Oil leak

By Hemin Hussein

The KRG’s speedy approach to concluding oil deals with foreign companies could backfire if measures are not taken to instill more transparency in the process.

As investments pour into the Kurdistan Region, oil is the one sector that remains precarious due to tensions between the federal Baghdad government and the Kurdistan Regional Government.According to one expert, most Iraqis object to giving away too much control over the region’s oil to foreign companies through production sharing agreements (PSA), while the Kurdish administration seeks to draw in large numbers of investors by offering contracts that are most advantageous to their interests.Greg Muttit, a researcher at Platform, an interdisciplinary London-based organization monitoring the human rights, development and environmental impacts of the oil and gas industry, said: “The question of the KRG oil contracts is one of the largest political disputes in Iraq at present. Many Iraqis oppose the use of production sharing agreements, as they believe they give away too much control over the oil to foreign companies. This view is shared by the federal government, and most of the parliament.”Muttit has been studying Iraqi oil policy since 2003, and has also worked on oil issues in the Caucasus, Russia, Kazakhstan, Nigeria, Thailand and other countries.“However, the Natural Resources Minister of the KRG disagrees - he aims to bring in companies as quickly as possible, and believes that since PSAs are the most favorable form of contract for the companies, they will attract lots of companies to come in rapidly,” added Muttit.The KRG has been quick to take advantage of the increasing dependency on oil and have already signed contracts with foreign companies, but it remains to be seen whether hasty action will prove beneficial to the KRG. “There is a cost to the speedy approach. In any business deal, the outcome for both sides really depends on their relative bargaining power at the time of signing. Many observers have expressed concern that the KRG deals were signed extremely quickly and without competitive bidding. More than half the land area of the Kurdistan Region was signed up in the space of about two months [at the end of 2007],” said Muttit. In making such deals, he added, companies would want significant profits to compensate for the political risks involved, especially since they have become aware of the unresolved dispute between the KRG and the federal government. He went on to explain that it is owing to these circumstances that make it difficult for any government to get a contract with terms that are more to their advantage. ”No-one denies Kurdistan's and Iraq's need for investment - the real question is on what terms that investment takes place. In our workshops, several of the participants expressed concern that the public interest could be or is being sacrificed in favor of the interests of individual investors,” said Muttit. In a recent workshop held in the capital, participants discussed the problems that these contracts could pose for human rights, including a clause titled ‘stablization clause’ which entitles the companies to compensation in the event of any change to laws or regulations, “effectively guaranteeing the investors' profits by putting them above the law.”One of the current problems to date within the KRG is lack of transparency especially when it comes to oil contracts as much seems to have been sealed behind locked doors.“The KRG’s 2007 regional oil and gas law requires that all details of contracts be published - this is a positive step, and would put the KRG at the forefront of international best practice on transparency, meeting the recommendations of the International Monetary Fund (IMF), US Treasury Department and others,” said Muttit.But he lamented: “Unfortunately, that provision of the law has still not been implemented. Although the KRG's oil contracts have potentially wide-ranging impacts on people's rights, the contracts remain secret. Not only that, they entitle investors to defend their interests in investment courts in London - where hearings could also be held in secret, with no-one in Kurdistan or Iraq knowing about the case, the arguments or the outcome.”The sudden influx of oil companies coming into the region, with the KRG terming many of them as ‘international’ or ‘big companies’, there is the danger that ‘cowboy’ companies could soon want in on the action and head for the Kurdistan Region to make that quick buck. “The result of the rush is that about 20 small oil companies have taken up the contracts, no doubt seeing an opportunity for high profits and favorable legal terms, although with some political risks. It has to be asked whether this type of investor has the best long-term interests of Kurdistan and Iraq at heart, and indeed, whether these will be stable investments,” said Muttit.The crux of the matter is Kurdistan’s need of oil investment but whether they have employed the right approach is another matter. What needs to be done first and foremost is for those contracts already signed to be published which will no doubt open the door of transparency and reinstate the people’s trust in the government and their dealings. ”I would advise a proper public debate about the future course of oil policy, before signing further contracts. If contracts were seen as having public legitimacy, and there were no secrecy or suspicions, this would be in the interests of long-term investors too, as they would see the contracts as more likely to be stable,” said Muttit.“Conversely, if further contracts are signed before the dispute with the federal government is resolved, there would be an economic cost, in the form of "risk premia". The lesson from countless other countries is that it is better in the long run to first achieve stability, transparency and good governance, before signing long-term investment deals, rather than seeking the investment before those things are properly in place,” added Muttit.