Will Iraq’s Oil Blessing Become a Curse?

The Iraqi government is considering a new oil law that could give private oil companies greater control over its vast reserves. In light of rampant violence and shaky democratic institutions, many fear the law is being pushed through hastily by special interests behind closed doors.

Oil. The world economy’s thick elixir yields politics as murky and combustible as the crude itself. And no wonder. It brings together some awkward bedfellows: It’s where multinationals meet villagers, where executives meet environmentalists, where vast wealth meets deep poverty, where East meets West.
Oil, of course, can be politically explosive at the best of times, let alone the worst. So, when the country with the third largest oil reserves in the world debates the future of its endowment during a time of civil war, people sit up and take notice.

The Iraqi government is working on a new hydrocarbons law that will set the course for the country’s oil sector and determine where its vast revenues will flow. The consequences for such a law in such a state are huge. Not only could it determine the future shape of the Iraqi federation — as regional governments battle with Baghdad’s central authority over rights to the riches — but it could put much of Iraqi oil into the hands of foreign oil companies.

Iraq carries little exploratory risk — OPEC estimates Iraq sits atop some 115 billion barrels of reserves and only a small fraction of its oil fields are in use. By signing oil deals with Iraq, oil companies could account for those reserves in their books without setting foot in the country — that alone is enough to boost the company’s stock. And, by negotiating deals while Iraq is unstable, companies could lock in a risk premium that may be much lower five or ten years from now.

Without drastic improvements in the security situation, companies are unlikely to begin operations anytime soon. “The legislation is not a golden bullet,” one industry source told SPIEGEL ONLINE. Western oil companies are happy to receive Iraqi officials in their European headquarters, but are not keen to return the visit. Firms from China, Russia and India, however, are less intimidated by Iraq’s precarious security situation and actively court Baghdad on its home turf.

Spiegel