COMMENTARY: To Succeed, an Iraqi National Oil Company Needs an Iraqi Oil Law

Country: Iraq
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By Patrick Heller, Legal Analyst, RWI

News from Iraq indicates that on July 28 the Cabinet agreed upon a bill establishing a new National Oil Company (NOC), to help develop the country's petroleum and ramp up production to meet the government's pressing revenue needs.  The details of the bill have not been released, but a strong commercial company with a clear mandate could be instrumental in the revitalization of Iraq's oil sector.

However, this enabling legislation cannot be a stand-alone action. A national company will be doomed to fail if it arrives unaccompanied by core laws to govern Iraq's oil sector. These long-debated laws continue to languish.

Since the fall of Saddam, Iraq's oil industry has been without a firm legal or institutional regime governing operation of the sector, revenue collection, or disbursements within the budget or across the country.  This vacuum of policy hobbles Iraq's prospects for stability, prosperity and investment in essential public programs. 

The hard costs of Iraq's absentee oil laws are many. The government has announced its hope of increasing production to 4 million barrels per day (from a level of about 2.4 million as of this June), but coherent plans for field development demand firm rules on regulatory policy, legislative oversight, and the obligations of private international companies. Meanwhile, the fractious and unresolved dispute over contracts signed between Kurdish authorities and foreign oil interests looms over the entire future of Iraqi oil.

Without an underlying legal regime, development risks skyrocket for private investors and for Iraq itself.  Divergent views on risk marred Iraq's bidding round for oil service contracts earlier this summer, when only one of the eight fields was successfully auctioned, due to a scarcity of bids and to proposals from risk-averse companies requiring compensation up to ten times higher than what Iraq was willing to pay.

Beyond the cloudy outlook for state revenue, the lack of a legal framework casts a long shadow over the potential for Iraqi citizens to benefit from the vast natural resource wealth beneath their feet. 

Arguments about revenue-sharing between the central government and the regions remain unresolved, and key decisions on budgeting, oversight and revenue reporting are likewise in legal limbo. The draft law that seeks to address several of these issues has been stuck in the national legislature since 2007.

An Iraqi National Oil Company would certainly play a major role in the ultimate success or failure of oil reform.  But as government spokesman Ali al-Dabbagh noted in July, an NOC law and a broader legal framework for the sector are "all one package."

Like any private company, an NOC must be subject to regulatory and legislative review.  When NOCs operate as de facto regulators or policy-makers, the risks of corruption and inefficiency rise significantly.  The question of who in government will act as the primary agent for the NOC's public shareholders is particularly important in Iraq, given the regional tensions over oil management and the continued involvement of the North, South, and Maysan Oil Companies in the industry.

As Iraq considers how to set up a new oil company amid myriad legal and policy challenges, it should also pay special attention to the hard lessons learned about government accountability in resource-rich nations like Peru and Nigeria, where poor resource management and public distrust have had steep costs not only for public prosperity, but in violence and the loss of life. 

A transparent national company that has established public trust through sound disclosure and budget practices could enhance citizen participation in the management of the nation’s most important assets.  Iraqi officials have acknowledged the importance of transparency in the country’s recovering oil sector by committing to implement the Extractive Industries Transparency Initiative; the National Oil Company can become a powerful vehicle for this public accountability agenda.