Global Insight Perspective | |
Significance | The installation of a permanent Iraqi government has enabled progress on the regulatory front, with the new foreign investment law a first tangible step towards economic opening by the elected regime. |
Implications | The law is expected to allow for foreign ownership in the downstream energy and retail sectors, priority investment areas for the government. However, further laws will be required to enable foreign participation in more sought-after upstream prospects which, together with ongoing civil instability, suggests that the immediate investor response may be muted. |
Outlook | Establishing the regulatory conditions necessary to insure investment remains one of the most important tasks ahead of the Iraqi government, if it is to maximise private interest in the energy sector and elsewhere. Nevertheless, progress on upstream legislation is likely to be considerably more difficult than this general investment law, given the stakes involved in an oil-rich state with strong impulses towards decentralisation. |
Open House
Only a month after the installation of an elected permanent Iraqi government, legislators are planning to pass their first foreign investment law, which will give foreign players equal ownership rights with Iraqi companies, outside a few key sectors.
Deputy Prime Minister Barham Saleh told Reuters that the cabinet is expected to approve the proposed legislation in days, enabling it to come before parliament and onto the legislative books by the end of the month. The legislation will give foreign firms equal ownership rights with Iraqi players, except where land is concerned. It also paves the way for the establishment of an investment promotions agency and a dispute resolution mechanism, according to Iraq's al-Mada newspaper.
Saleh said that the downstream and fuel retail would be covered by the legislation, although not the upstream prospects that have long exercised popular imagination in the international oil industry. Upstream investment will wait on the passing of a specific hydrocarbons law, which is due to be discussed by the parliamentary oil and power committee this week and could be passed in a "matter of months".
However, this and other optimistic statements by the likes of U.S. Energy Secretary, Samuel Bodman, this week were challenged by former oil officials, including former oil minister Ahmed Chalabi, who told Dow Jones that suggestions that foreign investment in the upstream oil industry could start as early as next year "aren't practical" given the challenges ahead. Chalabi cited parliamentary divisions, alongside security, as key obstacles to tapping upstream investment interest, and ruled out the prospect of pushing output to 3 million b/d by the year-end. This remains one of the current list of government targets.
Outlook and Implications
The Iraqi government is clearly attempting to send positive signals to would-be investors by rushing the general foreign investment law through, albeit one which avoids the most attractive interest area of upstream oil and gas. The law also has the advantage of paving the way for investment in priority energy sectors such as downstream refining and retail, which are essential to Iraq's economic wellbeing going forward, given the current high costs of imports and distribution. Nevertheless, the security situation, combined with the lack of an immediate upstream lure, means that the investor response is unlikely to be overwhelming in the near term, at least until further news on a specific hydrocarbon law appears.
And appear it will, given the government's strong need for new oil and investment funds, although its birth is likely to prove every bit the protracted and divisive issue anticipated by Chalabi, given the stakes at hand. Among key issues to be resolved are the role of local governments in managing hydrocarbon revenues and resources after the fudged provisions on this point in the 2005 constitution, which have encouraged the Kurds to go it alone in making their own exploration awards. That is likely to prove a central point of controversy in the hydrocarbons debate going forward and one which makes any early tender of substantive upstream assets unlikely, outside the smaller limited-term contracts available over the last two years. Even with the passing of some upstream-enabling legislation by the end of this year, the likelihood is that this will require changes in Iraq's own state agencies, not to mention the delineation and agreement on investment priorities for tender. That leaves 2008 as the earliest probable date for an Iraqi upstream comeback, requiring considerable coalescence on the more controversial issues of hydrocarbon management over the remainder of 2006.