How will Iraq share the oil?

The reason Iraq needs to pass a new oil law, President Bush has said, is to "share oil revenues among all of Iraq's citizens" – Sunnis, Shiites, and Kurds – and to help unify the country.

It's a goal broadly supported in the US Congress and by the Iraq Study Group, whose 2006 report said such an oil law was needed, too, to "create a fiscal and legal framework for investment" in the industry.

But now the oil law's status as a US "benchmark" for progress in Iraq is emerging as a flash point in both Baghdad and Washington.

So far, the frustration on Capitol Hill is mainly over the Iraqi government's perceived foot-dragging in finishing the oil law, which US advisers had a hand in crafting. But resistance is also surfacing to the substance of the oil bill, especially whether its main effect will be to ensure international companies a lucrative role in Iraq's rich oil fields. With House and Senate conferees about to put their heads together on a new war-funding bill that includes benchmarks for progress in Iraq, the proposed oil legislation is beginning to come under closer scrutiny.

"While we can't confirm it, there are enough reports out there that appear to indicate that undue, unfair preference and the influence of our oil companies are part of the Iraqi hydrocarbon law, and if that is true, that is not correct," says Rep. Joe Sestak (news, bio, voting record) (D) of Pennsylvania, a former admiral and defense adviser to the Clinton administration. "The aim of benchmarks is to help the process along, but we need benchmarks that are appropriate for the Iraqis and the Americans – not just our economy but our ideals."

US firms as the major beneficiary?Fueling new resistance to the oil benchmark are reports that the draft law in fact says little about sharing oil revenues among Iraqi groups and a lot about setting up a framework for investment that may be disadvantageous to Iraqis over the long term. On the flip side: Iraq's oil industry badly needs new investment, and oil companies are reluctant to go into Iraq without a legal framework that ensures that the contracts they sign will be respected by future Iraqi governments.

Last week, Rep. Dennis Kucinich (D) of Ohio, who is a presidential candidate, led off opposition to the draft law in a letter to Democratic colleagues. On Thursday, a coalition of oil industry watchdog groups and peace activists called on Speaker Nancy Pelosi (news, bio, voting record) and Senator Reid to drop the Iraqi oil law as a benchmark for progress in Iraq.

"If Democrats are perceived to be advocating withdrawal [of US troops] only after access to Iraqi oil has been assured, this will do little to reassure critics," says Steve Kretzmann, executive director of Oil Change International, a watchdog group that drafted the letter.

In an open letter to Democrats in the US Congress last week, Hasan Jum'a Awwad, head of the Iraqi Federation of Oil Unions, echoed that view. He urged that lawmakers "not link withdrawal [of US troops] with the oil law, especially since the USA claimed that it came to Iraq as a liberator and not in order to control Iraq's resources."

For most US lawmakers, the delay in passing the oil law shows that Iraq's new leaders aren't making tough political choices about their country's future, such as how to fairly distribute Iraq's oil wealth among all Iraqi groups.

"The Iraqi government remains in a dangerous stalemate: No oil law," Senate majority leader Harry Reid (news, bio, voting record) said during a debate on war policy on Wednesday.

Why Iraqis don't want to rushBut in Baghdad, some Iraqi lawmakers say the oil issue is too vast and complex to rush. It should be the last issue – not one of the first – to be resolved, they say.

Moreover, Iraqi critics of the current draft law say it does not address the issues that US lawmakers think it does.

"The actual draft law has nothing to do with sharing the oil revenue," says former Iraqi oil minister Issam Al Chalabi, in a phone interview from Amman, Jordan. The law aims to set a framework for investment by outside oil companies, including favorable production-sharing agreements that are typically used to reward companies for taking on risk, he says.

"We know the oil is there. Geological studies have been made for decades on these oil fields, so why would we let them [international firms] have a share of the oil?" he adds. "Iraqis will say this is solid proof that Americans have staged the war ... because of this law."

On Feb. 26, Iraq's Cabinet approved the draft oil law, which was to be sent to parliament by March 15 – along with four annexes that provide the fine print, draft oil contracts, and a draft oil revenue-sharing law. The Bush administration wanted Iraq's parliament to approve the entire oil package by the end of May. But as of this week, not even the draft oil law has been submitted to parliament.

"The US talks about the sovereignty of Iraq, but why are they getting involved in this oil law?" asks Mohammed al-Dynee, member of parliament representing the Iraqi Front for National Dialogue, a Sunni group. He is in Washington to try to persuade Congress to drop calls for the oil law. "Even if this law can pass, which I doubt, it will remain ink on paper and will not be implemented on the ground."

An unofficial English translation of the draft law was first released on the website of the Kurdish Regional Government and has since been carried on oil industry watchdog sites such as www.priceofoil.org.

At least one 'red flag'In New York, oil industry analyst Fadel Gheit of Oppenheimer & Co. Inc. has reviewed both the official Arabic version of the draft law and the unofficial English translation and says they are ambiguous and seem to be written in haste.

"The law did not strike me as something that was explicitly designed to favor American companies, although I'm not ruling that out," he says.

But the stipulation that a new Federal Oil and Gas Council must include foreign participation did "raise a red flag," he says. Under the draft law, the council would carry out Iraqi oil policies and set criteria for foreign companies working in the industry.

"Why shouldn't Iraq use Iraqi nationals to decide how the contracts will be awarded? They have oil engineers. Use the best brains in the country and, hopefully. they will do what is in the best interest of the country," he says. "Otherwise, there's an impression that American companies are telling Iraqis what to do."

Foreign investment needed in IraqWith the world's second-largest oil reserves after Saudi Arabia, Iraq is the top prize in the international oil business. Iraq needs new foreign investment to help modernize its oil industry, which has been closed to new technology for the past 25 years, says Mr. Gheit.

But even with a new draft oil law, international oil companies won't be eager to send engineers into a nation in turmoil. "It's very difficult for oil companies to recruit people willing to work in the Iraqi oil fields. It's mayhem," he says.

"If the idea of the law is to expedite getting international oil [firms] to ... set up shop and invest money, they're mistaken," Gheit adds. "I doubt very much that any oil company will be willing to send geologists, engineers to be shot at, kidnapped, or beheaded."

In the 1990s, Saddam Hussein shifted Iraq's oil industry from production-sharing agreements, which gave foreign investors a substantial share in revenues, to service agreements, which limit such investors' profits.

"It's very important, as we said in the [Iraq Study Group] report, that the US not be seen as trying to seek control of that oil," says Lee Hamilton, a cochairman of the Iraq Study Group. "But that will be very difficult to achieve because of the mind-set in much of the region today that we went in because of the oil.... Most of the critics will not be persuaded by any rhetoric of the US but by a law that is drafted and implemented fairly."