Following the Iraq Council of Representatives election held on March 7, 2010, the political struggle over forming a government has been fiercely continuing in Baghdad. According to unofficial election results announced by the Iraq’s Independent High Electoral Commission on March 26, the Iraqiyya or Iraqi National Movement (INM), headed by the former interim Prime Minister Iyad Allawi, has come out first with 91 seats, while State of Law (SoL) led by Prime Minister Nuri Al-Maliki was second with 89 seats. On the other hand, the Iraqi National Alliance (INA) won 70 seats and the Kurdish Alliance won 43 seats out of 325 seats in the next parliament.

            Nevertheless, the decision of the electoral judicial panel accepting the justice and accountability commission’s (known as de-Baathification committee) proposal to exclude 52 candidates and annual their votes has triggered a lengthy process of endless legislative and political battles over the election results. While it has been expected that it would take several months to put different parties from the four major coalitions into a new government, any deadlock over political negotiations cannot be afforded by any political groups. Because there has been a desperate need for public services, especially power and water, and for jobs to create for Iraqi people. Accordingly, no matter which scenario of forming a government comes true and whether any potential violence escalates in light of the ongoing security threats, any solution to political and security challenges requires oil wealth of Iraq and its legitimate distribution for the people of Iraq.

            Within this framework, this article aims to discuss the next challenges in oil politics in Iraq driven by three major issues namely, (i) a need for constitutional amendments, (ii) the hydrocarbon law, and (iii) the status of Kirkuk and disputed territories. The argument asserts that an agreement by political groups on oil revenue sharing in the hydrocarbon law package is strategic for success in other issues above. The reasons for such an argument are explained below by addressing the problems related to oil revenue sharing in the constitution and in the hydrocarbon law to be adopted by the next parliament of Iraq.

            In light of the historical trajectory of state-building in Iraq, the constitutional framework to distribute and manage oil wealth in Iraq is utmost important. The larger oil revenues and oil-led development in Iraq may create a rentier or distributive state instead of a democratization process built on political inclusiveness of different groups in Iraq. Because the leaders in power can decouple themselves from their constituents given the  means in oil-rich Iraq to distribute selective benefits to certain political and social  groups in exchange for political acquiescence. In other words, the political leaders can consolidate their power as long as they can control oil revenues, while they do not need to extract resources from a domestic economy that lacks diversified sectors.           Therefore, constitutional revisions are critical to remove a set of ambiguities and contradictions contained in the constitution regarding the oil revenue sharing formula as well as ownership and management of oil and gas resources prior to the passage of the hydrocarbon law. The specific articles of the constitution on this matter are given below.

            First, while Article 111 in Section Four, Powers of the Federal Government states “oil and gas are owned by all the people of Iraq in all the regions and governorates,” Article 112.1 is contradictory since it refers to the joint management of “present fields” by the federal government, producing governorates and regional governments, implying that new exploration and production to be fully in the control of regions and provinces excluding the federal government.

            Second, there is ambiguity regarding the management of oil sector under such a federal structure.  The exclusive authorities of the federal government are defined in Article 110 in Section Four, Power of the Federal Government. On the other hand, Article 115 and 121.2 endorses that the regions and producing governorates have the final say in the areas of shared (defined in Article 114) and regional (defined in Article 121) jurisdiction.[1] In light of these specific articles of the constitution, the meaning of “present field” in Article 112.1 presents the most contentious point.       “Present field” is not a standard term in the terminology of petroleum industry. Thus, it can be interpreted in multiple ways.[2] There are 24 developed fields and 71 undeveloped discovered fields holding approximately 115 billions of barrels of oil and equivalent in Iraq. While there is no production in the undeveloped fields, not all the 24 developed fields are producing currently.[3] If all undeveloped fields are considered “present field”, then there is no confusion. However, if they are not included in present fields, some of the giant fields that have been partially developed would create obviously conflict for oil revenue sharing between the federal government, the regions, and the governorates.

            Third, the ambiguity in the meaning of “present field” in Article 112.1 creates disputes for a revenue sharing formula. The Article 112.1 clearly states that the federal government with the producing governorates and regional governments distributes the revenues from the present fields “in a fair manner in proportion to the population distribution in all parts of the country.” Thus, revenue sharing in proportion to population is limited only to “present fields.” Unless “present fields” are defined as developed and undeveloped discovered fields of Iraq, the revenue distribution would obviously favor the provinces where the bulk of oil reserves are located.[4] Moreover, the revenue sharing principle in Article 112.1 is inconsistent with Article 111, which defines that oil and gas are owned by all Iraqi people. Article 112.1 also endorses a specific treatment for a specified period for the disadvantaged regions and ensures a balanced development. Nevertheless, this provision would be favorable only in the short term because for the long term when production from present fields drop, the disadvantaged regions (including non-producing or small producing provinces) will loose their subsidies from the large producing provinces.

            Furthermore, the status of Kirkuk and other disputed areas are also strongly related to oil politics. For example, the Kurds, whose territory was neglected for decades build their hopes highly on oil wealth estimated to be in the Kurdish governorates and by incorporating the disputed districts and proven reserves of Kirkuk.[5] Given the Kurdish Regional Government (KRG) frustration with its dependency on the federal budget and delaying of Article 140[6], they passed their own oil and gas law in August 2007 and unilaterally began signing contracts with foreign companies.[7] Most of other Iraqi people, however, oppose Kurdish nationalism and favor instead so-called resource nationalism. In fact, Oil Minister Shahristani declared the KRG’s contracts null and void, blacklisted companies doing business with the KRG and threatened to do the same with those contemplating similar moves.[8]

            Within this framework, the political process over the hydrocarbon law or the oil legislation, including the oil investment law, the revenue-sharing law, and the law for organization of Iraq’s Ministry of Oil and Iraq’s National Oil Company should be centered on the oil revenue-sharing formula in light of the aforementioned constitutional revisions.  IMF statistics indicate that more than 90 percent of public expenditures in Iraq are financed by oil revenues. Thus, the current political process to form a new government should take into consideration the urgent need for increasing oil revenues to consolidate the new leadership’s power and to maximize its legitimacy on the premise of a fair distribution of oil wealth for all Iraqi people.

Accordingly, the nature of oil contracts and their management should seek a balance between the needed large amount of investment and the national ownership of oil wealth favoring rapid improvement of human development indicators in Iraq. For example, a group of officials inside and outside the federal government who, favor centralization,  strongly criticize plans to permit foreign companies through production-sharing contracts (PSCs) and the extreme decentralization permitted by the constitution that prevents regulation between federal regions over oil production for export. The KRG and foreign companies, on the contrary, favor PSCs for different reasons. Companies prefer to be paid in oil under PSCs because it raises both their reserve portfolio and the value of their shares. The KRG considers PSCs an indispensable tool for exploration, which is the Kurds’ top priority, having had no development in their region and urgent need for income to expand public services in the poorer areas of the Kurdish region. Similarly, the KRG opposes the establishment of federal oil and gas council empowered to veto contracts and rejects the oil ministry’s proposed annexes classifying producing and non-producing oil fields since it undermines the KRG’s control and assign fields to the federal government.[9]

Consequently, a narrow focus on power sharing among different political and/or sectarian groups in the new government will undermine the ability of the new political leadership to govern since a political reconciliation process can not be managed without an agreement on a fair oil-revenue sharing formula for all Iraqi people. Moreover, given the problematic relationship between oil-led development and a potentially rentier state, political inclusiveness in state-building process is essential for human development, ensuring the empowerment of Iraqi people for a peaceful future of their country.

Pınar İpek is assistant professor at Bilkent University, Department of International Relations, Ankara, Turkey. Dr. İpek has published in Europe-Asia Studies, Middle East Journal, Middle East Policy, Perceptions: Journal of International Affairs, and Insight Turkey.

e-mail: pinari@bilkent.edu.tr