June 18, 2010 - part one and June 25, 2010 - part twoZalmay Khalilzad’s take on Iraq – Part 1
BAGHDAD - Iraq’s newly elected parliament was scheduled to meet Tuesday, but the tall task ahead of it proved too daunting. Not only do the new MPs need to negotiate a ruling coalition, but once they do, they’ll need to broker legislation that will regulate the development, management, and distribution of all things oil in Iraq. Under the strain of such expectations, Iraq’s would-be legislators postponed another two weeks. Investors hoping to understand the impact of the elections on Iraq’s oil sector are faced with the same frustrating answer as Iraqis anxious to meet their new leaders: “wait and see.”
That said, interviews with several new parliamentarians help give a provisional sketch of the future. Whoever winds up at Iraq’s helm, it’s already clear that traditional party lines will continue to dominate oil politics, as nationalist Arab parties still want power centralized in Baghdad, while Kurdish parties favor more regional control. There are new wrinkles, too: the recent, promising oil exploration in Kurdistan may relax the vehemence of Kurdish claims on oil-rich Kirkuk, and MPs from Basra seem impatient with their party’s official lines, as the province continues producing the lion’s share of Iraq’s oil but lags economically.
In the last parliament, such issues combusted in a single flashpoint – the failed hydrocarbon laws. Much of the proposed oil legislation failed to pass the council of ministers, let alone the full legislature. Parliamentarians have always agreed that such legislation is urgently important to Iraq’s political reconciliation and economic growth. Yet, because it touches so many essential questions – from the shape of Iraq’s democracy to the allocation of the state budget – the oil law has fallen prey to differences of opinion.
Central vs. regional control
“Oil and gas falls under the jurisdiction of the federal government, including the management of it,” says Izuldeen al-Dola, a returning MP from the Iraqiya coalition, led by former prime minister Ayad Allawi.
Al-Dola’s position is consistent with the Iraqiya platform, which favors a strong central government, according to Dr. Sayed Majeed al-Khafaji, a political science professor at Baghdad’s Mustansariya University.
“They (Iraqiya) are concerned most with the constitution’s statements that oil is owned by the entire Iraqi people,” said al-Khafaji, adding that they “favor political power and budget allocation based more on population” – a policy which favors Baghdad over the provinces.
Al-Dola is from Ninewa, which has its share of oil, but nothing which compares to the massive fields of Basra or Kirkuk. Such a province would likely benefit from an arrangement that distributes oil wealth to provinces according to population rather than production levels.
“Oil should be managed in a way to unite the Iraqi people, not divide them,” al-Dola said. “When it comes to oil, we seek to minimize the provincial and regional powers.”
The major regional power in Iraq is Kurdistan, the northern enclave which boasts its own semi-autonomous Kurdistan Regional Government. In a highly controversial move, the KRG signed contracts with foreign oil companies in recent years, over the objections of the central government. Iraq’s Oil Ministry has since agreed to take over the management of the work being done under those contracts, but oil issues between Baghdad and Erbil are far from resolved.
“The main problems are not technical or economic – they are political,” says Mahmoud Othman, one of the leading lawmakers of the Kurdistan Alliance.
“The constitution says oil belongs to the federal government, so it has to be that way,” conceded Othman. “At the same time, there is the Kurdistan region, Basra, or other provinces with much oil – they want to have a say in how to exploit the oil. The constitution gives the right to them to do this. It says that it could be exploited locally, by local authorities, through agreement with the central government.”
He then asks, rhetorically, “But how to agree?”
One related issue which famously evades agreement is the northern city of Kirkuk, which Iraq’s Kurds, Arabs and Turkmen all see as their own; its huge oil deposits play no small part in these feelings of ownership. According to Professor al-Khafaji, the Kurdistan Alliance has “always looked to Kirkuk, which they see as the core of their future economic power, and the key to establishing a stronger Kurdistan.”
Othman, however, speaks of a possible development in the fight over Kirkuki crude.
“Before, everyone thought we were pushing for Kirkuk just because of oil,” Othman said. “But now in Kurdistan, wherever you dig, there is oil. We don’t need Kirkuk for all of our oil anymore.”
That being said, one would still be hard-pressed to find a Kurdish politician who isn’t actively pushing for Kirkuk to be either part of the Kurdistan region, or for it to be granted “special status” – in effect, to become its own region. Non-Kurdish parties generally believe that such proposals would take Kirkuk a step closer to Kurdistan.
Distribution of oil revenue
One very clear advantage to the oil-rich areas is a provision which was attached to the 2010 budget, the last piece of Iraqi legislation passed to date. It stipulates that provinces will be allocated one US dollar for each barrel of oil produced or refined and every 150 cubic meters of natural gas produced. For places like Basra and Kirkuk, this adds hundreds of millions of dollars to their annual budgets.
According to Izuldeen Al-Dola, of the Iraqiya party, such a revenue-sharing deal causes politicians in other oil provinces to eye the autonomy enjoyed by Kurdistan. He says this weakens Iraq.
“The decision to give money to some Iraqis will lead to discrimination of others who live in areas without much oil,” he said. “This is very dangerous – it basically encourages provinces to become regions.”
That has been a hot topic in Basra, Iraq’s leading oil-producing province. In 2008, a petition was circulated which could have legally forced a referendum on the creation of a federal Basra region. Ultimately, it failed because not enough names were compiled in the time allotted. Many now consider the attempt to have been unrealistic, but there has been renewed talk of the idea.
Prime-Minister Nouri al-Maliki has opposed it, but some Basrawi members of his State of Law coalition (which holds 14 of Basra’s 24 parliamentary seats) are now hinting that they support a move toward greater autonomy.
One such member is Rahaab Nuhma Maktouf, a newly-elected MP. Like other MPs, she insists that the Hydrocarbon Law is desperately needed, but has specific ideas of how Basra should fit into the equation.
“We are keeping track of those supporting Basra as an independent region. We have had several meetings about this – not just our party, but all 24 of the MPs from Basra together,” Moktouf said. “People from Basra are now very upset with services provided to them from the Iraqi government, and are demanding improvements.”
Such regionalist attitudes are increasingly widespread in Basra, even among the traditionally nationalist parties, according to Dr. Abdul-Hadi al-Hasani, who was the Deputy Chairman of the last parliament’s Oil and Gas Committee and is a high-ranking member of the State of Law from Basra.
“There is definitely a regional attitude in Basra, among members of the State of Law and other parties,” he said. “Since Basra is responsible for so much of the budget of Iraq, you cannot build up Iraq except by building up Basra.”
Maktouf, along with several other MPs from Basra, argue that the budgetary allotment of a single dollar per barrel is simply not enough for Basra’s economy, in comparison to the financial and infrastructure costs associated with oil production.
“I don’t know if Basra is going to be in conflict with the government or not. All I can say is that things need to be improved here,” she said.
According to Joost Hiltermann of the International Crisis Group, a non-profit research organization that studies international conflict, “Basrawis have a long history of grievance against central rule and of seeking a degree of autonomy, but they have also signally failed to attain it. Now will be no different, and indeed the one dollar per barrel of oil produced or refined may well give a boost to the local economy.”
Such economic progress depends less on the size of the provincial budget than on the competence of its leaders, said Hiltermann.
“The question is not whether these new funds will suffice but whether local government will have the capacity to spend it, and spend it wisely,” he said.
An unbroken stalemate
It’s still unclear whether the two winningest blocs in the election – former prime minister Ayad Allawi’s Iraqiya coalition with 91 seats and prime minister Nouri al-Maliki’s State of Law coalition with 81 seats – will join forces, or be able to court enough opposition parties to form a government on their own. The opening weeks of parliament have not been auspicious.
On June 14, the newly elected MPs met for the first time to be sworn in. But nothing much else happened. The whole session lasted less than 20 minutes, and never technically adjourned, since the constitution requires that key positions be appointed by the end of the first meeting. The continuation of that “first meeting” has now been postponed another two weeks. Thus, through a dubious loophole, the stalemate continues.
Meanwhile, the political parties seem united only in their outrage that nobody has shown the will to make concessions toward a middle ground.
“The political blocks in general look for their own interests. They do not look for the interests of the Iraqi people,” said Ezaldeen al-Dawla, an MP of the Iraqiya party. “Each block has its stands and does not want to give any compromise.”
Despite a constitutional requirement that a government form within 120 days of an election, parliament is now past due.
“[Postponing] is a way getting round on the constitution and marginalizing the will of the Iraqi people by what is called the heads of the political blocks,” said Ja’far al-Musawi, an MP with the Fadhila party, which is a member of the Iraqi National Alliance coalition. “Those who wrote the constitution, now they are violating its articles.”
They have been violating it for years, of course: the constitution also required the last parliament to pass an oil law to reconcile the disputes that now stymie this one.
Zalmay Khalilzad’s take on Iraq – Part 2
WASHINGTON, D.C. - Before being named a board member of the Norwegian oil firm DNO – one of the biggest foreign players in Iraqi Kurdistan – former U.S. Ambassador to Iraq Zalmay Khalilzad spoke with Iraq Oil Report about the country during and after his tenure.
One of the critical issues he faced as ambassador was the rift between the semi-autonomous Kurdistan Regional Government in the north and the central government in Baghdad. Their dispute over control of Iraq’s oil sector has been a major front in a battle to determine the shape of Iraq’s young democracy. Khalilzad tried to referee this fight, brokering the unsuccessful negotiations to pass legislation that would have governed the development of Iraq’s hydrocarbon resources.
In Part Two of our interview (click here for Part One), Khalilzad said that passing such an oil law will be more important than ever – a crucible of Iraq’s ability to overcome a divisive election and form a cohesive government.
Khalilzad also defended the role his consulting firm, Khalilzad Associates, is playing in the country’s oil sector. U.S. policy discourages foreign oil firms from doing business directly with the KRG; Khalilzad claims that his clients, who are engaging with Baghdad, are pursuing agendas in harmony with American priorities.
Ben Lando: The U.S. is trying to help in whatever way they can to bring some sort of conclusion or agreement between Baghdad and Erbil on some of these key oil issues. Some people in the State Department and the Embassy said that they felt it could be confusing, or maybe problematic for them, to have the former U.S. Ambassador to Iraq involved in oil deals – as a private individual, but involved – in oil deals in the north.
Zalmay Khalilzad: I support that goal, obviously, of reaching an agreement between the center and Erbil and I tried very hard when I was ambassador to achieve that goal. I have not been involved in any agreement reached between companies and the KRG dealing with oil in the north.
BL: Aren’t you [involved with Kurdistan] with your clients though?
ZK: I have no clients that I have helped reach an agreement for oil contracts in Kurdistan, no.
BL: I wanted to get your thoughts on the oil law and the future of some sort of legislation governing the oil sector, which would basically get rid of the issues that we addressed, the dispute between the KRG and Baghdad. There were long, drawn-out negotiations, then there was an initial agreement in 2007 that then broke down – and it’s been almost the same status ever since. How do you see making any headway in the future?
ZK: I think that the constitution requires that there be a new law, although the constitution does give some rights to the center and some rights to the region, but it does say there has to be a new law and that the new law has to emphasize new technologies, private sector. But the constitution also says that oil resources belongs to all Iraqis in all Iraqi provinces so that the revenue sharing part is there. I feel that it is in both sides’ interest for there to be an agreement.
We were very close in 2007. There had been a basic agreement when I was there and then it broke down afterwards. One of the challenges of the next government in the formation process is how central will that be in the negotiations during the formation of government, to deal with this issue, and I believe it’s very important that this issue be resolved, but there are so many issues I think we’ll have to wait and see.
BL: How crucial of an issue is this in terms of the future of Iraq, in terms of security, of development – political development, economic development?
ZK: It is vital.
BL: Is it one of the most important? The most important?
ZK: It is one of the most important issues that need to be resolved because it is a source of tension between the region of Kurdistan and the center, it is a factor that negatively effects the development of those resources.
BL: The draft law that was agreed upon (in 2007) was more of an incomplete draft. There were some issues actually that needed to be ironed out before they could have a proper agreement, and thus it fell apart. And there are some sides who said that if they were given a little bit more time, if there wasn’t as much American insistence on passing it so quickly, on approving it so quickly, that it might have had a better chance than it had now.
ZK: We thought that it was important that at that time – and many Iraqis agreed with us – to get as many of the basic issues agreed to as possible because Iraqis needed a sort of national compact about this new Iraq and that this was important not only for the economic development in terms of this oil issue but also in terms of political development of the country.
The draft that they agreed to, which ultimately they had to agree to, but we were encouraging, was ultimately approved by the cabinet. There were some issues that had to be agreed to within a specified time frame, how revenue sharing would be implemented – everybody agreed to share but how do you do it? – and there was also some issue with regard to the role of the center vs. the region in terms of some of the contracting mechanisms. But the cabinet did approve the draft oil law.
It ran into difficulties in parliament and because they couldn’t get an agreement in a timely manner.
BL: But the first breakdown came just a few months after the agreement and it gets to the meat of the disagreement between the two sides, which is control over fields. There were the four different annexes of the fields – those that are producing, those that are discovered, etc – those weren’t addressed in the oil law. And the oil minister, Shahristani, basically presented these annexes as if these were the final draft, and the KRG disputed that.
ZK: The agreement was that these would be negotiated by the two sides. There was also revenue sharing implementation that was part of that. As I said the agreement was made in principle when I was there in February, and then I left in March to go to the United Nations, and the deadline was in May, to complete the rest.
Sometimes you can’t agree to everything at once. You agree to what you can agree. And what will be left for later. That’s what they all agreed was a good way to proceed but at the same time there was a timeline because the Iraqis had been doing well when there was a timeline, whether it was about the constitution or some of the elections, to meet the deadline.
But it did not work out. I do not know all the details since I was gone when it happened. But I felt that the fundamental agreement was an important milestone on something important to Iraqis – we’re talking trillions of dollars, how to develop that resource for the benefit of all Iraqis.
BL: This milestone was a difficult milestone to reach.
ZK: It was.
BL: Not only were the two sides very, very far apart on it, but it took some arm twisting, which may be too harsh, may be too soft of a word, you tell me.
ZK: These are important issues. They were and continue to be important issues. A lot is at stake and there are clearly differences of view as to how much is the role of the center, how much is the role of the region in regard to these issues. Also different, analytically, different approaches as to how you do these sort of things. In order to make more progress, it needed to have more senior people than the ministers involved, in order to make some of the decisions, including President Talabani, President Barzani and Prime Minister Maliki, on the telephone at one stage, to discuss and make decisions.
BL: All four of you were on the phone like a conference call, or with the ministers as well?
ZK: With the others as well but with the four principles involved. These things are not easy. It’s about a lot of resources, not only about economics. It is very important but it is also about politics, personalities. So you have to get more senior people involved at some times to explain the issue, what the differences are, how maybe there is a way to bridge those differences and only principals sometimes can make the decision that they needed to make.
BL: Who was there?
ZK: (KRG Natural Resources Minister Ashti) Hawrami was there. Prime Minister Nechirvan Barzani was there. The team from Baghdad was there.
BL: Who led that? Was it Shahristani or Thamir Ghadhban?
ZK: Thamir was there. But people were in contact with each other and Minister Shahristani was very much kept in the picture. But ultimately there had to be a discussion on the telephone. And that’s why the cabinet approved it. It wasn’t that the deal was only struck in Kurdistan without the center and other parties being in the picture. It was approved rather quickly after the agreement had been done by the cabinet. But as I said there were other requirements that had to be done with regard to steps that had to be taken and that they were not met.
BL: Did you foresee that there would be such a split between Ashti Hawrami and Hussain Shahristani?
ZK: Personalities are very important in all negotiations and I wouldn’t be surprised if they were important in this regard as well. That would be unique if not the case. But I also have to say that these were important and complicated issues. Some people knew a lot about the issues, some people didn’t know a lot about this whole issue of energy and oil. There were political constraints that they all have faced. These are difficult issues.
But I think the key thing is the mechanism through our help – which our help was just to facilitate, we didn’t go with a view that it must be resolved this way, that it must be resolved that way but to help them we saw it as a partnership with them, and to offer them the benefit of our experience, knowledge – was a way to offer bridging formulas from our point of view, always recognizing that the decision was theirs, but recognizing that an agreement on something as important as oil would have a positive impact for Iraq.
BL: Obviously, Iraq has a lot of prospects in many sectors, the possibilities are almost endless. A lot of people in various industries they see these big risks, especially in security, that the future isn’t certain and the way that they’ll get to the future isn’t certain either. So how would you explain this to clients, that the benefits would outweigh the risks in investing in Iraq?
ZK: Iraq has huge potential. There are risks associated with it, obviously. The benefits are great. I believe that Iraq will ultimately work. That in many other countries that have had political instability and some unresolved issues, very good deals have been made and in fact economic development has had a positive impact on the political development of the country. And sometimes if you are there early on, the kind of relationships you establish pays dividends down the road in terms of your market position, in terms of the quality of the relationship.
BL: You are talking about you or your clients? Maybe both?
ZK: I’m talking about my clients. My judgment is that if you look around the world at some of the places where there is a lot of oil and energy, they are places where there has been instability and yet companies have done very well there.
My motivation besides making money has been to focus on the countries that I spend a lot of time on to see what can be done from outside to assist with the economic development. But at the same time I spend my time on the side on other issues that are non-profit. For example I’m on the board of the American University of Iraq because I think education is very important. I’m also on the board of the American University of Afghanistan. I’m creating an education foundation that will deal with how you assist the next generation and prepare them for success. So it is in my case the focus is on a region that I know and care about it and its economic development and ultimately its future but my activities are for profit but also nonprofit.
BL: One question that people have raised, and it’s important to allow you to respond: the issue of oil and Iraq and the U.S. motivations for going to war in Iraq. Do you think there is any kind of conflict, for such a top-level American official to be involved in the oil sector in Iraq, now that he is in the private sector? Kind of the revolving door issue?
ZK: I don’t see a conflict if you behave consistent with the law and regulations and you are facilitating the development of the sector. You’re not doing it yourself. I’m not seeking oil fields for myself from the Iraqi government, and I’m very careful about the kind of businesses I select to make sure they are reputable people and companies and that they will do a good job. This is what they need. The businesses need it and also the Iraqis need it. So this idea has no particular standing in my view.
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