it's going to start discussions which is all good. But don't count on seeing majors in there any time soon," said an official at one big U.S. oil company.

The oil majors have eschewed investing in Iraq until the hydrocarbons law becomes final and the security situation in the country improves.

Government and non-government officials also caution that some members of parliament, riven with sectarian divisions, could still try to unpick the draft when it goes in front of them.

Disagreements between Baghdad and the Kurdish government have centered on the extent to which oil exploration will be controlled by the Shiite-led federal government and how revenues will be distributed among oil-rich areas in the North and south of the country and the oil-poor center of Iraq.

Ashti Hawrami, the Kurdish Regional Government's oil minister, said earlier Monday that the revenue-sharing law, a vital part of the legislation, will guarantee the Kurdish region and all parts of the country oil revenues based on population size. Hawrami affirmed the Kurdish government's support for the draft law.

The Kurds, with a population of around 5 million, dominate the country's north while the majority Shiites populate the South.

Iraq's Sunni population, which outnumber the Kurds and reside largely in central Iraq, has felt it could be squeezed out of gaining its share of Iraq's oil revenues.

Hawrami said the Kurdish government will allow an independent panel to review five existing contracts between the KRG and a handful of small foreign oil companies but based on "certain agreed commercial criteria."

The oil minister said the KRG didn't believe any further changes would be needed to the five contracts, but said the government will "consult" the panel to ensure all the contracts meet the required Iraq-wide standards.

The existing contracts were signed before 2005 and include oil and gas companies, such as Norway's Det Norske Oljeselskap (DNO.OS) and Canada's Addax Petroleum Corp. (AXC.T).

DNO couldn't be reached for comment.

Hawrami said the Kurdish government will share some of its constitutional powers in managing oil exploration in the region with the federal government but will continue to be allowed to sign contracts with foreign oil companies.

Copyright (c) 2007 Dow Jones & Company, Inc.