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Update No: 047 - (28/03/07)

Draft oil law agreed
The Iraqi cabinet finally approved a draft oil law at the end of February. The new law opens more than two thirds of existing fields and all future fields to foreign investment and guarantees that the distribution of revenue will take place on the basis of the population of the different regions. The Kurdish regional authorities will be allowed to continue signing oil contracts, a point which was the source of much controversy. While the new law elicited mostly positive comments abroad and in particular among oil investors, it generated rather negative feelings at home, where remains a strong commitment to nationalist economic policies. Oil Workers Unions have already threatened to go on strike, while in the parliament Allawi's secular bloc, the main Sunni alliance and sections of the increasingly fragmented Shiite alliance are opposed to the current draft, mainly on the ground of excessive concessions to foreign companies. Among the most controversial points are the lack of any provision forcing investors to reinvest earnings in the Iraqi economy, form partnerships with Iraqi companies or employ Iraqis. Moreover, oil companies will not have to start exploiting the fields immediately after signing the contracts and will be able to wait until they judge the situation safe enough. Contracts will be long-term ones (20-35 years) and will allow investors to exercise a large degree of control. In sum, the Iraqi oil law is one of the most business friendly of the world. The rationale for this is to give an incentive to investors to explore that 90% of Iraqi which has not been explored yet, as well as to offset any disinclination to invest in Iraqi because of the security situation and of the uncertainties concerning the future. Critics see US pressure as having played a key role in shaping the law and even sources close to Prime Minister Al-Maliki admit that the US embassy has made clear that unless the final version of the law is in place by June support for the Prime Minister will cease. Some companies are already beginning discussions about specific projects. Royal Dutch Shell, for example, is looking at the gas fields and is considering building a pipeline to Europe via Turkey.

Al-Maliki between two fires
Prime Minister Al-Maliki is also under US pressure to enlarge his cabinet, give it a more secular leaning and make it acceptable to the Saudis. In particular, the Americans seem to be demanding the ousting of the Sadrists. The pressure on Al-Maliki rose further as Allawi and Kurdish leader Barzani visited Saudi Arabia, allegedly to discuss alternative alliances. The concern of the Americans and the Saudis is of course that Iran is steadily expanding its influence over Iraq and that Al-Maliki is doing little, or in any case not enough, to prevent that. Saudi and US pressure seem aimed at breaking up the Shiite alliance and hence weakening Iranian influence. They achieved some success in this regard already, as the pro-Sadrist Al-Fadila party in March was officially announced to be leaving the alliance. It is unlikely, however, that the Iranians will remain quiet spectators of these efforts. Although the greatest concern is Iran's political influence, the economic influence of Iran is certainly growing too and according to some unofficial estimates trade between the two countries has been growing by 30% a year since 2003. Cultural influence is also growing, as Iranian books, heavily subsidised by Teheran, flood the Iraqi market. Al-Maliki is also under pressure to improve the performance of his cabinet and improve the welfare of the growingly frustrated population. The new 2007 draft budget doubles spending on education and health, but it will remain to be seen how effectively that money is going to be spent.

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