Iraq Struggles to Finish Oil Law

Forging an Agreement Requires Balancing Sharply Divided Interests, Ethnic Groups

Four months ago, about 80 oil company executives and consultants packed an office on St. James's Square in London for a briefing on exploration prospects in Iraq's Kurdish region and a Kurdish draft of an Iraqi national petroleum law.

Despite the immense risks of working in Iraq -- pipeline explosions, kidnappings, insurgency, political infighting -- the oil company executives were lured by the potential rewards, which are immense, too. Outside Saudi Arabia, no country has proven oil reserves as big as Iraq's. And the oil there is high quality, easy and cheap to produce, and bottled up in reservoirs that many major oil companies were familiar with three decades ago before wars and sanctions drove them out.

"Exxon Mobil has more seismic data on Iraq than on Houston real estate," says Fadel Gheit, an oil analyst at Oppenheimer & Co. who used to work for Mobil. "If Exxon had security on the ground, the following day it would have crews there," Gheit said. "And money would be no object."

Gheit estimated that Iraq could easily produce 6 million barrels a day, more than three times its current output and enough to help keep a lid on world prices.

Four months after the London meeting, however, security remains elusive and so does the national petroleum law. Barham Saleh, Iraq's deputy prime minister, said in a recent telephone interview that a compromise was "very, very close."

The proposed law has taken on significance beyond oil. While Iraq and foreign oil companies are eager to tap new revenue, the Bush administration and many Iraqis also hope that the law can be a model for resolving disputes and can bind Iraq's warring factions together.

Agreement has been reached on sharing oil revenue on a per-capita basis, a benefit for Sunnis who live mostly in areas with less production. A deal also has been struck that recognizes the power of regional authorities, such as the Kurdish Regional Government, to award oil contracts, but establishes a national petroleum commission with the power to review contracts within 60 days. A "revamped" national oil company would continue to manage existing production while new regional affiliates would participate in new exploration and production.

"We need to close the deal on one or two small issues," Saleh said. "A number of the major issues have been resolved."

But an adviser to the Kurdish authorities said those "small issues" included some significant details. On Friday, the Kurdistan Regional Government posted an item on its Web site denying news reports that a deal was complete. The "important annexes to the law are still pending," it said.

Outstanding issues include how much oil revenue will go to the central government; a charter for the new national oil company; the role of the oil ministry; and the principles upon which the new commission could reject regionally negotiated contracts. Also unsettled is whether the commission will require a simple majority vote or a two-thirds vote to reject a contract's terms. Those provisions must all be part of one package with the petroleum law, Kurdish leaders said.

If the Shia-dominated Iraqi central government spends heavily on its own projects, it could deny the Kurds and other regional authorities significant shares of oil revenue.

Even if negotiators agree on a draft, it must win approval from Iraq's cabinet and fractious parliament, which hasn't met in weeks.