IRAQ'S OIL: NOW COMES THE HARD PART

BAGHDAD, Dec. 16 (UPI) -- The Iraqi government, a bundle of contracts with major foreign oil companies in its pocket from a weekend auction, plans to start boosting the country's oil production to challenge world leader Saudi Arabia.

But it still faces a host of problems that could wreck those plans.

First, there is the glaring absence of a long-stymied hydrocarbons law, which the Americans see as a benchmark for Iraq's political progress in the post-Saddam Hussein era.

This would regulate Iraq's refurbished oil industry and determine how the revenues will be shared among the various regions and sects.

"Already an argument is building within the government that the contracts must be approved by Parliament, not just the Cabinet," according to the U.S. global security consultancy Stratfor.

As it is, Baghdad is already at odds with Iraq's Kurds, who run their own semiautonomous enclave in the northeast. In the absence of an oil law, the Kurdish Regional Government is battling the central government over Kurdistan's energy resources.

The KRG has signed contracts, far more lucrative than those secured by the central government, with some 20 foreign oil companies. The Kurds see this as the economic underpinning of an eventual independent state.

Baghdad, which claims it has control over Kurdish oil and fiercely opposes Kurdish statehood, insists these are illegal and refuses to sanction payments to the oil companies.

The KRG retaliated by halting oil exports from the fields it controls, thus depriving Baghdad of the revenue from 100,000 barrels a day as of October.

Kurdish claims on the northern Kirkuk oil fields, which contain one-third of Iraq's known reserves, have created a powder-keg crisis that could explode at any moment.

Second, parliamentary elections in the spring, delayed from January because of sectarian feuding in the fractious national assembly, could result in the negation of the contracts.

"Iraq's general elections in March will be a critical milestone in the development of the oil fields because a new government could either be friendly or hostile to Iraq opening up its most important industry to foreigners," The Financial Times observed.

A few days after the auction ended Saturday, an Iraqi lawmaker filed a lawsuit against the Oil Ministry and the government of Prime Minister Nouri al-Maliki for signing a 20-year contract with BP and the China National Petroleum Corp. to run the giant Rumaila field without parliamentary approval.

Doubtless, Maliki, who sees the oil deals as vote-winner in the upcoming elections, will be able to neutralize that threat.

But the lawsuit, scheduled to be heard in court on Dec. 22, underlined the perils that lie ahead as the government drives to boost oil production to pay for rebuilding the nation.

With the elections postponed and a referendum still pending on Iraq's security agreement with United States that resulted in U.S. forces starting to withdraw last June, Iraq faces the grim prospect of a new wave of bloodshed and no guarantee that the polling will produce a functional coalition government.

Third, Baghdad is likely to run into resistance from the Organization of Petroleum Exporting Countries, whose members feel threatened by Baghdad's ambitious plans.

Oil Minister Hussain al-Shahristani wants to ramp up its production, currently limping along at about 2.4 million barrels a day, to 10 million to 12 million a day over the next six years through use of the advanced technology the foreign companies will bring in.

That's bound to upset OPEC's equilibrium and increase tension between Shiite-dominated Iraq and its Sunni-led neighbors in Saudi Arabia, Kuwait and the United Arab Emirates.

It will also likely complicate relations with overwhelmingly Shiite Iran, OPEC's second-largest producer. But if Iraq implodes, Iran may well snatch the Shiite-controlled southern fields that contain most of Iraq's reserves.

Iraq is technically a member of OPEC, but its production has slumped so badly over the last decade that it has not had to adhere to the 13-member cartel's production quota system.

So boosting production capacity to rival Saudi Arabia's 12 million barrels a day -- although it only actually produces around 8 million a day at present -- or even non-OPEC Russia's 10 million barrels a day is a challenge that other producers cannot ignore.

Finally, the immense importance of Iraq's oil industry on proving the economic powerhouse to rebuild the long-battered nation, and the oil-field projects in particular, make tempting targets for Sunni insurgents led by al-Qaida and remnants of Saddam's outlawed Baath Party.

http://www.upi.com/Science_News/Resource-Wars/2009/12/16/Iraqs-oil-Now-comes-the-hard-part/UPI-47361260987000/