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Update No: 044 - (20/12/06)

Badly needed oil law might not be enough
Despite the crucial importance of approving Iraq's new oil law, the Oil Committee of the Iraqi parliament was still split over it as the end of December approached. The bone of contention is still the role of the regions in signing deals with oil companies, but a deal has been reached on revenue sharing, which had also been very problematic in the past. The Kurdish regional government remains adamant that it wants the right to sign oil deals, despite the opposition of both Shiite and Sunni parties. Even if the Oil Law was approved, however, a number of problems would remain which could still hamper the recovery of the industry. The Oil Ministry now estimates that it is losing US$700 million a month because of the smuggling of oil products, with some 100,000 barrels being smuggled every day, out of a total production now at 1.9 million bpd. Some observers believe that the problem is intractable because sectors of the government are involved in the smuggling, from which they derive resources to maintain and expand their patronage network. Oil production appears now to have reached a ceiling, due also to insufficient provision of electricity. Average production for the first six months of 2006 was 1.95 million bpd, up from 1.85 million bpd in 2005 but still below the 1.99 million bpd of 2004, not to speak of pre-war levels. The Oil Ministry was planning to produce 2.66 million bpd in 2006. These lower than expected outputs are in part the result of insufficient provision of electricity. Experts have recently revised upwards the investment required to rebuild Iraq's electrical system, to US$50-60 billion from the original US$20 billion estimated in 2003 by the World Bank. 

Paralysis
The climate on uncertainty between the extreme corruption of the system and proclaimed efforts to reform is increasingly paralysing the government. State officials are afraid to spend money because they fear the new anti-corruption initiatives. This together with the difficulty of starting reconstruction projects due to the violence, has led to a budget surplus of US$15 billion, a paradox in a country where the living condition of the people are continuously deteriorating. With regard in particular to the oil industry, in the first six months of 2006 just US$290 million were spent of a budgeted US$3.5 billion. This is an even worse performance than in 2005, when about half of the budgeted US$2 billion were actually spent. It is therefore not surprising that oil production stagnates. 

Al Maliki on sunset boulevard?
The industrial sector, moreover, has almost ceased to exist as factories closed down after the fall of Saddam and the entrepreneurial class has mostly fled the country, further reducing the prospects of economic recovery. Prime Minister Al Maliki's efforts are seen by many as going in the right direction, but in practice he is achieving little. In December the government offered to former Baathist army officers reintegration in the ranks, but few seem to have the intention to accept. Many consider the current government illegitimate and would not serve in the army as long as the country is militarily occupied. There is increasingly the feeling in Baghdad that while the Bush Administration continues to put pressure on Maliki to carry out reform, it has really lost hope in his ability or willingness to effectively break with sectarianism and is preparing for future scenarios. The Administration seems to be manoeuvring to organise Maliki's replacement by some other Shiite politician deemed to be more willing to form a genuine coalition government, sacrificing the residual unity of the Shiite alliance. However, it is known that Ayatollah Al Sistani has always previously opposed such a development as he prizes Shiite unity over anything. Moreover, the general perception among Iraqi politicians seems to be that the Americans are weaker and weaker, as even those who were the closest supporters, such as secular politicians, are beginning to feel abandoned and betrayed. Therefore, not many leading politicians at this stage might be willing to throw in their lot with what used to be the world's superpower.

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