Black gold turns grey as Western giants prepare to draw from the wells of Iraq

The big oil multinationals thought the prize was theirs under new production-sharing agreements in the war-torn country. But the 'Iraqi wealth for the Iraqi people' movement is growing amid internecine conflicts and trade union resistance. Ewa Jasiewicz reports

Iraq is open for business," promised oil ministry officials. "Investment can reduce Iraq's poverty and help bring peace," came back the chorus from oil company chiefs.

As the executives toasted one another with cocktails sponsored by Lukoil at the Iraq Petroleum 2007 conference in Dubai earlier this month, ordinary Iraqis were living in a state of emergency. Oxfam reports that 28 per cent of the country's children are malnourished, that four million people regularly can't buy enough to eat, and that 70 per cent are without adequate water supplies. With 60,000 Iraqis fleeing their homes each month and reports of an average of 62 violent deaths per day, the soft carpets, piped music and quiet deal-making at the Hyatt Regency hotel were a world away from occupied Iraq.

At the same time, a parallel conference was taking place in Basra under the banner, "Oil wealth belongs to the Iraqi people". Organised by the Iraqi Federation of Oil Unions (Ifou) and attended by civil society leaders, activists and academics from all over the country, this was Ifou's third conference aimed at stopping the likes of Shell and BP from gaining a controlling stake in Iraq's oil wealth.

With a growing movement to keep the oil in the public sector, disputes between the Kurdish regional government (KRG) and Baghdad, and no legal framework for investment, the black goldrush that international oil companies are banking on is not a done deal.

Iraq, with proven reserves of 115 billion barrels represents the biggest untapped oil and gas market on the planet. Iraqi oil production stands at just 2.5 per cent of the world's total even though the country possesses 10 per cent (or potentially double that, according to some estimates) of global reserves. With just 4 per cent of the world's oil in the hands of multinationals and a growing trend for nationalisation in countries from Venezuela to Kazakhstan, Iraq is seen by many international groups as their best chance to turn the tables.

Central to their hopes is a new oil law friendly to foreign investment. Drafted in closed-door consultations between international oil companies, the International Monetary Fund and the American and British governments, this law is the blueprint for foreign companies to explore, develop, produce and sell Iraqi oil under exclusive contracts lasting up to 30 years.

Regardless of whether Iraq's parliament passes the law, oil minister Hussain al-Shahristani (pictured right) has declared the country open for business and plans to invite companies to invest under existing Baath regime legislation to speed up the process. "There is no legal vacuum in Iraq," he declared at the Iraq Petroleum conference in Dubai. "We are now under the oil law of Iraq that has been in force for a few years. We are going to go ahead and prepare our model contracts."

Controversy has raged over the provisions of the new law, with political parties, religious authorities, oil experts and trade unions calling for a referendum and a moratorium on any long-term contracts with foreign groups. Planning minister Ali Baban has pledged to resign if the law is passed; the Association of Muslim Scholars has issued a fatwa against it; more than 100 senior technocrats and experts have written to the government boycotting it; and Iraqi oil unions have not ruled out strike action.

Asked about the possibility of a consultation involving Iraqi civil society and unions over the law – a senior source at the Iraqi ministry of planning, who did not wish to be named, said: "Well Iraqi workers, they come from a low class – they are not well informed about these things. They are always demanding something: whether it's higher wages or conditions, they are always wanting something." He denied they should be included in consultations.

Oil and gas lawyer Jay Park has run training workshops for the oil ministry and international companies on the draft law. He was the author of oil legislation in both Somalia and Kurdistan and has represented foreign companies and the KRG in contract negotiations. In a workshop at the Dubai conference, Parks paraphrased Bismarck, quipping: "Laws are like sausages: you don't want to know how they were made, you don't want to know how the sausage machine works."

But it is not on sausage machines that Iraqi civil society begs to differ. A recent research poll commissioned by US and UK human rights groups found that just 4 per cent of Iraqis felt they had received enough information about the oil law. Some 63 per cent said they believed their oil industry should be developed by state companies, with 32 per cent of those indicating a strong preference.

Adding fuel to the fire, conflict between the Kurdish regional government and Baghdad reached a new high this month when the KRG signed a production sharing agreement with Dallas-based oil firm Hunt.

Mr Shahristani has declared the Hunt deal illegal. Speaking on the sidelines of Iraq Petroleum, he said: "Any contract that has been signed by anybody other than the ministry of oil now, before the new law is legislated, has no standing as far as the government of Iraq is concerned." With the Kurdish energy minister claiming to have at least 10 companies in line to sign further deals, the conflict looks set to escalate.

The type of contracts on offer has also been a source of controversy. Production-sharing agreements (PSAs) were the first to be touted by the law – exclusive long-term deals that Iraq's unions liken to earlier, colonial-era concession agreements. These gave companies virtually unlimited profits, and control over the production, depletion and sale of Iraq's oil.

PSAs are usually used by countries with reserves to which it is hard to gain access and, as a result, high extraction costs. None of the top six Opec countries use the agreements, opting instead for service contracts. These allow the state to retain full authority over all production decisions and consign the investing company to the role of contractor.

But the international groups want PSAs. In 2004, BP, Shell, Chevron, Exxon, Total and ENI employed the services of Washington-based corporate lobbyists the International Tax and Investment Centre. The ITIC produced a document which concluded that PSAs were the only investment option for Iraq. Officials from the British Foreign Office and Treasury advised the ITIC in late 2004 on their strategy for influencing the Iraqi government. The British ambassador to Iraq then sent the document formally to the Iraqi finance minister.

Although Foreign minister Kim Howells claimed the Foreign Office was only acting as a postal service, Rob Sherwin, Middle East economic adviser for the Foreign & Commonwealth Office, admitted on the sidelines of Iraq Petroleum that the FCO and British oil companies have held talks on the future of Iraqi oil. "We have had discussions in the past as to where Iraq's oil industry ought to go," he said.

Mr Sherwin, who used to work as Middle East economic business development adviser to Shell, believes charges of the Government advocating UK oil group interests are overstated. "Of course Britain has an interest in Iraq, but some people are trying to overplay those interests and relationships with oil companies. They are trying to make a nuisance."

Back at Iraq Petroleum, John Heavyside, business manager for BP in Iraq, was showing his enthusiasm for PSAs: "We want to take risks and get incentivised to perform better; service contracts don't really allow us to do that. It's what we all want, all the international companies here. Production-sharing agreements offer a win-win situation. They are equitable and offer lucrative returns and benefits to both the state and investing companies."

Some in the oil ministry disagree. Natiq al Bayati, director of reservoir and oil fields development, has called PSAs "a red line". Speaking at Iraq Petroleum, he stated: "International oil companies would prefer the PSC [production-sharing contract] but the political and economic culture and atmosphere in Iraq is not conducive to this contract. We will operate on a 'horses for courses' basis – there will be no one model contract."

While oil groups have not yet sent their personnel to Iraq, they have been working hard to get a foot in the door. The country currently has 45 competitive memoranda of understanding with oil companies – confirmed pre-contractual commitments to work together on particular projects. The oil ministry has also confirmed work on model deals and regulations. More than 100 blocks are up for exploration – 40 in the Kurdish region and 65 in the rest of Iraq.

Abdul Ilah Qassim al-Amir, oil adviser to the Iraqi prime minister, reiterated that contracts signed under the previous regime would be reviewed. In this category are the Al Ahdab field for the China Petroleum Company; Exploration Block 8 for India's ONGC Videsh; the Amara field for Petro Vietnam; Block 3 for Indonesia's Petro-mina; and the Al Noor field for the Syrian government.

However, Lukoil's claim to the West Qurna field – a super giant possessing up to 10 per cent of all Iraq's known reserves – is invalid, according to Mr Amir, who claimed that the previous regime annulled the contract.

Washington has referred to the oil legislation as a revenue- sharing law and reconciliation measure. Yet just one of the 46 provisions refers to revenue sharing and mentions it as the subject of a second law. The "reconciliation" aspect is the incentivising of regional authorities to counter insurgency and achieve their own political and religious ambitions by controlling oil policy. This has led some commentators to call the law an "oil for peace" measure, and others a plan for the dismemberment of the country.

Step up the Federal Oil and Gas Council. The FOGC will have at least 15 members representing regional political leaders, the Iraqi National Oil Company, and the ministries of oil, planning and finance. It will have the power to decide what type of contracts, and with which companies, will be signed, and how resources accounting for 95 per cent of all government revenue will be developed and managed for a generation.

Timothy Mills, president of the US Chamber of Commerce and campaign lawyer to George Bush during the disputed election results of 2000, provided an insight into the pacification policy behind regional economic decision-making. Writing for the official programme of the Iraq Petroleum conference in Dubai, he said: "[If] the untapped oil wealth of Iraq is fairly distributed amongst the various political and social factions, then each political and social faction would share a strong interest in quelling the unrest that has persisted for the better part of the past four years."

Yet Tariq Shafiq, author of the oil law and former director of the Iraqi National Oil Company, believes that tasking regional political authorities with economic, political and security mandates could escalate sectarianism. "The FOGC will conform to the ethnic and sectarian divisions inside the country. People should be picked for their ability and integrity, not along ethnic lines. The decision making requires two-thirds to approve. If you have a strong party there or a strong region, one party could easily block one third."

Iraqi economist and oil expert Kamil Mahdi goes further: "This arrangement will see regions competing with each other to award contracts to multinationals, with the benefits flowing to corrupt local elites and the multinationals themselves."

Many of Iraq's top professionals have joined the exodus from the country, and the brain drain is taking its toll on the oil sector.

An Iraqi consultant working with organisations in Baghdad, who did not wish to be named, said: "Iraq can, on its own capability and manpower, double production, but the organisations operating here are incredibly weak. Execution of work has been delayed, and contracts with suppliers and manufacturers are taking three to four times as long as they used to because experts in the field of contracting have left. About 90 per cent of Iraq's top experts have left. Nobody wants to die."

A world away from the bright lights of Dubai in the power-cut streets of Basra, the Iraqi Federation of Oil Unions was pressing ahead with its campaign for a unified industry in public hands.

Hassan Jumaa Awad, Ifou president, believes Iraqi manpower and international technology and expertise make a good match for developing the oil sector, but only on terms advantageous to Iraq. Speaking from Basra, he said: "It is possible to co-operate with oil companies through a service contract, for the development of the oil industry in the service of the Iraqi economy." He said that the Southern Oil Company could increase output by one million barrels per day by the end of 2008 if given a $500m (£250m) investment.

Despite their reconstruction efforts and a membership of 26,000, Mr Shahristani has ruled the union illegal and wants to see it shut down. The oil minister has refused to recognise or meet with it, instead reapplying Baathist laws that ban unions in the public sector.

Speaking on the sidelines of Iraq Petroleum, he stated: "Trade unions anywhere else are supposed to be concerned with the welfare of workers and adequate wages, not set policies for the government." He said that industrial action effecting exports would be treated as "violent" and dealt with by force.

The strength of the union, however, has forced the prime minister to meet with leaders over demands covering pay, health and safety and permanent contracts, as well as a re-instatement of fuel subsidies and consultation on the oil law.

Ifou, from its origins as the Southern Oil Company union in 2003, has held regular elections and grown to a nationwide federation including unions from 10 state oil and gas companies. Responding to the oil minister's comments, Mr Awad said: "Our legitimacy has come through the ballot box and the Iraqi constitution, which enshrines the right to form unions. The minister's actions are similar to those undertaken by Saddam's regime against those who demanded better conditions for the people."

He went on to say: "We will continue our efforts to serve our members and defend our oil wealth, no matter what the cost."

And the cost may be high. In June arrest warrants were issued against union leaders and Iraqi troops occupied the oil fields over strike threats. The TUC and the International Federation of Chemical, Energy, Mine and General Workers' Unions have both condemned the Iraqi government's strong-armed tactics and called for negotiations and recognition of Ifou as a bona fide organisation.

For Iraqis, an economic occupation, imposed by military force, threatens a future of genuine sovereignty and freedom. Yet with a growing opposition challenging sectarian, corporate and foreign agendas, the future of Iraq's black gold is far from certain.

Ewa Jasiewicz is a freelance journalist and part-time researcher for Platform, an independent oil industry analyst