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Update No: 106 - (26/02/12)

An investors’ flight?
Although oil production rose 15% in 2011, the Iraqi government has been slow in processing the new oil contracts and even more so in addressing the issue of old and decaying infrastructure and of bureaucratic inefficiency. The government has revised its original and wildly optimistic plans to expand production to 17 million bpd by 2017 to just 7 million. The Iraqi insistence in keeping the revenue of oil investors as low as possible is keeping them away from the country; the contracts which award just US$2 per barrel of oil to the oil companies are turning out to not be very profitable, considering the state of Iraqi oil infrastructure.

Norwegian Statoil, for example, is reportedly trying to get rid of its stake in the West Qurna Phase 2 field, perhaps selling it to its partner Lukoil, and invest instead in the US and in Norwegian offshore fields, whose oil is much more expensive to extract. Exxon Mobil also seems to be losing interest: it has won a share of West Qurna Phase 1, but in November it signed a deal with the Kurdish regional authorities to start drilling there. Baghdad,as a result, threatens to ban Exxon Mobil from contracts in the rest of Iraq, but perhaps Exxon secretly hopes that this will happen and so get rid of a non-profitable deal. Even Total is reportedly considering signing a deal in Kurdistan.

Changing tack
It now appears that the Iraqi oil ministry might be preparing to offer better deals to the oil firms in the next round of contracts. For this purpose the tenders have been postponed from January to May, as the contracts are being revised. The Iraqi public remains hostile to offering more generous terms to the investors and some political factions would certainly be ready to ride a wave of popular opposition to the deals. The government is now reportedly trying to frame the new contracts as not much of an innovation, while in reality introducing an element of production sharing, which is what investors want. The problem of the weak infrastructure will however continue to bog down the development of the Iraqi oil industry and might discourage investors.

In addition, economic reforms are on hold since last year, as the government fear that they could unleash popular protest. Far from abolishing subsidies and introducing taxation, the government has been handing out new subsidies, even more inefficient and wasteful than those already existing, while tax reform plans appear to have been all but forgotten.

Tension with Sunni Arabs easing
In the meanwhile the Iraqi political scene has known some evolution. Towards the end of January the escalation in the confrontation between Maliki and the Sunni Arab factions reached its peak; the situation seemed so bad that even the Turkish government decided to intervene and warn Baghdad that sectarianism in Iraq would not be tolerated. Maliki responded aggressively to the Turkish move, but at the end of January the Sunni lawmakers ended their boycott of parliament and a few days later the Sunni members of the Cabinet also went back. It is not clear whether Maliki has promised concessions, or whether the Sunnis decided to try some confidence building steps in order to de-escalate and invite Maliki to reciprocate.

And now it is the turn of the Shiites
While tension with the Sunni Arabs seems to ease, Maliki is taking steps to weaken opposition to his personal rule among the Shiites. He has succeeded in splitting the ISCI party, by co-opting into the government as minister of transport one of its leaders, Hadi al-Amiri, and leaving the party’s head Ammar al Hakim out. Maliki is also encouraging splinter groups from Muqtada as-Sadr’s group, probably as a tool to force Muqtada to toe the line and stop attacking the government all the time. Maliki will also be pleased that his rival Allawi’s bloc is fraying, with a second wave of defections weakening it dramatically. The nationalists quit last year, and now the ‘Sons of Iraq for Change’ have emerged.

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