Iraq: Oil and Gas Legislation, Revenue Sharing, and U.S. Policy Christopher M. Blanchard Analyst in Middle Eastern Affairs November 3, 2009 Congressional Research Service 7-5700 www.crs.gov RL34064 CRS Report for Congress Prepared for Members and Committees of Congress Iraq: Oil and Gas Legislation, Revenue Sharing, and U.S. Policy Summary Development in Iraq’s oil and natural gas sector is proceeding, in spite of continuing delays in agreeing to hydrocarbon sector and revenue sharing legislation to define new terms for the management of the country’s significant oil and natural gas resources. Both the Bush Administration and the 110th Congress considered the passage of oil and gas sector framework and revenue sharing legislation as important benchmarks that would indicate the Iraqi government’s commitment to promoting political reconciliation and providing a solid foundation for long-term economic development in Iraq. Obama Administration officials and some Members of the 111th Congress have expressed similar views. In the absence of new Iraqi legislation, interim revenue sharing mechanisms have been implemented, while both the national government and the Kurdistan Regional Government have signed oil and natural gas contracts with foreign firms. The central importance of oil and gas revenue for the Iraqi economy is widely recognized by Iraqis, and most groups accept the need to create new legal and policy guidelines for the development of the country’s oil and natural gas resources. However, Iraq’s Council of Representatives (parliament) has not taken action to consider proposed legislation to date because of ongoing political disputes. In September 2009, U.S. Ambassador to Iraq Christopher Hill predicted that proposed legislation would not be considered prior to national elections planned for early 2010. The chairman of the Iraqi parliament’s oil and gas committee also recently expressed doubt that the legislation will be considered by the current parliament. Iraqi critics and supporters of various proposed solutions differ strongly on a number of key issues, including the proper role and powers of federal and regional authorities in regulating oil and gas development; the terms and extent of potential foreign participation in the oil and gas sectors; and proposed formulas and mechanisms for equitably sharing oil and gas revenue. Concurrent, related discussions about the administrative status of the city of Kirkuk and proposed amendments to articles of Iraq’s constitution that outline federal and regional oil and gas rights also are highly contentious. In October 2009, the Council of Ministers prepared its proposed 2010 budget, which includes a deficit of more than $15 billion for the second straight year because of lower global oil prices and stagnant production and export levels in Iraq. Iraq is seeking a loan from the IMF to cover a portion of the expected 2010 deficit, as U.S. officials continue to warn that reduced Iraqi revenues and spending jeopardize investments needed to stabilize the country. The military strategy employed by U.S. forces in Iraq has sought to create a secure environment in which Iraqis can resolve core political differences as a means of ensuring national stability and security. However, it remains to be seen whether proposed oil and gas legislation and ongoing interim efforts to development Iraq’s energy resources will promote reconciliation or contribute to deeper political tension. U.S. policymakers and Members of Congress thus face difficult choices with regard to engaging Iraqis on various policy proposals, related constitutional reforms, and oil and natural gas development contracts, while encouraging Iraqi counterparts to ensure that the content of proposed laws, amendments, and contracts reflects acceptable political compromises. This report reviews policy proposals and interim contracts, analyzes the positions of various Iraqi political actors, and discusses potential implications for U.S. foreign policy goals in Iraq. See also CRS Report RL31339, Iraq: Post-Saddam Governance and Security, by Kenneth Katzman. Congressional Research Service Iraq: Oil and Gas Legislation, Revenue Sharing, and U.S. Policy Contents Background ................................................................................................................................1 Recent Developments..................................................................................................................3 Key Issues ..................................................................................................................................5 Draft Hydrocarbon Legislation..............................................................................................5 Interim Arrangements and Contracts .....................................................................................6 Kurdistan Regional Government (KRG) Contracts..........................................................6 Ministry of Oil Contracts ................................................................................................7 Prospects for Revenue Sharing and Current Arrangements.....................................................8 Iraqi Perspectives........................................................................................................................9 Core Issues ...........................................................................................................................9 Iraq’s Constitution: Federal and Regional Authority ........................................................9 Revenue Sharing........................................................................................................... 11 Foreign Participation..................................................................................................... 11 Players and Positions ..........................................................................................................12 The Kurds: Regional Authority, Revenue, and Kirkuk ...................................................12 Sunni Arabs: Revenue Sharing and Foreign Participation ..............................................13 Dawa and Islamic Supreme Council of Iraq: Investment and Development....................14 Industry Unions and the Southern Oil Company............................................................14 International Energy Companies....................................................................................15 Oil Revenue and Security Concerns ..........................................................................................16 Revenues and Arrangements ...............................................................................................16 Current Arrangements ...................................................................................................16 Oversight of Oil Production and Revenue Management.................................................17 Oil Revenue and Budget Execution...............................................................................18 Security ..............................................................................................................................21 Infrastructure Attacks and Smuggling............................................................................21 U.S. Policy and Issues for Congress ..........................................................................................22 Congressional Benchmark and Other Legislation ................................................................22 Legislation in the 111th Congress...................................................................................22 Legislation in the 110th Congress...................................................................................23 Figures Figure 1. Location of Iraq’s Oil Reserves and Infrastructure ........................................................2 Figure 2. Iraq’s Oil Fields and Bidding Plans...............................................................................8 Tables Table 1. Key Oil Indicators..........................................................................................................1 Congressional Research Service Iraq: Oil and Gas Legislation, Revenue Sharing, and U.S. Policy Appendixes Appendix. Draft Hydrocarbon Legislation.................................................................................25 Contacts Author Contact Information ......................................................................................................29 Congressional Research Service Iraq: Oil and Gas Legislation, Revenue Sharing, and U.S. Policy Background Oil exploration and production in Iraq began in the 1920s under the terms of a wide-ranging concession granted to a consortium of international oil companies known as the Turkish Petroleum Company and later as the Iraq Petroleum Company. The nationalization of Iraq’s oil resources and production was complete by 1975. From 1975 to 2003, Iraq’s oil production and export operations were entirely state operated. However, from the early 1980s until the toppling of Saddam Hussein’s government in 2003, the country’s hydrocarbon infrastructure suffered from the negative effects of war, international sanctions, a lack of investment and technology, and, in some cases, mismanagement. According to the Oil and Gas Journal, Iraq has 115 billion barrels of proven oil reserves, the world’s third-largest. Other estimates of Iraq’s potential oil reserves vary, and the U.S. Department of