Oil is the lifeblood of the Iraqi economy, accounting for nearly 90% of government revenues and about two-thirds of GDP in 2009. Such dependence often opens the door to abuse of revenues by those in power and few would have predicted, amid that turmoil following the overthrow of Saddam Hussein, that Iraq’s oil industry would one day be among the most transparent in the region.
The so-called resource curse afflicting many developing countries that are rich in natural resources can be avoided by instituting good governance measures based on transparency and accountability.
Since May 2003, proceeds from export sales of petroleum, petroleum products and natural gas have been deposited in accounts held at the Federal Reserve Bank of New York, known as the Development Fund for Iraq (DFI). The fund was established and administered by the Coalition Provisional Authority (CPA) and recognised by UN security council resolution 1483.
Surplus funds from the Oil-for-Food programme and frozen assets in foreign countries were also transferred to the DFI. The International Advisory and Monitoring Board was established by the UN to audit the DFI funds and to ensure that the CPA used revenues for the benefit of the Iraqi people.
After the CPA was dissolved in June 2004, the interim Iraqi government authorised the US defence department to continue to manage DFI funds allocated for reconstruction projects that were held in a sub-account until the end of 2007. Management of the main account was assumed by the Central Bank of Iraq and funds are transferred to the Ministry of Finance for federal budget execution.
For the first time in the country’s history, Iraqis have the opportunity to monitor the bulk of their oil revenues and to hold the government to account. The DFI has not stopped abuses but it has made it possible to identify sources of abuse.
This was illustrated in a damning report released by the US’s Special Inspector General for Iraq Reconstruction in July, which said that the US defence department was unable to account for $8.7bn (£5.6bn) of the $9.1bn in DFI funds it received for reconstruction activities in Iraq, blaming weaknesses in the defence department’s financial and management controls as the primary cause.
Nearly three years after the Iraqi government directed the return of remaining funds, the defence department has yet to order their return. At least two US organisations and one contractor are holding up to $34.3m in DFI funds, although the exact amount cannot be ascertained due to poor accounting procedures.
This is obviously worrying, but in many oil-producing countries such problems would never have come to light in the first place.
Tighter mechanisms are needed to root out potential sources of corruption. One such mechanism is a global standard known as the Extractive Industries Transparency Initiative (EITI). It requires the government to provide audited and accessible information on all payments received from international oil companies, including royalties and export revenues. An independent validation process is overseen by a multi-stakeholder group comprising government, private sector and civil society representatives.
Iraq was officially accepted by the EITI as a candidate country in February after prime minister Nouri al-Maliki expressed the government’s interest in joining the process. With Yemen being the only other country in the Middle East to gain candidacy, Iraq is set to become the largest oil producing country to implement the EITI.
The fate of Iraq’s oil wealth was effectively determined in 2009, when major international companies were invited to bid for service contracts at two licensing rounds broadcast live on state television. As per the terms of the deals, companies would raise production in the oilfields they were bidding on to agreed levels in return for a remuneration fee calculated per barrel of oil produced. Crucially, ownership of the oilfields would remain in Iraq’s hands.
The first round was considered a failure by many observers after only one deal on offer was agreed. Iraq’s hard bargaining tactics left few companies willing to commit for such low returns. By the second round, the companies caved in, and a further nine deals were struck with 15 international oil companies from 13 countries including China, Turkey, Malaysia, Angola, Britain and the United States.
Clauses in the contracts stipulated that management of projects would have to be undertaken in partnership with Iraqi state-owned companies who were also given first preference in subcontracting awards, and guarantees were made to protect the local environment.
Iraq’s tough line had paid off. The best offer for the West Qurna oilfield during the first round came from Russia’s Lukoil who were prepared to raise production to 1.8m barrels per day in return for $6.49 for each barrel of oil extracted. This bid was rejected, and subsequently awarded for only $1.15 per barrel at the second round. Overall, oil companies will take home a weighted average of $0.89 per barrel of oil extracted through their services.
With oil production volumes expected to compete with the likes of Saudi Arabia, it is vital that a comprehensive metering system is completed to prevent illegal siphoning of petroleum through unmetered depots. In addition, monthly production and export figures are released by the Ministry of Oil, auditors’ reports are provided by the Central Bank, and the Ministry of Finance has a detailed breakdown of federal budget allocations on its website.
But Iraq cannot take a big leap in good governance without passing a freedom of information law, thereby guaranteeing civil society access to key documents and statistics.
That Iraq’s oil assets have remained under the control of Iraqis and are open to public scrutiny is a testament to the will of Iraq’s leaders and policymakers – a factor often overlooked by analysts. Seven-and-a-half years on, the constitutional guarantee that ownership of Iraq’s oil and gas belongs to “all the people of Iraq” still holds true.
Ali Al-Mawlawi, a research fellow at an independent Baghdad-based think tank, the Iraqi Institute for Economic Reform.