Oil bonanza stays in Western sights after cosmetic change to Iraqi deals

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The Independent Online

The final draft of Iraq's controversial hydrocarbons law has been submitted to the Iraqi Cabinet ahead of its presentation to Parliament for ratification next month.

Iraqi officials have attempted to defuse the backlash caused by last month's revelation in The Independent on Sunday that the law would grant foreign oil companies a large slice of the country's oil reserves.

The final draft has quietly dropped the term "production-sharing contracts" used in earlier drafts. These contracts involve energy companies paying for the initial investment in an oil field but reaping bigger returns if their gamble pays off.

The proposed introduction of production-sharing agreements in Iraq is controversial because they are usually used in challenging regions where oil is difficult and expensive to access, such as the Amazon. By contrast, much of Iraq's 112 billion barrels of proven oil reserves - the second-largest in the world - has already been discovered and is cheap to drill.

But the draft, seen exclusively by The Independent on Sunday, still proposes handing over exploration and production contracts for up to 32 years - far longer than most deals between companies and goveernments.

The draft empowers the new Federal Oil and Gas Council to set the exact terms of each contract, but given Iraq's parlous economy and security uncertainties, the terms offered are likely to be very generous. Greg Muttitt, a campaigner from lobby group Platform, said: "This is a huge amount of time. If contracts are signed in the coming months... there will be a massive risk premium, and the Iraqi side would be negotiating from a position of extreme weakness. As a result, the terms would be highly profitable for the companies, and Iraqis would be unable to change them for 20 years."

Other differences between previous drafts include the omission of a requirement for the terms of each contract to be published within two months. Now, according to Article 36, only non-specified "financially significant" details need be published, and no timeframe is given.

Iraqi unions have expressed their opposition to the proposed law. In a speech earlier this month to a conference, Hassan Jumaa, head of the Federation of Oil Unions, said: "We strongly warn all the foreign companies and foreign capital in the form of American companies against coming into our lands under the guise of production-sharing agreements."

Foreign oil firms already operating in Iraq are anxious not to antagonise unions as some may have links to insurgents who could target oil installations.

David Horgan, managing director of Petrel Resources, an AIM-listed oil company focused on Iraq, said contracts could be renegotiated by the government.

"The term 'production-sharing agreement' used in previous drafts has been dropped because of the controversy the term caused. They have built quite a lot of flexibility into the law. It makes sense to reward companies who start work now when the security situation is bad. The terms can always be made less attractive in a few years when things calm down."

He added that the Iraqi government had changed its approach in recent weeks over the hydrocarbons law. Rather than trying to force it through, particularly in the face of opposition from the Kurds in the north seeking more control over their oil resources, officials have attempted to achieve consensus within government, he said.

Last weekend, past and present officials from the oil ministry met in a hotel in Jordan to hammer out the draft's final details.