Iraq: Oil and Gas Legislation, Revenue Sharing, and U.S. Policy

Prepared for Members and Committees of Congress

Iraqi leaders continue to debate a package of hydrocarbon sector and revenue sharing legislation
that would define the terms for the future management and development of the country’s
significant oil and natural gas resources. A group of four proposed laws includes an oil and gas
sector framework law and three supporting laws that would outline revenue sharing, restructure
Iraq’s Ministry of Oil, and create an Iraqi National Oil Company. Both the Bush Administration th
and the 110 Congress considered the passage of oil and gas sector framework and revenue
sharing legislation as important benchmarks that would indicate the current Iraqi government’s
commitment to promoting political reconciliation and long term economic development in Iraq.
In the absence of new legislation, revenue sharing mechanisms have been implemented and both
the Iraqi national government and the Kurdistan Regional Government have signed oil and
natural gas development 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. However, Iraq’s Council of Representatives
(parliament) has not taken action to consider the proposed legislation to date because of ongoing
political disputes. Iraqi critics and supporters of the proposed legislation 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 city of Kirkuk and proposed amendments to
articles of Iraq’s constitution that outline federal and regional oil and gas rights also are highly
The current military strategy employed by U.S. forces in Iraq seeks to create a secure
environment in which Iraqis can resolve core political differences. However, it remains to be seen
whether proposed oil and gas legislation will promote reconciliation or contribute to deeper
political tension. U.S. policymakers and Members of Congress thus face difficult choices with
regard to encouraging consideration of the proposed legislation, related constitutional reforms,
and oil and natural gas development, while attempting to ensure that the content of proposed
laws, amendments, and contracts reflect compromises reached by and acceptable to Iraqis. This
report reviews proposed legislation and contracts, analyzes the positions of various Iraqi political
actors, and discusses potential implications for U.S. foreign policy goals in Iraq. The report will
be updated to reflect new developments. See also CRS Report RL31339, Iraq: Post-Saddam
Governance and Security, by Kenneth Katzman.

Backgr ound ..................................................................................................................................... 1
Draft Hydrocarbon Legislation........................................................................................................1
Draft Hydrocarbon Framework Law.........................................................................................3
Federal Oil and Gas Council...............................................................................................4
Contract Type(s)..................................................................................................................5
Petroleum Revenues and Sharing Arrangements................................................................5
Regional Authority and Oil Field Management Annexes...................................................6
Draft Revenue Sharing Law......................................................................................................6
Prospects for Revenue Sharing and Current Arrangements................................................7
Ministry of Oil and Iraq National Oil Company Laws.............................................................8
Prospects for Enactment and Implementation...........................................................................8
Interim Arrangements and Contracts.........................................................................................9
KRG Contracts....................................................................................................................9
Ministry of Oil Contracts..................................................................................................10
Iraqi Perspectives...........................................................................................................................11
Core Issues...............................................................................................................................11
Iraq’s Constitution: Federal and Regional Authority.........................................................11
Revenue Sharing...............................................................................................................13
Foreign Participation.........................................................................................................14
Players and Positions...............................................................................................................14
The Kurds: Regional Authority, Revenue, and Kirkuk.....................................................15
Sunni Arabs: Revenue Sharing and Foreign Participation................................................15
The United Iraqi Alliance: Investment and Development.................................................16
Basrah: Industry Unions and the Fadilah Party................................................................16
Sadr and Sunni Insurgent Groups.....................................................................................17
International Energy Companies.......................................................................................18
Oil Revenue and Security Concerns..............................................................................................19
Revenues and Arrangements...................................................................................................19
Current Arrangements.......................................................................................................19
Oversight of Oil Production and Revenue Management..................................................20
Oil Revenue and Budget Execution..................................................................................21
Security ................................................................................................................................... 23
Infrastructure Attacks and Smuggling...............................................................................23
U.S. Policy and Issues for Congress..............................................................................................24
Frequently Asked Questions...................................................................................................24
Privatization and Foreign Participation.............................................................................24
U.S. Advisors and Diplomatic Support ............................................................................25
Congressional Benchmark and Other Legislation...................................................................26
Figure 1. Location of Iraq’s Oil Reserves and Infrastructure..........................................................2

Table 1. Key Oil Indicators.............................................................................................................3
Author Contact Information..........................................................................................................28

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 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. In April 2007, oil
industry consultants IHS estimated that Iraq’s proven and probable reserves equal 116 billion
barrels, with a potential additional 100 billion barrels in largely unexplored western areas. The
U.S. Geological Survey’s median estimate for additional oil reserves in Iraq is approximately 45
billion barrels. In August 2004, Iraq’s then-Oil Minister Thamer al Ghadban stated that Iraq had
“unconfirmed or potential reserves” of 214 billion barrels. Iraq’s proven reserves are concentrated
largely (65 percent or more) in southern Iraq, particularly in the southernmost governorate of Al
Basrah. Significant proven oil resources also are located in the northern governorate of Al Tamim
near the disputed city of Kirkuk. (See Figure 1, below). Oil exports provide over 90% of Iraq’s
government revenue.

Iraqis continue to debate a package of hydrocarbon sector and revenue sharing legislation that
would define the terms for the future management and development of the country’s significant
oil and natural gas resources. The centerpiece of the legislative package is a draft hydrocarbon
framework law that would create a regulatory and policy development framework for future oil
and gas exploration and production in Iraq. Three companion laws would complete the package
by establishing terms and mechanisms for revenue sharing, creating the Iraq National Oil
Company, and reorganizing Iraq’s Ministry of Oil. Concurrent negotiations regarding
constitutional amendments may have direct implications for the package of hydrocarbon
legislation, particularly efforts to clarify the specific authorities granted to federal and regional
governments to regulate oil and gas development and export activities under Articles 111 and 112
of the Iraqi constitution.

Figure 1. Location of Iraq’s Oil Reserves and Infrastructure
Source: Adapted from U.S. Energy Information Administration (EIA), Energy Situation Analysis Report, June 26,
2003. See also EIA, Country Analysis Brief: Iraq, August 2007, available at

Table 1. Key Oil Indicators
Oil Production Oil Oil Oil Oil Oil Revenue
(current weekly Production Oil Exports Exports Revenue Revenue (2008, to
avg.) (pre-2003) (current) (pre-2003) (2006) (2007) date)
2.4 million barrels 2.5 mbd 1.88 mbd 2.2 mbd $31.3 billion $41 $58.6 billion
per day (mbd) billion
Note: Figures in the table from the U.S. Department of State “Iraq Weekly Status Report,” December 3, 2008.
Oil export revenue is net of a 5% deduction for reparations to the victims of the 1990 Iraqi invasion and
occupation of Kuwait, as provided for in U.N. Security Council Resolution 1483.
Both the Bush Administration and the 110th Congress considered the passage of oil and gas sector
management and revenue sharing legislation as important benchmarks that would indicate the
current Iraqi government’s commitment to promoting political reconciliation and economic
development in Iraq. Iraqi critics and supporters of the legislative package differ over the proper
roles and authorities of federal and regional bodies, the terms and extent of potential foreign
participation in oil and gas production and development, and potential formulas and mechanisms
for equitably sharing oil and gas revenue. Iraqi labor groups have challenged the transparency and
inclusiveness of legislative drafting and contract negotiation processes thus far, and some blocs
within Iraq’s Council of Representatives have vowed to oppose or attempt to significantly amend
elements of proposed legislation to reflect their priorities (see Players and Positions below). Iraqi,
U.S., and other international observers have expressed concern that continuing violence and
political tension in Iraq may not be conducive to careful consideration of detailed hydrocarbon
sector legislation or new national contracts. At present, the four elements of the proposed package
of hydrocarbon legislation remain at different stages of development and negotiation.
Beginning in mid-2006, a three member Oil and Energy Committee working under the auspices
of the Iraqi cabinet prepared draft hydrocarbon framework legislation to regulate Iraq’s oil and
gas sector. A political negotiating committee subsequently edited their draft. Following approval
by the negotiating committee, Iraq’s Council of Ministers (cabinet) approved a draft version of 1
the hydrocarbon framework law in February 2007. Subsequent negotiations among Iraqi leaders
sought to clarify the responsibilities of federal and regional authorities as well as contracting
procedures for oil fields. On July 3, 2007, Iraqi Prime Minister Nouri al Maliki announced that
the Council of Ministers had approved a final version of the framework law and had forwarded
the bill to the Council of Representatives for consideration.
The Council of Ministers’ Shoura Council reportedly amended provisions of the bill to ensure
their consistency with provisions of the Iraqi constitution. However, Kurdish officials protested
the changes, arguing that they are substantive, rather than semantic, and have tentatively
withdrawn their support for the legislation. The boycott of cabinet and parliamentary proceedings

1 In response to a June 2007 CRS inquiry, the U.S. Department of State referred to an English text of the draft
legislation made available by the Kurdistan Regional Government as an official English draft version. It is available
online at

by various Iraqi entities at the time of the cabinet’s approval of the law added to the controversy
surrounding the proposed legislation. Statements from Iraqi government officials and members of
the Council of Representatives suggest that parliamentary consideration of the legislation
continues to be delayed by disagreements between key political figures.
According to the June 2008 Report to Congress prepared by the U.S. Department of Defense, the
Chairman of the Council of Representative’s Oil and Gas Committee will not proceed with a first
reading of the draft legislation until the federal government and the Kurdistan Regional 2
Government reach a political agreement on the hydrocarbon sector. The September 2008 report
predicts that “it is likely that several more rounds of negotiations between the two sides will occur
before they reach an agreement,” and that “controversy on the [provincial] elections in Kirkuk 3
will likely affect the hydrocarbon legislation package.” In the absence of a new legal and
regulatory framework, the Baghdad government has announced its intention to award long-term
service contracts to expand oil production.
The central element of the draft hydrocarbon framework legislation is the creation of a Federal
Oil and Gas Council (FOGC) to determine all national oil and gas sector policies and plans,
including those governing exploration, development, and transportation. The FOGC would
become the most powerful body in Iraq’s oil sector, with the power to review all contracts, and
would operate according to a two-thirds majority decision-making system. The seats on the
FOGC are reserved for specific cabinet members, representatives of constitutionally recognized 4
regional governments, hydrocarbon experts, and “producing governorates.” A “Panel of
Independent Experts,” open to Iraqi and foreign membership, would work with the FOGC in a
non-binding, advisory capacity. The possibility that foreign energy experts or industry
representatives could be chosen to participate on this panel has alarmed some Iraqis and foreign
Although the draft law stipulates that the formation of the FOGC “shall take into consideration a
fair representation of the basic components of the Iraqi society,” some observers have warned that
the makeup of the FOGC specified in the draft law could potentially contribute to sectarian or
regional tensions. Given the potential for the majority Shiite Arab community to directly or
indirectly control the makeup of Iraq’s cabinet in Iraq’s democratic system and the ineligibility of
Sunni Arab governorates to qualify for FOGC seats based on the other specified terms, some
Sunni Arabs fear their interests may not be adequately represented in the powerful council. Other
Iraqis may be encouraged to seek constitutionally recognized regional status in order to ensure
their representation in the council.

2 U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2008, Report to Congress in accordance
with the Department of Defense Appropriations Act 2007 (Section 9010, P.L. 109-289), p. 3.
3 U.S. Department of Defense, Measuring Stability and Security in Iraq - September 2008, p. 3.
4 Article four of the draft framework law defines aproducing governorate asany Iraqi Governorate that produces
Crude Oil and natural gas continually on rates more than one hundred and fifty thousand (150,000) barrels a day.

The draft hydrocarbon framework law establishes several criteria that future “exploration and
production contracts” must meet. The criteria are designed to preserve Iraqi control and maximize
the country’s economic return. The draft law does not mandate the use of so-called “production-
sharing agreements” as the sole model contract for future oil development in Iraq. The law states
that contract holders may be given exclusive rights to exploration, development, production, and
marketing of Iraqi oil for specified periods, subject to approval of the contract and a field
development plan by Iraqi authorities. The law also outlines general terms and conditions for
evaluating contracts and development plans designed to preserve the Iraqi government’s
sovereign control of oil production, economic returns to Iraq, and “appropriate returns” to 5
potential investors. The FOGC’s Panel of Independent Experts would use these criteria to
evaluate contracts signed by the Kurdistan Regional Government since 2003, and the Ministry of
Oil, and the FOGC would use the criteria to evaluate contracts signed by the former regime with
international oil companies (Article 40).
The contract provisions of the law have attracted significant attention because they would allow
foreign participation and therefore represent, in principle, a reversal of the nationalization of
Iraq’s oil sector. The specific details of model contracts developed by Iraqis and the terms of
specific individual contracts negotiated between Iraq and potential foreign partners would
determine the type of foreign participation and the specific long term revenue benefits to Iraq or
foreign companies. The draft hydrocarbon framework law does not mandate a specific form of 6
contract or predetermine specific contract terms or details. The FOGC would develop model
contracts for use in Iraqi oil and gas fields and evaluate agreements with foreign participants 7
according to the stated criteria and the model contracts. According to Revenue Watch Middle
East director Yahia Said, “the aim of this law from beginning was to promote foreign investment
in Iraq’s oil sector. Yet while the law opens the door for foreign companies, there are careful, 8
deliberate mechanisms in place to maintain control in the hands of national government.”
The draft hydrocarbon framework law states that Iraq’s oil wealth belongs to all of its citizens, as
reflected in the Iraqi constitution. However, the draft legislation does not contain specific
guidelines or mechanisms for revenue sharing. The draft would create two funds for oil revenues:
the first, an “Oil Revenue Fund,” and the second, a “Future Fund” to hold an unspecified
percentage of oil revenue for long-term development goals. Both funds would be regulated and

5 According to Article 9 of the draft framework,All model contracts shall be formulated to honor the following
objectives and criteria: 1- National control; 2- Ownership of the resources; 3- Optimum economic return to the country;
4- An appropriate return on investment to the investor; and 5- Reasonable incentives to the investor for ensuring
solutions which are optimal to the country in the long-term related to a- improved and enhanced recovery, b-
technology transfer, c- training and development of Iraqi personnel, d- optimal utilization of the infrastructure, and e-
environmentally friendly solutions and plans.
6 The law explicitly states in Article 9 thatModel Contracts may be based upon Service Contract, Field Development
and Production Contract, or Risk Exploration Contract.”
7 Revenue Watch is an independent operating and grantmaking 501(c) 3 organization that monitors natural resource
revenues and public expenditures and provides grants to local partners to improve transparency in oil and gas
producing countries. For more information, see
8 Yahia Said, Remarks at the United States Institute of Peace, May 18, 2007, as quoted in Christina Parajon, “USIPeace
Briefing: The Iraq Hydrocarbon Law: How and When?, June 2007.

administered according to terms specified in separate federal revenue legislation (for more
information on current arrangements see Prospects for Revenue Sharing below).
Constitutionally recognized regional authorities would automatically qualify for seats on the
FOGC under the terms of the draft oil sector legislation. The draft law originally was structured
to grant regional authorities licensing powers with regard to oil fields specified in four annexes,
subject to the terms of the draft law and in conjunction with the plans and procedures of the 9
FOGC.Official versions of the draft annexes were not published. However, Kurdish
representatives made several public statements following an April 2007 conference in Dubai
expressing their opposition to the draft annexes and threatening to withdraw support for the 10
legislative package in the Council of Representatives. The annexes reportedly were dropped
from the draft legislation prior to its approval by the cabinet. Under the new arrangement—
allegedly designed to meet demands of Kurdish negotiators—the management of specific oil
fields would be decided by the members of the FOGC.
Article 112 of the Iraqi constitution sets qualitative criteria for the distribution of oil and gas
revenues and requires the Iraqi parliament to pass a law regulating revenue distribution. In
February 2007, some officials in Baghdad and Washington indicated that a broad agreement to
share oil revenues among regions based on population had been reached. However, Iraqi leaders
continued to negotiate the terms of the draft revenue sharing law through June 2007. In line with
the constitutional requirement, a separate draft revenue sharing law has been prepared as a
component of the hydrocarbon legislative package currently under consideration.
According to a draft of the revenue sharing law published by the Kurdistan Regional Government 11
on June 20, 2007, the federal government would be empowered to collect all oil and gas
revenue, with the stipulation that all funds be deposited into external and internal accounts based
on their source. The federal government would have priority to allocate the funds in the accounts
to support national priorities such as defense and foreign affairs, “provided that this does not
impact the balance and needs of the governments of the Regions and the Governorates which are
not organized in a region.” The remainder of the accounts would be distributed to regions and
governorates automatically, on a monthly basis, based on agreed population-density-based
percentages until a census can be completed. The Kurdistan Regional Government would receive

9 An unofficial transcript of the Dubai meeting is available at
April%2018%20transcript.pdf. According to press reports, approximately 93 percent of Iraq’s proven oil reserves
would have been subject to the jurisdiction of the federal government (Annexes 1, 2, and 4), while the Kurdistan
Regional Government (KRG) would have exercised authority over the remaining seven percent (Annex 3). Annex 1
listed 26 fields currently in production, Annex 2 listed 25 fields that areclose to production,” Annex 3 listed 27 fields
not near production and open to international oil companies or the INOC, and Annex 4 delineated 65 exploration
blocks. The KRG posted its analysis of the draft annexes on its website, available at
10 For example, Ashti Hawrami, Minister of Natural Resources for the Kurdistan Regional Government, said, “The
annexes as they are written now will not be accepted by the KRG.... If I dont get the lions share of fields (in the
region) then it’s a bad law. If the law dilutes regional control then it is unconstitutional.” Simon Webb, “Iraq Oil Law
to Go to Parliament, Kurds Wary,” Reuters, April 18, 2007.
11 Available at

a 17% share of the remaining funds deposited in two accounts at the Central Bank of Iraq branch 12
in Irbil. No specific provision is made in the draft for addressing requirements to meet the needs
of “damaged regions” as required by Article 112 of the constitution.
The draft revenue law also would create a “Commission of Monitoring the Federal Financial
Resources” composed of central government officials, experts, and representatives of each region
and governorate. The Commission would monitor deposits and allocations from the central
revenue fund, in addition to facilitating international audits and producing monthly, quarterly, and
annual transparency reports. Article 7 of the draft revenue law reiterates the call for the
establishment of a “Future Fund” for surplus revenue, but states that the operation of such a fund
should be defined in a separate piece of legislation following further negotiation among federal,
regional, and governorate representatives.
A number of outside observers have emphasized the importance of proper oil revenue
management and equitable oil revenue sharing as requirements for economic development and
political reconciliation in post-Saddam Iraq. The Iraq Study Group recommended that oil revenue
accrue to the central government and not to regions (Recommendation 28). This principle appears
to have been included in the draft hydrocarbon framework and draft revenue sharing legislation,
which would create central accounts for oil and gas revenues. According to the drafts, revenue
sharing would reflect a population-based system for revenue allocation, with automatic monthly
distributions to regional and governorate authorities.Potential obstacles to revenue sharing on
terms include the lack of recent, reliable national census data and uncertainty over the terms of
communal representation on hydrocarbon policy decision making and implementation bodies.
Current revenue sharing arrangements are outlined in Articles 17 through 19 of Iraq’s 2008 13
Budget Law. The budget prioritizes so-called “sovereign expenditures” for the Council of
Representatives, the administration of the national Cabinet, the Ministry of Foreign Affairs, the
Ministry of Defense, oil export production, and other national government functions. After these
expenditures are provided for, 17% of the remaining budget is allocated to the Kurdistan Regional
Government, and the rest is allocated for use by national ministries in other governorates on the
basis of population percentages and specific needs. The law calls for the auditing of KRG
government revenue to determine any funds that should be transferred to the national treasury and
provides for the potential withholding of proportionate amounts of national budgetary funds from
transfer to the KRG in the event of non-payment by the KRG of revenues due to the national
government. Article 19 of the law states that the percentages of the budget allocated to the KRG
and the governorates will be “revisited” in the 2009 budget and calls on the national government
to “conduct a population census throughout Iraq no later than December 31, 2008.” The U.S.
Department of Defense reported in March 2008 that the Iraqi government “continues to distribute 14
oil revenues equitably to the provinces in the absence of... comprehensive legislation.”

12 Ben Lando,Iraqis Make Progress on Sharing Oil Sales, United Press International (UPI), June 21, 2007.
13 English translation of law provided to CRS Analyst by U.S. Department of State, September 15, 2008.
14 U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008, Report to Congress in
accordance with the Department of Defense Appropriations Act 2007 (Section 9010, P.L. 109-289), p. 4.

The final two components of the hydrocarbon legislative package are proposed laws that will
reorganize Iraq’s Ministry of Oil and establish an Iraqi National Oil Company (INOC). Under the
hydrocarbon framework law, the responsibilities and authorities of the Ministry of Oil and the
INOC would be altered significantly, and the draft Ministry and INOC laws are necessary to
ensure proper oversight, accountability, and separation of powers between the two entities. As of
January 2008, drafts of these laws had not been published and public reporting on their contents
remains limited.
Iraqi and U.S. officials hailed the Council of Ministers’ February 2007 approval of the draft
hydrocarbon framework legislation as an important step forward. However, the draft legislative
package remains the subject of intense scrutiny from Iraqi and international observers: the draft
framework law is imprecise on key issues, including contract terms and revenue sharing, and
political observers have warned the legislation would create decision making structures that could
contribute to sectarian or inter-regional tensions rather than defuse them. Both the U.S. and Iraqi
administrations had hoped the hydrocarbon framework law would be approved by the parliament
by the end of May 2007. However, differences over oil field management responsibilities,
revenue sharing formulas and mechanisms, and broader disputes concerning constitutional
authority and the administrative status of Kirkuk and other areas continue to preclude
parliamentary consideration.
On July 3, 2007, Iraqi Prime Minister Nouri al Maliki announced that the Council of Ministers
had formally approved a final version of the framework law and had forwarded the bill to the
Council of Representatives for consideration. Iraqi officials stated that “linguistic” changes were
made to the February 2007 draft, but precise details on what changes may have been included
have not been made public. Kurdish leaders raised questions about the changes, and at least one
Kurdish official claimed that Kurdish representatives were not consulted on the final version of
the draft prior to its delivery to the parliament. On July 11, Kurdistan Regional Government
(KRG) Natural Resource Minister Ashti Hawrami stated that the amendments to the draft law 15
“reduce the powers of the (Kurdish) region and should not be approved.” Political groupings
that favor strong central government control over production and revenue decision making also
criticized the draft framework law.
The failure to achieve a regular quorum in the Iraqi Council of Representatives complicated 16
efforts to consider or adopt legislation from late 2006 through September 2007.
At present, the draft hydrocarbon framework law has not been placed on the parliament’s
legislative calendar, primarily because of continuing political differences between the national
government and the Kurdistan Regional Government (KRG) over federal and regional oil-related
decision-making powers. Intense discussions among party leaders are ongoing, amid reports that
some groups may be seeking to revisit core compromises that enabled the draft legislation to
move forward in February 2007. In January 2008, the chairman of the parliament’s Energy

15 Associated Press, “Kurds Speak Out Against Key Oil Law, July 11, 2007.
16 A quorum in the Council of Representatives consists of half the 275 members plus onea total of 139 members.

Committee stated that, “the Parliament awaits for the government’s approval of any of the draft 17
law’s four copies.” Kurdistan Regional Government Prime Minister Nechirvan Barzani and
Iraqi Prime Minister Nouri al Maliki met in April and June 2008 to negotiate terms for moving
forward on the draft hydrocarbon laws and other outstanding issues. According to Barzani, a 18
political committee has been formed to continue negotiations on the framework legislation.
Within the parliament, criticism of a perceived fast-tracking of hydrocarbon legislation because of
U.S. demands is prevalent. Iraq’s ambassador to the United States Samir Sumaidaie has
questioned whether there was “too much emphasis placed on the promulgation of these laws” by 19
the United States and argued that “sorting out the complex issues of legislation needs time.”
Once the parliament begins consideration of the legislation, potential amendments to the drafts
could alter or jeopardize core compromises reached by negotiators and cabinet officials. The Iraqi
government may face long-term challenges in implementing enacted legislation in light of
potential security threats and the strong opposition to proposed compromises voiced by some
Iraqi groups (see Players and Positions below).
In the absence of new oil legislation and regulation, the Ministry of Oil and the KRG have moved
forward with hydrocarbon sector investment and development. New national and KRG contracts
have contributed to the persistence of an atmosphere of political controversy surrounding the
hydrocarbon sector. In turn, several international companies have chosen to pursue investment
opportunities in Iraq in an uncertain legal environment.
In late 2007, the KRG finalized its own regional oil and gas investment law and signed new
production sharing agreements with several international companies, including U.S.-based Hunt 20
Oil. Some analysts believe that the Kurdish moves signal the KRG’s intention to begin large
scale oil and natural gas development activities regardless of progress on federal legislation. The
KRG opposes proposals to require federal approval of its existing or future contracts, but notes
that it is committed to revenue sharing as defined in the constitution and the draft revenue sharing
law. In September 2007 a State Department spokesman stated the Administration’s view that the
KRG deals “elevate tensions between the Kurdish regional government and the Government of
Iraq,” and “aren’t particularly helpful” to the extent that they hinder consideration of a national 21
oil law.

17 UPI, “Iraq MP: Kurds, Government Stall Oil Law, January 10, 2008.
18 Kurdistan Regional Government, Press Release: “PM Barzani announces political committee to discuss Iraqi federal
hydrocarbons law, June 28, 2008.
19 Jeffrey Bartholet,Plain Speaking: Amb. Samir Sumaidaie” Newsweek Online, September 24, 2007. Available at
20 Bloomberg News, “Dallas Oil Company Approved to Drill in Kurdistan,” September 10, 2007. The KRG law is
available at
21 U.S. Department of State Daily Press Briefing, Tom Casey, Deputy Spokesman, Washington, DC, September 28,

Government officials from other parties have reacted negatively to the impasse and the KRG’s
recent activities. On September 8, Iraqi Oil Minister Hussein al Shahristani stated that the
national government considers contracts signed by the KRG to have “no standing” and threatened
that “if for any political reason the [hydrocarbon framework] law is delayed, we’ll go ahead and 22
start discussions with international oil companies” at the national level. The KRG responded by
stating that Al Shahristani’s views were “irrelevant to what the KRG is doing legally and 23
constitutionally in Kurdistan.”
Tensions appeared to escalate further after Minister Al Shahristani warned international oil
companies that the national government would not allow the export of oil produced under KRG 24
contracts. The KRG responded by accusing Minister Al Shahristani of mismanaging the Oil 25
Ministry budget and restated its opinion that its contracts were both constitutional and legal. In
November 2007, 60 Iraqi oil sector leaders wrote to the Council of Representatives to state that
the KRG’s unilateral signing of contracts constituted a “deliberate and dangerous action” and had 26
no “legal or political standing whatsoever.” At least 120 members of the Council of
Representatives from a wide range of political parties endorsed a January 2008 joint statement 27
underscoring their opposition to the KRG contracts. The cross-sectarian opposition appears to
be motivated by concerns about the production sharing model in the KRG contracts and the
precedent set by KRG demands for regional autonomy in oil and revenue decision-making.
The Ministry of Oil has since refined its position slightly to emphasize its opposition to contracts
signed by the KRG after February 2007. Contracts signed before February 2007 with firms
currently producing oil for domestic consumption would be considered valid after review and
potential amendments. According to Minister Al Shahristani, oil produced or exported under post-28
February 2007 contracts “will be confiscated.” The KRG has signed over twenty production
sharing agreements with international oil companies, but the limited amount of oil currently being
produced in KRG territory is not exported because of the national government’s prohibition. In
November 2008, the Ministry of Oil agreed to allow technical work to connect two northern oil
fields to the export pipeline system. However, Minister Al Shahristani reiterated that “the position
vis-a-vis the contracts the Kurds sign without going through the central government remains 29
unchanged. Those contracts have no standing with the Iraq government.”
In an effort to improve the output of Iraq’s currently producing oil fields, the Ministry of Oil
opened negotiations with major international oil companies on two-year technical service
contracts (TSCs), but decided in September 2008 to drop further negotiations. Potential partners

22 Ben Lando,Deeper Than an Oil Law in Iraq,” UPI, September 10, 2007.
23 James Glanz, “Compromise on Oil Law in Iraq Seems to Be Collapsing, New York Times, September 13, 2007.
24 Platts Commodity News, “Iraq’s Shahristani Says Hydrocarbon Law not Expected Soon,” November 15, 2007.
25 Kurdistan Regional Government,KRG responds to Dr Shahristani’s threats to international oil companies,
November 20, 2007.
26 Radio Free Europe Documents and Publications, “Iraq: Baghdad, Kurds At Odds Over Oil Deals, November 30,
27 Ned Parker, “Iraqi Political Factions Jointly Pressure Kurds,” Los Angeles Times, January 14, 2008; and, UPI, “Iraq
Factions Join Against Kurd Oil Deals, January 15, 2008.
28 Ben Lando,Wildcatters in Controversial Iraq Oil Deals Optimistic,” UPI, June 26, 2008.
29 Ben Lando,Iraq Kurd oil exports may remain victim to political strife despite deal, UPI, December 5, 2008.

reportedly included Royal Dutch Shell, Chevron, BHP Billiton, Anadarko, ExxonMobil, BP and
Total SA. Under the terms of the TSCs, international firms would have provided technology,
equipment and services to increase the total output of currently producing Iraqi oil fields by 30
500,000 barrels per day. The technical contracts reportedly were to be based on studies that
international oil companies completed for the Iraqi government under the terms of existing 31
memoranda of understanding.
Instead, Minister Al Shahristani has directed the Ministry of Oil to continue preparations for a
licensing round for long-term service contracts in a number of oil fields. In January 2008, the
Ministry launched a pre-qualification review process for potential international investors. Oil
companies interested in bidding on oil extraction and service licenses issued by Iraq’s national
government were required to submit a pre-qualification form to the ministry’s Directorate of 32
Petroleum Contracts and Licensing by February 18, 2008. In March 2008, Minister Al
Shahristani reported that approximately 150 companies had made submissions, and, by June
2008, 35 companies had been pre-qualified to bid for long-term service contracts. The first round
of contracts reportedly will cover Iraq’s main oil fields at Rumaila, Kirkuk, Zubair, West Qurna
(Stage I), Bai Hassan, and Maysan, along with natural gas fields at Akkaz and Mansouriyah. A
second round reportedly will include four discovered but currently non-producing fields: Halfaya,
Majnoon, Bin Umar and West Qurna (Stage II). Contract terms and conditions were presented to
pre-qualified firms in October at a conference in London. International firms reportedly will be
required to open offices in Baghdad and to have a local partner with a 25 percent stake in the 33
operation. Contracts could be signed by mid-2009 and would be service contracts based on the
terms of the draft framework law. Cabinet approval may be sought for long-term contracts if the
COR has not approved the draft hydrocarbon framework law.

According to Revenue Watch34 Middle East director Yahia Said, “the most contentious issue in
the legal framework is the division of authority between the federal center and the regions.” The
concept of federalism has been incorporated into Iraq’s constitution and law, and Iraqi attitudes
toward the oil sector and proposed oil legislation often correspond with regional differences of
opinion about the proper role and power of the federal government and regional and governorate
authorities to make oil policy and revenue decisions. However, the constitution’s ambiguity about
the roles and powers of federal, regional, and governorate authorities has contributed significantly

30 Mariam Karouny, “Oil firms line up for contracts in Iraq,” Reuters, March 1, 2008.
31 Vahe Petrossian, “Iraq Opens Door to Foreign Input,” Upstream, March 28, 2008.
32 Faleh al Khayat, “Iraq Prepares Oil Licensing Round Without Federal Oil Law, Platts Commodity News, January 9,
2008. An Arabic and English version of the form is available at
33 Dean Yates, “Iraq Throws Open Door to Foreign Oil Firms, Reuters, June 30, 2008.
34 Yahia Said, Director, Middle East and North Africa, Revenue Watch Institute,Iraq Hydrocarbons Legal
Framework, Statement Submitted to the House Subcommittees on the Middle East and South Asia and International
Organizations, Human Rights and Oversight, July 19, 2007.

to the ongoing impasse over these issues.35 Articles 111 and 112 of the Iraqi constitution state that
Iraq’s natural resources are the property of “all the people of Iraq in all regions and
governorates,” and that “the federal government, with the producing governorates and regional
governments, shall undertake the management of oil and gas extracted from present fields (italics
added).” These provisions were included as a means of ensuring consensus among Iraqis and the
adoption of the constitution.
Iraq’s Constitutional Review Committee (CRC) delivered its long-expected recommendations for
constitutional amendments in late May 2007, but left many sensitive issues, including the
distribution of oil revenue, to be decided by “the political leadership in the country, to settle them 36
for the interest of the nation and to guarantee rights to all parties.” Reportedly, Kurdish
representatives on the committee pressed for regional power to distribute oil revenue, while Sunni
and Shiite Arab members supported central government control over revenue collection and 37
distribution. The CRC was expected to release a report with final recommendations on these and
other sensitive issues by the end of August 2007. In September, the Council of Representatives 38
extended the CRC deadline until December 31, 2007. In December 2007, CRC Chairman 39
Humam Hamoudi requested and received a further six-month extension. The CRC failed to
produce a final report by June 30, 2008, and its deadline has been extended once again through
the end of 2008.
The June 2008 Measuring Stability and Security in Iraq report to Congress stated that “the CRC
continues to review almost 50 amendments addressing the authority of the federal government
and governorates,” including provisions addressing “the extent of governorate powers under 4041
Article 115” and the “status and management of oil and gas.” According to one analysis of the
CRC recommendations relating to Articles 111 and 112, draft amendments would strengthen
federal authority in case of oil and gas related disputes with regions; provide for automatic
distribution of revenues according to legislated criteria; and clarify that provisions related to
revenue and certain management responsibilities apply to all fields, not just “new” or currently 42
producing fields.

35 Further complicating matters are Article 115, which provides regional authorities the power to override federal law in
the event of conflicts with regional legislation, and Article 110, which grants powers to Iraq’s federal government to
formulate “foreign sovereign economic and trade policy and regulatecommercial policy across regional and
governorate boundaries” similar to those granted to the United States Congress by the commerce clause of the U.S.
Constitution. For one analysis of these issues, see Joseph C. Bell and Cheryl Saunders, “Iraqi Oil Policy
Constitutional Issues Regarding Federal and Regional Authority,” Memorandum, July 7, 2006. Available at
36 Damien Cave, “Iraqis Are Failing to Meet U.S. Benchmarks,” New York Times, June 13, 2007.
37 Mariam Karouny, “Iraq Lawmakers Deadlocked over Constitution Reforms, Reuters, May 22, 2007.
38 U.S. Department of Defense, Measuring Stability and Security in Iraq - December 2007.
39 Tina Susman and Asso Ahmed, “Kurds Delay Vote on Fate of Kirkuk as Iraq Goals Slip,” Los Angeles Times,
December 27, 2007; and U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008, p. 4.
40 Article 115 provides regional authorities the power to override federal law in the event of conflicts with regional
41 U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2008, Report to Congress in accordance
with the Department of Defense Appropriations Act 2007 (Section 9010, P.L. 109-289), p. 3.
42 Joseph C. Bell, Hogan & Hartson LLP, “Iraqi Oil Policy - Proposed Constitutional Amendments Regarding Federal
and Regional Authority over Oil and Gas, July 16, 2007.

Some observers argue that without a mutually acceptable agreement on federal and regional
power sharing as reflected in a constitutional amendment, passage of the current draft
hydrocarbon framework and revenue sharing laws may not adequately ensure equitable
distribution or contribute to political reconciliation or economic growth. To date, Iraqi Kurds,
acting through their Kurdistan Regional Government (KRG), have demanded the right to sign oil
development deals without much national government interference. Other sub-national groupings
also may contest the right of Iraq’s central government to control aspects of oil policy, including
some inhabitants of the oil-rich governorate of Al Basrah and members of the minority Sunni
Arab community who fear that a Shiite Arab and Kurdish dominated national government may
not administer hydrocarbon revenues fairly. Ongoing efforts by Basrah groups to establish the oil-
rich province as a federal region could greatly affect consideration of regional oil decision
making powers.
The central role of the oil sector in Iraq’s economy, the uneven geographic distribution of Iraq’s
oil resources, and the legacy of communal favoritism practiced under Saddam Hussein have
created lasting concerns among Iraqis about the future equitable distribution of oil revenues.
These concerns deepened in the atmosphere of violence and sectarian tension that gripped Iraq
from mid-2003 though mid-2008. The principles and mechanisms by and through which Iraq’s oil
revenues are to be collected and distributed remain contested. Most outside observers agree that
an equitable, mutually accepted revenue distribution formula will be critically important to Iraq’s
future economic health and political stability. Article 112 of Iraq’s constitution requires the Iraqi
government to distribute revenues:
in a fair manner in proportion to the population distribution in all parts of the country,
specifying an allotment for a specified period for the damaged regions which were unjustly
deprived of them by the former regime, and the regions that were damaged afterwards in a
way that ensures balanced development in different areas of the country, and this shall be
regulated by a law.
Recent debate has centered on the content of draft revenue sharing legislation that must be
considered and approved as part of the hydrocarbon package. The principal issues remain
formulas for ensuring equitable distribution of revenues to Iraq’s population and the mechanisms
through which revenue will be collected and distributed. Debate over distribution formulas
reflects efforts to agree on quantitative terms for ensuring equitable per capita distribution and
providing for “damaged” and “unjustly deprived” regions in line with Article 112 of the
constitution. Debate on distribution mechanisms focuses on whether or not regions or
governorates should retain the right to make decisions about revenue from oil and gas produced
in their territory and whether federal revenue distribution should be automatic and fixed or
whether the federal government should retain discretion over the allocation of funding to regions
and governorates. The U.S. Department of Defense reported in March 2008 that the Iraqi
government “continues to distribute oil revenues equitably to the provinces in the absence of... 43
comprehensive legislation.”

43 U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008, Report to Congress in
accordance with the Department of Defense Appropriations Act 2007 (Section 9010, P.L. 109-289), p. 4.

The sovereign control of Iraq’s oil resources and revenues remains a subject of intense scrutiny,
debate, and sensitivity in Iraq. Iraq completed the nationalization of its oil resources in 1975, and
oil exploration, production, and exports were managed subsequently by state-run entities that
employed thousands of Iraqis. Given the effects of war, sanctions, and mismanagement of the
country’s oil infrastructure since 1980, many energy experts believe Iraq will need significant
infusions of investment, technology, and expertise in order to rehabilitate and eventually expand 44
its oil production capacity in line with the current government’s plans. Iraq’s own oil revenues
may provide a significant resource base for such investment and for attracting technology and
expertise. However, some observers have questioned the Iraqi government’s capacity to
effectively direct large amounts of its own resources toward hydrocarbon sector rehabilitation in
light of its past failures to manage and expend funds set aside in the federal budget for those 45
purposes (see Revenues below).
To date, Iraq’s unstable security situation has presented a significant barrier to large-scale
investment by most international entities. Over the medium to long term, Iraqis face difficult
choices about the character and needs of their oil and gas industries: preserving full control over
all investment and technological inputs to the sector may not be compatible with its technical
needs. Whereas some Iraqis oppose foreign participation on any terms, others support foreign
participation in the form of technical service contracts, and still others favor production sharing
agreements (PSAs), which would grant international companies exploration and production rights
over specific areas for specified periods, subject to the terms of negotiated contracts. Iraq’s
Ministry of Oil is moving forward with technical service contract awards, while the KRG has
awarded controversial production sharing contracts.
Iraqi attitudes on the future of the country’s oil industry are shaped by a number of factors,
including geography, ethnicity, political ideology, and party affiliation. Sectarian identity politics
is an important factor, particularly with regard to the concerns of some members of the minority
Sunni Arab community who fear exclusion from decision-making bodies and inadequate revenue
sharing. However, viewing ongoing Iraqi debates over oil resources and revenue through a purely
sectarian lens obscures other important nonsectarian dynamics. Constitutional questions relating
to federal and regional authority concern all Iraqis, and members of different ethnic and sectarian
groups have formed coalitions to oppose positions and compromises with regard to the package
of draft hydrocarbon legislation. Many Iraqi oil experts, technicians, and powerful unions also
have taken strong positions on the legislative package that do not correspond to apparent ethnic or
sectarian affiliations or interests.

44 According to a May 2007 Government Accountability Office (GAO) report,U.S. officials and industry experts have
stated that Iraq would need an estimated $20 billion to $30 billion over the next several years to reach and sustain a
crude oil production capacity of 5 million barrels per day. This production goal is below the level identified in the Iraqi
2005-2007 National Development Strategy—at least 6 million barrels per day by 2015.” GAO, “Rebuilding Iraq:
Integrated Strategic Plan Needed to Help Restore Iraqs Oil and Electricity Sectors,” GAO-07-677, May 15, 2007.
45 See U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2007, pp. 9, 11-12.

The Kurdistan Regional Government (KRG) has signed oil and natural gas production sharing
contracts with several international companies since 2003. Under the draft oil sector law, these
existing contracts would be subject to review by the Panel of Independent Advisers of the Federal
Oil and Gas Council (FOGC). Regional authorities would retain the right to license future
international participation in oil and gas development in their region, subject to the terms of the
hydrocarbon framework law, the Iraqi constitution, and the review of the FOGC. In early July
2007, the four draft annexes to the hydrocarbon framework law that would have divided Iraq’s oil
fields for federal and regional management were dropped in favor of future adjudication by the
FOGC, reportedly in line with Kurdish demands. The KRG favors the establishment of an
automatic revenue distribution mechanism based on a per capita formula in order to prevent
political intervention at the federal government level that would limit allocations to the Kurdish 46
region. The KRG has adopted legislation outlining a regional oil and natural gas framework and
a model contract for production sharing agreements with outside investors.
The Kurds, both through legal procedures as well as population movements, also are trying to
secure political control over the ethnically and religiously mixed city of Kirkuk, which sits atop a
large oil field in the northern governorate of Al Tamim. The Kurds supported insertion of
language in Iraq’s constitution (Article 140) requiring a vote by December 2007 on whether
Kirkuk might formally join the Kurdish-administered region. The Iraq Study Group report stated
that this referendum should be delayed (Recommendation 30). In June 2007, Kurdistan Regional
Government president Massoud Barzani stated that, “we will never delay; we will never accept 47
any delay in the implementation of Article 140.” However, tensions revolving around the
Kirkuk issue abated somewhat after Iraqi officials agreed to a six-month extension of the deadline
for a referendum “for technical reasons.” According to the Department of Defense, the
involvement of the United Nations Assistance Mission for Iraq (UNAMI) in technical assistance
related to the Kirkuk question opened the possibility of negotiation for a political agreement on 48
the issue rather than a referendum. Temporary consensus was reached amid outbreaks of
violence in Al Tamim allowing a the provincial elections law to move forward in September
2008. A special parliamentary review committee will establish guidelines for special provincial
elections in Kirkuk to be held separately from nationwide provincial government elections in
early 2009. A September 2008 Department of Defense report states that “sporadic violence may
complicate future boundary-related negotiations”.
The Sunni Arab minority-dominated areas of Iraq have few proven crude oil or natural gas
deposits, although petroleum geologists differ as to whether substantial oil deposits may be found
in Iraq’s western Al Anbar governorate in the course of future exploration. As such, the
community’s concerns have focused on ensuring equitable distribution of oil export revenues in

46 Yahia Said as quoted in Christina Parajon, “The Iraq Hydrocarbon Law: How and When?, United States Institute of
Peace Briefing, June 2007.
47 On June 12, 2005, Barzani was named “President of Kurdistan” by the 111-seat Kurdish regional assembly that was
elected in January 2005. Articles 63 to 67 of the Iraqi constitution set general rules for the creation of executive
authority by regional governments. Radio Free Europe/Radio Liberty, “Iraq: Kurdish Official Says Kirkuk
Normalization To Proceed, June 22, 2007.
48 U.S. Department of Defense, Measuring Stability and Security in Iraq-March 2008, p. 3.

the future. In some cases, Sunni parties also have taken a hard-line position on preventing feared
exploitation of Iraq’s oil resources by international companies or other third parties. Sunni
negotiators opposed Iraq’s new constitution in part because it empowers regions in oil production
and revenue allocation policy. The Association of Muslim Scholars and the Iraqi Accord Front [Al
Tawafuq], both Sunni groups, have criticized the draft oil legislation currently under 49
consideration. Representatives of the Al Tawafuq party have called oil and gas deals signed by 50
the Kurdistan Regional Government with foreign companies “illegal.”
The leading parties of the ruling Shiite United Iraqi Alliance (UIA)—the Dawa Party and the
Islamic Supreme Council of Iraq (ISCI, formerly known as the Supreme Council for Islamic
Revolution in Iraq, or SCIRI), have supported the adoption of the hydrocarbon legislative
package as a means of reviving Iraq’s oil sector and increasing government revenues. To date,
ministries led by members of these parties have faced mounting criticism over allegations of oil-
related corruption and mismanagement of export revenues. According to some analysts,
differences within the UIA with regard to principles of federalism could have important
implications for future oil sector decisions, particularly the ISCI’s reported preference for
establishing a large federal region encompassing all of the Shiite Arab majority governorates of 51
southern Iraq. However, at present, both the Dawa Party and the ISCI reportedly favor the
centralization of authority in federal decision making bodies likely to be dominated by Shiite
parties under Iraq’s democratic system. The UIA also reportedly supports the creation of a strong
Iraq National Oil Company to limit the influence of potential political challengers affiliated with
Iraq’s Southern Oil Company, the Iraq Federation of Oil Unions, and the Fadilah (Virtue) party.
Al Basrah governorate holds most of Iraq’s proven oil resources and, as such, local political
actors exert influence over the hydrocarbon sector and consideration of the legislative package.
Ongoing efforts by some Basrah politicians aim to establish a federal region which could
complicate decision-making regarding the development of local energy resources. Press reports
suggest that competition between local politicians, militia groups, union members, and federal 52
ministry representatives fueled conflict in the region through early 2008. The 26,000 member
Iraq Federation of Oil Unions has voiced its members’ strong opposition to the proposed draft of
the hydrocarbon framework legislation and has demonstrated a capacity to disrupt oil production 53
and refinery operations with strikes.

49 Sabah Jerges, “Iraqi Sunni Faction Calls for Ban on PSAs, Platts Oilgram News, Volume 85, Issue 81, April 25,
50 James Glanz, “Compromise on Oil Law in Iraq Seems to Be Collapsing, New York Times, September 13, 2007.
51 Reidar Visser, “Basra Crude: The Great Game of Iraq’s ‘Southern’ Oil,” Norwegian Institute of International Affairs,
March 2007.
52 Sam Dagher, “Basra Oil Fuels Fight to Control Iraq’s Economic Might,” Christian Science Monitor, September 19,
53 In June, the Iraqi Federation of Oil Unions led a two-day strike against the Southern Pipeline Company over working
conditions and threatened to spread the action to other unions and facilities. The Iraqi government responded by
deploying military forces to the Company facilities and issuing arrest warrants for union leaders. See also, Ben Lando,
Unions Could Sway Iraq Oil Law, UPI, March 28, 2007; and Associated Press, “Iraqi Oil Workers Threaten Open-
Ended Strike In South, June 6, 2007.

In May 2007, oil unions demanded participation in discussions of the draft hydrocarbon
legislation with Prime Minister Al Maliki, who reportedly agreed to include the unions in future
talks. By June 2007, the unions stated that Maliki’s failure to do so was one contributing factor to
their decision to launch a strike that halted oil operations in southern Iraq for days. In response,
the federal government dispatched troops to the south, issued arrest warrants for union leaders,
and ultimately agreed in negotiations to establish a formal mechanism for union input into the 54
legislative drafting process. Subhi Al Badri, chairman of the Iraqi Federation of Union Councils,
has described the draft framework law as “a bomb that may kill everyone,” and vowed that “if the 55
Iraqi parliament approves this law, [union members] will resort to mutiny.” In September 2007,
the Iraqi Federation of Southern Oil Unions (IFOU) vowed to shut down oil pipelines in southern
Iraq if the parliament passed the draft hydrocarbon framework legislation in its then-current form.
The Fadhila (Virtue) party holds about 15 seats in Iraq’s Council of Representatives and split
from the ruling UIA coalition earlier this year. The Governor of Al Basrah governorate and the 56
former director of the influential Southern Oil Company (SOC) are both Fadhila party members.
Following a controversy in mid-2008 sparked by the Ministry of Oil’s decision to remove then-
SOC director Jabbar Al Luaibi, he recently was re-appointed as a special adviser with authority to
“oversee operations and projects to sustain and increase oil and gas production and exports
carried out by all operating companies in the southern region.” Fadhila leaders have voiced
similar opinions to those of some oil union members and may support efforts to secure regional
status for Al Basrah and adjacent oil producing governorates of Maysan and Dhi Qar that would
increase southern Iraqis’ influence over national oil and gas policy. Both the oil unions and the
Fadhila party reportedly oppose the use of production sharing agreements with international
companies and may support the introduction of foreign investment and technology on the basis of
technical service contracts similar to those used by other Gulf region producers.
The Shiite Arab political faction associated with Moqtada al Sadr and at least two Sunni insurgent
groups also have expressed their opposition to the draft legislation. Following the announcement
of the cabinet’s approval of the draft bill on July 3, 2007, Sadr affiliates vowed to oppose the bill
in parliament unless an amendment is passed precluding the signing of production sharing
agreements. In September 2007, Sadr-affiliated parliamentarians quit the ruling United Iraqi
Alliance in protest over the government’s policies. Four remaining Sadr-affiliated cabinet
members were replaced in July 2008 after continuing their boycott of cabinet proceedings. Since
mid-June 2007, insurgents affiliated with the 1920 Revolution Brigades and the Jihad and Reform
Front have released communiques condemning the draft legislation as a mechanism for foreign
exploitation of Iraqi natural resources and threatening attacks against cabinet members and
parliamentarians who vote for or otherwise support the bill.

54 Ben Lando,Iraq Oil Strike on Hold, Troops Remain,” UPI, June 8, 2007.
55 UPI, “Iraq Unions VowMutiny Over Oil Law, July 23, 2007.
56 In May 2007, the Al Basrah provincial council voted to remove Governor Mohammed Al Waili, a Fadhila party
leader, from office. He has refused to vacate the office and Prime Minister Maliki has declined to intervene.

The absence of an accepted hydrocarbon framework presents a potential procedural obstacle to
broad international investment in Iraq’s oil and natural gas sector. Some energy experts argue that
the persistence of insecurity has been a more fundamental concern to international energy
companies. However, in December 2007 a U.S. Deputy Treasury Secretary Robert Kimmitt
identified the lack of progress on the oil law as a primary barrier to investment by international
oil companies and encouraged U.S. oil companies to refrain from signing contracts in Iraq until a 57
new oil law is passed. While some small international energy companies have signed limited
production sharing agreements in the Kurdish-controlled region of northern Iraq, significant
international investments in oil exploration and production elsewhere in Iraq were not made from
2003 through mid-2008. This may change in light of the licensing pre-qualification and service
contract bidding processes being administered by the Ministry of Oil.
Saddam Hussein’s government signed contracts with several major international oil companies,
and under the draft hydrocarbon legislation currently under consideration, these contracts must be 58
evaluated and re-approved by the Federal Oil and Gas Council. In September 2008, Iraqi Oil
Minister Hussein al Shahristani announced that a 1997 contract signed by the Saddam Hussein
regime and China National Petroleum Corporation to develop the Al Ahdab oil field in Wasit
governorate would be transformed from a production sharing agreement to a 20-year technical 59
service contract. In August 2008, Iraq ended negotiations with Russian oil company Lukoil on
renewing a Saddam-era contract but invited Lukoil to enter a bid for a new service contract in 60
Iraq’s upcoming licensing round. In a new arrangement, Royal Dutch Shell and Iraq have
launched negotiations to develop systems for capturing and marketing associated natural gas in
Iraq’s southern oilfields; the gas currently is being wasted at a cost estimated by the Iraqi 61
government to be $40 million per day.
While the risks associated with investment in Iraq’s established producing oil fields are relatively
low, potential future investments in discovered but undeveloped or exploration blocks could carry
more significant risks. Investors are therefore likely to seek contract terms that would provide
adequate return and compensation, and may seek terms that would allow for production sharing.
According to some observers, concerns about corruption and the potential opacity of Iraq’s
regulatory and contracting processes may also deter some outside investment over the long term, 62
particularly if key decision making powers are delegated to regional or governorate authorities.
Nevertheless, recent reporting suggests that there is significant interest among international oil

57 Bradley Brooks,A top US Treasury Official Says Stalled Oil Law, Not Insecurity, Hampering Iraq Oil Investment,”
Associated Press, December 4, 2007.
58 Some of the presumptive contracts for oil exploration in Iraq, signed with the government of Saddam Hussein,
include the following: Al Ahdab field—China National Petroleum Corporation (China); Nassiriya field—Agip (Italy)
and Repsol (Spain); West QurnaLukoil (Russia); Majnoon—Total Fina Elf (France); Nahr UmarTotal Fina Elf
(France); Tuba—ONGC (India) and Sonatrach (Algeria); RatawiRoyal Dutch Shell (Britain and the Netherlands);
Block 8—ONGC (India). Dan Morgan and David Ottaway, In Iraqi War Scenario, Oil Is Key Issue,” Washington
Post, September 15, 2002.
59 Associated Press, “Iraq, China to finalize $3 bln oil deal next week,” September 24, 2008..
60 Nataliya Vasilyeva,Iraq invites Russian oil major back,” Associated Press, August 20, 2008.
61 Reuters, “Iraq approves preliminary gas deal with Shell,” September 7, 2008; Ruba Husari, “Shell Inks Iraqi Gas
Deal in Baghdad,” International Oil Daily, September 23, 2008.
62 Oxford Analytica, “Iraq: Oil Law Necessary but not Sufficient for IOCs,” March 6, 2007.

companies to begin operations in Iraq, even subject to terms and conditions being set on an
interim basis by the Iraqi Ministry of Oil.

Revenues from the sale of oil resources are the engine of Iraq’s national economy and the
lifeblood of its national budget. Iraq’s state-owned oil production and marketing system ensures
that revenue from the export and sale of Iraqi oil accrues to the Iraqi government, and the Iraqi
people’s elected representatives are now responsible for administering that revenue to meet the
country’s considerable development needs. The U.S. Department of the Treasury and the
International Monetary Fund have expressed confidence that, over time, Iraq’s oil revenues are
likely to be sufficient to meet the country’s development needs, if underlying conditions remain
favorable for the expansion of oil production and if revenues are managed effectively. However,
according to U.S., Iraqi, and international observers, shortcomings in Iraqi financial management
capacity have prevented capital investment budgets from being spent effectively thus far and may
continue to hinder reconstruction progress if left unaddressed. Changes in security conditions,
Iraqi political reconciliation, and international supply and demand may affect the Iraqi oil sector’s
ability to fund Iraq’s reconstruction over the medium to long-term.
Iraq’s State Oil Marketing Organization (SOMO) remains responsible for the sale and export of
Iraqi crude oil. Under the terms of United Nations Security Council resolution (UNSCR) 1483
(and renewed through subsequent Security Council resolutions), revenue from Iraq’s oil exports is
deposited into an Iraq-controlled account held at the Federal Reserve Bank of New York
(FRBNY). Five percent of the funds are reserved for a United Nations Compensation Fund for
reparations to the victims of the 1990 Iraqi invasion and occupation of Kuwait. The remaining
95% is deposited into a Development Fund for Iraq (DFI) account at the FRBNY and is then
transferred to an Iraqi Ministry of Finance account at the Central Bank of Iraq for further 63
distribution to Iraqi government ministries. Under the terms of UNSCR1546 (and renewed by
subsequent resolutions), the DFI is monitored by an International Advisory and Monitoring Board
(IAMB), which provides periodic reports on Iraq’s oil export revenue, Iraq’s use of its oil 64
revenues, and its oil production practices. According to the IAMB, as of December 31, 2007,
$23.43 billion had been disbursed from the United Nations Compensation Fund; Iraq owes
$28.95 billion to the Fund. The IAMB estimates that “at the present rate of Iraqi oil sales, it 65
would take approximately 17 years for the compensation award to be fully paid.”
UNSCR 1790 of December 18, 2007, extended the IAMB monitoring of the DFI until December
31, 2008, subject to Iraqi government review. In October 2006, the Iraqi cabinet approved the

63 Ernst & Young, Development Fund for IraqStatement of Cash Receipts and Payments for the period from 1 July
2005 to 31 December 2005, September 19, 2006, p. 6.
64 The IAMB homepage is available at
65 Ernst & Young, Development Fund for Iraq—Summary of Audit Results for the year ended December 31, 2007,
May 12-13, 2008.

creation of an oversight body known as the Committee of Financial Experts (COFE) to monitor
oil revenue collection and administration. The president of the COFE inaugurated its activities in
April 2007, and it currently is working alongside the IAMB on audit procedures. The
establishment of an audit oversight committee for the DFI and oil export revenues is a structural
benchmark under Iraq’s Stand-by Arrangement (SBA) with the International Monetary Fund
currently satisfied by the extension of the IAMB arrangement and the creation of the COFE. The
signing of the SBA was a requirement for Iraq’s debt reduction agreements with the members of 66
the Paris Club. Immunity provisions contained in standing UN Security Council resolutions
prevent Iraqi funds deposited in the DFI from being subject to property attachment motions in
lieu of legal judgments rendered against the former Iraqi regime. Many observers expect those
immunity provisions to be renewed in a new UN resolution, and the Iraqi government has
requested continued immunity protection from the Security Council. President Bush issued a
continuation of the U.S. legal protections for the DFI and other Iraqi assets under Executive 67
Order 13303 through May 20, 2009, at which time the new Administration will need to act.
Article 26 of the U.S.-Iraq security agreement commits the United States to continue to assist Iraq
with its request to the UN to extend related protections for energy proceeds and the DFI.
From its creation in May 2003 through December 31, 2007, the DFI had received over $121.7 68
billion in oil proceeds and other deposits. Periodic audits conducted under the auspices of the
IAMB have routinely found irreconcilable discrepancies in oil production and export figures and
DFI account receipt and distribution amounts. A lack of reliable oil output measurement has
proven to be a fundamental and persistent problem. Oil production and exports were conducted
without metering equipment throughout the Coalition Provisional Authority (CPA) period. A May

2007 GAO report confirmed that reliable metering in Iraq’s oil fields remained lacking and 69

contributed to the lack of reliable data on Iraq’s oil production and related revenue. A January
2008 IAMB report stated that Iraq’s Ministry of Oil “does not have in place a full operational
loading and metering system at production and loading points in order to determine produced and 70
loaded quantities [of oil] accurately.” A June 2008 IAMB report confirmed that “some metering 71
has been installed at oil terminals, but there continues to be no metering in the oil fields.”
Completed financial audits through December 2005 found that “no comprehensive financial and
internal controls policies and procedures manuals” were present in Iraqi ministries that were
spending oil export proceeds delivered through the DFI system. On June 12, 2007, the IAMB

66 See International Monetary Fund, Country Report No. 07/115, Iraq: Third and Fourth Reviews Under the Stand-By
Arrangement, March 2007; and, CRS Report RL33376, Iraq's Debt Relief: Procedure and Potential Implications for
International Debt Relief, by Martin A. Weiss.
67 The White House, Notice: Continuation of the National Emergency with Respect to the Stabilization of Iraq, May 20,
68 Ernst & Young—Summary of Preliminary Findings for the year ended December 31, 2007, published on January 14,
69 James Glanz,Billions in Oil Missing in Iraq, U.S. Study Finds,” New York Times, May 12, 2007; and, GAO, GAO-
07-677, May 15, 2007, pp. 26-7.
70 Ernst & Young—Summary of Preliminary Findings for the year ended December 31, 2007, published on January 14,
71 Ernst & Young, Development Fund for Iraq—Summary of Audit Results for the year ended December 31, 2007,
May 12-13, 2008.

released a statement on its 2006 findings, noting that the audits demonstrated that “the overall
financial system of controls is deficient.” The audits found that there was “no overall
comprehensive system of controls over oil revenues,” and that “basic administrative procedures” 72
were “outdated and ineffective.” These conditions may have facilitated the type of widespread
corruption that has been alleged against a number of Iraqi ministries spending distributed oil
export revenue, often associated with weak contracting and cash management policies. The
IAMB’s preliminary findings for 2007 recognized Iraqi government’s efforts to respond to IAMB
recommendations, but found that “the overall financial system of controls in place in the spending
ministries, the U.S. agencies in respect of outstanding commitments using DFI resources, and the 73
Iraqi administration of DFI resources remain deficient.”
The IMF warned in a January 2008 report that Iraq’s public finances have been “fragile” in recent
years and added that, in light of considerable operations and reconstruction needs, the Iraqi
government has “little room for fiscal slippage” until oil output increases. The IMF report
explains how high oil prices compensated for missed oil production expansion targets that were
undermining revenue generation through late 2007. Further increases in oil prices through August
2008 and expanded oil exports generated substantially higher than expected oil revenues for Iraq
through most of 2008. According to the U.S. Department of State, crude oil exports averaged 1.73 74
million barrels per day in the third quarter of 2008, at an average price of $110 per barrel.
Sharp drops in global oil prices since September 2008 have drastically undercut Iraqi oil
revenues, and this trend has forced the Iraqi government to scale back its 2009 budget plans. In
November 2008, the COR approved a $67 billion budget for 2009, down from a planned $80
billion. The budget assumes an export level of 2 million barrels per day at a price of $62 per 7576
barrel. As of December 3, 2008, Iraq’s Basrah light oil was priced at $49.30 per barrel.
In order to provide Iraq with a sustainable revenue stream, the Ministry of Oil has set a goal of
nearly doubling current oil production to 4.5 million barrels per day within five years, and
expanding production thereafter to 6 million barrels per day within 10 years. The U.S.
Department of Defense concluded in its September 2008 report to Congress that “billions of
dollars in capital investment are needed to produce substantial increases in crude oil production,
transport, and export.” The United States has spent $1.6 billion in appropriated reconstruction
funding on efforts to repair and secure Iraq’s hydrocarbon production and export infrastructure 77
since 2003. In addition, as of December 2005, the United States had administered over $2.8 78
billion in Iraqi funds from the DFI for oil infrastructure projects.

72 Statement by the International Advisory and Monitoring Board on the Development Fund for Iraq, June 12, 2007.
73 International Advisory and Monitoring Board on Iraq, “Third Interim Report Covering the Year 2007,” February 28,
74 Report to Congress Submitted Pursuant to U.S. Policy in Iraq Act, Section 1227(c) of the National Defense
Authorization Act for Fiscal Year 2006 (P.L. 109-163), as amended by Section 1223 of the National Defense
Authorization Act for Fiscal Year 2008 (P.L. 110-181), October 2008.
75 International Oil Daily, “Iraq Approves 2009 Budget,” November 12, 2008.
76 U.S. Department of State, “Iraq Weekly Status Report,” December 3, 2008.
77 For more information about U.S. reconstruction spending and programs, see CRS Report RL31833, Iraq:
Reconstruction Assistance, by Curt Tarnoff.
78 GAO, GAO-07-677, May 15, 2007, p. 15.

The June 2007 U.S. Department of Defense Measuring Stability and Security in Iraq report stated
that the Iraqi government’s “failure to execute several billion dollars of its own funds in oil sector 79
capital investments” had limited the overall recovery of the sector. Although capital investment
expenditure rates in the oil sector and in other sectors reportedly have increased since mid-2007,
broad shortcomings in Iraqi revenue management practices and capabilities have contributed to
the accumulation of budget surpluses. According to the June 2008 Measuring Stability and
Security report, the Ministry of Oil executed $1.1 billion of its $2.2 billion 2007 capital budget,
and may face continuing challenges because of a lack of administrative capacity and international 80
firms’ reluctance to engage in long-term, multi-year development projects. The report noted
“marginal improvement” in the Government of Iraq’s ability to spend its resources, although the
report concluded that “budget execution rates continue to be relatively low, limiting Iraq’s ability
to increase economic development and deliver essential services to its citizens.” Among the
“considerable challenges” facing efforts to improve the performance of Iraq’s ministries identified
in the report were “cumbersome budgetary approval and complex funding processes,” limited
experience among available staff, and the “limited availability of resident contractors.”
The U.S. State Department made similar assessments in July 2008. According to the
Department’s latest Section 2207 Report on Iraq Relief and Reconstruction, impediments to
effective budgetary expenditure in Iraq “persist at all levels.” The report concluded that
“continued assistance is needed to address impediments to capital budget execution.” The Special
Inspector General for Iraq Reconstruction (SIGIR) reported in July 2008 that U.S. funded
ministerial capacity development programs had been hindered by “weak coordination” among
multiple agencies that “tended to implement their own programs with little prioritization of
projects or coordinated planning.” The SIGIR concluded that U.S. investments in capacity 81
building are “at risk” unless more integrated programming is implemented.
In light of these assessments, both the U.S. and Iraqi governments have undertaken initiatives in
recent months to improve public financial management and the coordination of U.S. assistance
programs. Iraq has issued new decrees and reformed administrative bodies to grant greater 82
contracting authority to ministries and provinces. Iraq’s 2008 Budget Law allows provinces and
government agencies to carry over their unused budget authority into the current fiscal year. The
U.S. Embassy in Baghdad and the commanders of Multi-National Forces-Iraq also have
reorganized the management of existing U.S. and coalition budget assistance programs to
improve coordination.
In late June 2008, the interagency Public Finance Management Assistance Group (PFMAG)
began its work. The PFMAG’s civilian-military Policy and Operations Committees now direct the

79 According to the report, Iraq’s Ministry of Oil expended only $90 million of its $3.5 billion capital budget in 2006,
and the Ministrys 2007 allocation of $2.2 billion was less than half of the ministrys own estimated maintenance and
growth needs. U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2007, pp. 9, 11-12.
80 U.S. Department of Defense, Measuring Stability and Security in Iraq - June 2008, p. 10.
81 Special Inspector General for Iraq Reconstruction (SIGIR) Report 08-020, “Key Recurring Management Issues
Identified in Audits of Iraq Reconstruction Efforts, July 2008.
82 A Central Contracts Committee has now replaced Iraqs former contract approving authority. Decrees issued since
January 2008 granted Governors and selected Ministers and Heads of Agencies authority to enter into contracts worth
$50 million. The ministries selected were Defense, Interior, Oil, Trade, Health, Electricity, Industry and Minerals,
Water Resources, Municipalities, and Public Works. Agencies not attached to ministries have been granted a $30
million contract approval ceiling. Iraq’s governorates can now approve contracts worth up to $10 million. SIGIR
Report 08-020, July 2008.

activities of paired teams of Action Officers and Treasury Technical Assistance Advisors who
work alongside Iraqis, collecting and analyzing data and helping to re-engineer and expedite 83
payments and other budgetary processes. These activities build on existing programs such as
USAID’s National Capacity Development Program (more commonly known by the name
Tatweer, the Arabic word for development), the U.S. Embassy Iraq Transition Assistance Office
(ITAO) Ministerial Capacity Development Program, and the work of the Multi-National Security
Transition Command-Iraq (MNSTC-I) Embedded Advisory and Functional Capability Teams.
Coalition partners, such as the United Kingdom’s Department for International Development
(DFID), participate in PFMAG decision-making, and U.S. officials report that expanded PFMAG
coordination with international bodies such as the IMF and World Bank is planned.
Iraq’s oil infrastructure suffered little damage during the U.S.-led invasion (an estimated nine oil
wells were set on fire), but insurgents and smugglers have targeted oil infrastructure for political
and financial reasons since 2003. Iraq’s total pipeline system is over 4,300 miles long, and most
insurgent attacks have focused on pipelines in northern Iraq that feed the Iraq-Turkey oil export 84
pipeline as a means of reducing government export revenues. Southern pipeline infrastructure
also has been targeted as a means of making oil and refined products more vulnerable to theft and
diversion. Prior to IMF-sponsored efforts to phase out Iraqi fuel subsidies, highly organized
smuggling operations leveraged supply and price imbalances in the Iraqi refined fuel market to
create lucrative profit opportunities. The Department of Defense has estimated that in once case,
“as much as 70% of the fuel processed at Bayji was lost to the black market—possibly as much as 85
US$2 billion a year.”
In response, the Iraqi government and Coalition forces have launched several initiatives to
improve the security of Iraq’s oil infrastructure. Pipeline Exclusion Zones have been established
between Kirkuk and the main refining center at Bayji, and new zones are planned to link Bayji,
Baghdad, and Karbala. In January 2008, the command of the 22,000-member Ministry of Oil 86
Protection Force (OPF) was transferred to the Ministry of Interior. According to the Department
of Defense, “increased security efforts, such as the construction of pipeline exclusion zones and
the use of the oil protection force... enabled an increase in total exports for the year by 10% over 87
2006” in 2007. Increased security has enabled continued production and repair on older
infrastructure that had been delayed by persistent attacks. In November 2008, a PKK attack on a
Turkish oil pipeline suspended Iraqi crude oil exports and underscored the vulnerability of the
region’s energy infrastructure.

83 Information provided to CRS by U.S. Treasury Attaché, Baghdad, Iraq, September 13, 2008.
84 See Michael Knights, “Iraqi Critical Infrastructure Faces Sophisticated Threat,” Jane’s Intelligence Review, January
1, 2006.
85 U.S. Department of Defense, Measuring Stability and Security in Iraq, June 2007, p.13.
86 The U.S. military has reported that some members of the Iraqi Ministry of Defense Strategic Infrastructure Battalions
and the Ministry of Oil Protection Force are “sometimes suspected of being complicit in interdiction and smuggling.
U.S. Department of Defense, Measuring Stability and Security in Iraq, June 2007, p. 13.
87 U.S. Department of Defense, Measuring Stability and Security in Iraq - March 2008, p. 11.

Both the Bush Administration and the 110th Congress identified political reconciliation and long-
term economic development as key policy goals and benchmarks for the progress of U.S. efforts
in Iraq. The current military strategy employed by U.S. forces in Iraq seeks to create a secure
environment in which Iraqis can resolve core political differences. In Iraq, the ongoing debate
over a package of four draft hydrocarbon laws reflects Iraqis’ unresolved political differences
over the powers reserved for federal and regional authorities, proper means for ensuring equitable
distribution of hydrocarbon revenues, and longstanding, shared concerns about preserving Iraq’s
unity and sovereignty.
In light of the U.S. military commitment and persistent Iraqi political differences, Members of
Congress and U.S. policymakers face a number of challenging questions: To what extent does the
U.S. investment in improving Iraq’s security permit the United States to influence either the pace
or content of Iraqi debates over the future management of Iraq’s sovereign economic resources?
Should the United States encourage Iraqis to complete constitutional reforms that will resolve
core political differences before promoting the adoption and implementation of hydrocarbon
legislation? How can the United States most effectively ensure that Iraqis adopt equitable revenue
sharing mechanisms? Should the U.S. government promote international investment in Iraq’s oil
and gas sector and, if so, in what form and on what scale?
To the extent that Iraqi factions perceive the United States to be promoting legislative solutions or
processes opposed to or supportive of their interests, they may oppose or support the hydrocarbon
legislation and U.S. preferences and policy goals. If constitutional disputes over federal and
regional authority remain unresolved, the durability of compromises reached with regard to the
hydrocarbon legislation may be undermined. Revenue sharing mechanisms based on per capita
population formulas may ensure formerly disadvantaged regions receive adequate shares of oil
and gas proceeds, but could create new resentment in less populous governorates, including areas
inhabited by Iraq’s minority Sunni Arab population. International investment and technology may
be necessary in light of the current Iraqi government’s ambitious plans for the expansion of Iraq’s
oil and gas production. However, the terms and conditions of international participation are likely
to remain highly controversial, with powerful Iraqi interest groups taking opposing positions. The
public positions that Members of Congress and Administration officials take on each of these
questions will likely influence Iraqi attitudes toward the U.S. presence in Iraq, toward the draft
legislative package, and toward each other.
Some U.S. and international press coverage of Iraq’s draft hydrocarbon framework legislation has
alleged that draft legislation would require the Iraqi government to use contracts known as
production sharing agreements in future dealings with international oil companies. While draft
legislation represents a reversal of the nationalization of Iraq’s hydrocarbon sector insofar as it
allows foreign investment and participation in exploration, production, and development, the
legislation does not mandate the use of production sharing agreements or any other type of model
contract. Rather, the legislation would require the Federal Oil and Gas Council to develop model
contracts subject to terms of the law that seek to preserve economic return for Iraq, the sovereign

control of oil and gas resources, and production plans in line with Iraq’s long-term development.
While Iraqis may choose to use production sharing agreements or service contracts in the future,
the legislation currently under consideration would not require them to use one specific type or to
agree to specific revenue, tax, or ownership terms with potential international partners.
Interim investment arrangements being implemented by Iraq’s Ministry of Oil will offer “Long
Term Improved Service Contracts” rather than production sharing contracts, which Natiq al 88
Bayati, director general of the body implementing the licensing has called a “red line.”
Contracts signed by the Kurdistan Regional Government with international companies have used
a production sharing arrangement, offering a 12 to 15% production share to participants.
The broader questions of whether and on what terms international investment would be necessary
or useful for Iraq remain open. Some Iraqis swift favor the development of unexplored oil fields
as a means of maximizing potential revenue, while others, such as draft framework law co-author
Tariq Shafiq have argued that “new oil is indeed not needed for over a decade,” because Iraq’s
currently producing and discovered but non-producing fields can provide adequate revenue if 89
properly managed.

Several press reports have alleged that U.S. government personnel, U.S. contractors, or
international oil executives may have had a role in drafting or otherwise contributing to the
creation of the draft hydrocarbon framework legislation. Administration officials deny that any
U.S. official drafted any component of the legislation. At the direction of the United States
Agency for International Development (USAID), the U.S. contractor BearingPoint prepared a
study of potential oil management models for Iraq in December 2003 entitled, “Options for 91
Developing a Long Term Sustainable Iraqi Oil Industry.” In addition, a number of U.S. advisors,
some of whom have been former international oil company executives, have worked closely with
Iraq’s Ministry of Oil and other energy officials in various capacities since 2003. Current advisory
efforts with the ministry are focused on budget planning and outlay processes in light of the Iraqi
government’s difficulties in allocating its oil investment budgets over the last two years.
From mid-2006 to April 2007, USAID also funded a Baghdad-based Petroleum Legal and 92
Regulatory Advisor on a contract basis. The advisor worked with the U.S. Embassy and
coordinated with five other contracted lawyers affiliated with the U.S. Department of Commerce
(DOC), and the U.S. Department of Energy (DOE). Together the lawyers worked to “assist the
Iraqis by providing commentary and case studies,” which, according to USAID, were designed to
“help lay the foundation for a legal, regulatory, and tax environment conducive to domestic and
foreign investment in [Iraq’s] energy sector.” The legal advisory effort concluded in April 2007.

88 Platts Commodity News, “Iraq not Seen Offering Production-sharing Contracts: Document,” January 10, 2008.
89 Tariq Shafiq, testimony Before a Joint Hearing of the Subcommittee on the Middle East and South Asia and the
Subcommittee on International Organizations, Human Rights, and Oversight of the House Committee on Foreign
Affairs, July 18, 2007.
90 This information is drawn from an interagency Administration response to a CRS inquiry, drafted by the U.S.
Department of State Bureau for Near Eastern Affairs on March 19, 2007.
91 Available at
92 BearingPoint held the contract for this advisory coordinator position.

In response to a March 2007 CRS inquiry, the Bush Administration reported that the “U.S.
Government did not provide any drafting input to the recent hydrocarbon law; the Iraqis have not
asked for that kind of assistance on that law or on the revenue sharing law.”
According to the U.S. Department of State, an “Energy Fusion Cell” made up of U.S. Embassy
personnel, representatives of Multinational Force-Iraq (MNF-I), and Iraq’s Ministry of Oil and
Ministry of Electricity also is working to develop an integrated national energy strategy to better 93
coordinate Iraqi budget allocations, reconstruction plans, and production goals. In September
2007, the Washington Post reported that the Commerce Department has sought to hire an
international legal adviser fluent in Arabic “to provide expert input, when requested” to “U.S.
government agencies or to Iraqi authorities as they draft the laws and regulations that will govern 94
Iraq’s oil and gas sector.”
In July 2008, the New York Times cited unnamed U.S. officials in reporting that U.S. advisers
and contractors provided advice to Iraqi officials considering short-term technical support
contracts with a number of international firms, including U.S.-based firms. According to the
officials, they advised the Iraqis on the “technical and legal details of the contracts”, but did not 95
have any role in choosing which companies would receive the contracts. U.S. Department of
State spokesman Tom Casey responded to the reports by stating that, “the United States was not
involved in any decisions to award contracts, to make determinations of what kinds of contracts
would be offered, [or] to provide advice over what kinds of contracts would be offered.” The
short-term contract plans were eventually shelved in favor of a long term contract award process.
The United States also has provided diplomatic support to promote political reconciliation among
Iraqi leaders on oil-related issues and to facilitate contacts between Iraqis and potential
international investors. In July 2006, U.S. Secretary of Energy Samuel Bodman visited Baghdad
and expressed his support for the drafting and passage of new legislation to govern Iraq’s oil
industry and to facilitate international investment. Later that month, Iraqi Minister of Oil
Shahristani visited Washington, DC, and met with executives from major international oil
companies at U.S. Department of Energy headquarters. During 2008, the U.S. Embassy in
Baghdad hosted and arranged a number of meetings among key Iraqi political figures to
encourage discussion and compromise over outstanding legislative and constitutional reforms,
including the package of hydrocarbon legislation.
Section 1314 of the FY2007 Supplemental Appropriations Act [P.L. 110-28] specifically
identified the enactment and implementation of legislation “to ensure the equitable distribution of
hydrocarbon resources of the people of Iraq without regard to the sect or ethnicity of recipients”
and “to ensure that the energy resources of Iraq benefit Sunni Arabs, Shia Arabs, Kurds, and other
Iraqi citizens in an equitable manner” as benchmarks on which the President was required to
report to Congress in July and September 2007. Section 3301 of the act states that no funds

93 GAO, GAO-07-677, May 15, 2007, p. 45.
94 Walter Pincus, “Commerce Seeks Adviser for Iraq Oil Interests,” Washington Post, September 10, 2007.
Andrew E. Kramer, “U.S. Advised Iraqi Ministry on Oil Deals,New York Times, June 30, 2008.

appropriated by the act or any other act may be used “to exercise United States control over any
oil resource of Iraq.”
On July 12, 2007, the Administration released an interim report on the Iraq benchmarks stating
that progress toward meeting the revenue sharing benchmark “is unsatisfactory,” and noting that
the Administration remains “actively engaged” in encouraging Iraqi leaders “to expeditiously
approve the draft [revenue sharing] law in the Council of Ministers and move it to the Council of
Representatives.” According to the report, “the effect of limited progress toward this benchmark 96
has been to reduce the perceived confidence in, and effectiveness of, the Iraqi Government.”
The September 2007 report stated that Iraq’s government “has not made satisfactory progress
toward enacting and implementing legislation to ensure the equitable distribution of hydrocarbon
revenue.” The report also stressed that “it is difficult to predict what further progress might 97
occur” when Iraq’s parliament reconvenes and considers proposed legislation.
Section 8113 of P.L. 110-116, the Department of Defense Appropriations Act, 2008 (November
13, 2007) states that “none of the funds appropriated or otherwise made available by this or any
other Act shall be obligated or expended by the United States Government... to exercise United
States control over any oil resource of Iraq.”
Section 1222 of P.L. 110-181, the National Defense Authorization Act for Fiscal Year 2008
(January 28, 2008) states that “no funds appropriated pursuant to an authorization of
appropriations in this Act may be obligated or expended... to exercise United States control of the
oil resources of Iraq.” Section 1211 of S. 3001, the Duncan Hunter National Defense
Authorization Act for Fiscal Year 2009 (September 27, 2008) and Section 8106 of P.L. 110-329,
the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009, contain
similar prohibitive language. President Bush has issued signing statements stating that the
executive branch would “construe such provisions in a manner consistent with the constitutional
authority of the President” because, in his view, the provisions “could inhibit the President’s
ability to carry out his constitutional obligations.”
Some Members of Congress, such as Senator Hillary Rodham Clinton and Senator John Ensign,
have advocated for the creation of an “Iraq Oil Trust” to ensure that all Iraqis share Iraq’s oil 98
wealth equitably. S. 3470, the Support for Iraq Oil Trust Act of 2008, would require the U.S.
Department of State to provide the Government of Iraq with a plan outlining options for the
creation and implementation of different types of oil trusts. The bill would withhold a percentage
of certain kinds of U.S. assistance to Iraq until the Administration certified the delivery of such a
Other relevant legislation before the 110th Congress included:
• Section 8 of H.R. 2574, the Iraq Study Group Recommendations Implementation
Act of 2007, includes a detailed statement of policy on the oil sector in Iraq. The
bill would require the Administration to report on the implementation of the bill’s

96 The White House, Initial Benchmark Assessment Report, July 12, 2007. Available at
97 The White House, Benchmark Assessment Report, September 14, 2007. Available at
98 Senators Hillary Rodham Clinton and John Ensign, “An Oil Trust for Iraq,” Wall Street Journal, December 18, 2006.

reformulation of the Iraq Study Group recommendations (including Section 8) 90
days after enactment.
• Section 4 of S. 670, the Iraq Troop Protection and Reduction Act of 2007, would
prohibit the provision of appropriated funds to the Government of Iraq for
security purposes unless the President certifies to Congress that the GOI
“provides for an equitable distribution of the oil revenues of Iraq.”
• S.Con.Res. 37 states that the United States should encourage Iraqis to adopt oil
revenue sharing legislation as a “critical component of a comprehensive political
settlement based upon federalism.”
• H.Res. 835 calls on Iraq not to reopen the Kirkuk-Baniyas oil pipeline to Syria
until Syria makes “significant progress” with regard to support for Lebanese
Hezbollah, nonproliferation, and other issues.
• H.Res. 1205 calls on the Iraqi government to devote more of its own financial
resources to meeting the needs of displaced Iraqis in light of its substantial oil
revenue surpluses.
• Other resolutions and bills include statements of policy declaring that it is not
and shall not be the policy of the United States to control Iraq’s oil resources. See
H.Con.Res. 46 and H.R. 663.
Christopher M. Blanchard
Analyst in Middle Eastern Affairs, 7-0428