Significance of Iraq Gas Auction Controversy

The Iraqi oil ministry’s auction of three natural gas fields last month was angrily opposed by all the governorates in which they are located.

With provincial officials threatening legal action against Baghdad and warning that they will refuse to cooperate with the developers, IWPR Iraq editorial manager Tiare Rath assesses the significance of the controversy.

What are the implications of the troubled gas auction on the already troubled relationship between Baghdad and the provinces?

The recent dispute between the oil ministry and local authorities has clearly widened the rift between Baghdad and the provinces. Provincial officials in Anbar, Diyala and Basra, where bids were awarded to develop gas fields, all claimed that they were not informed of the auction, leave alone consulted – a charge that the ministry of oil denies.

Baghdad controls all natural resources revenue, but both local and federal authorities claim they have the right to sign contracts and manage projects.

The ministry has been accused of forging ahead with natural resources development without consulting local authorities in the past, and has sparred with the Kurdistan Regional Government and the Shia-majority provinces of Wasit and Basra over natural resources management and contract issues. The addition of Sunni-majority Anbar and Diyala to the mix doesn’t bode well for the oil ministry. Moreover, there are again rumblings about creating a federal region in resources-rich Basra, potentially giving the local government more authority over oil and gas reserves in the province.

What do the provinces want?

Simply put, citizens want Iraq’s oil boom to improve their quality of life. Aside from security, day-to-day life in Iraq is challenging at best. Hospitals, schools, services and jobs are in short supply. Given Iraq’s high unemployment, jobs are especially crucial for the country’s growth and stability. Baghdad maintains that natural resources development will create local employment and has promised governorates one dollar for each barrel of oil that is produced – but citizens and local officials remain sceptical.

Local authorities are demanding more influence over the management of oil and gas in their provinces, and want assurances from the central government that the governorates will economically benefit from the contracts. Provincial officials interviewed by IWPR clearly felt snubbed by Baghdad’s decision to leave them out of the auction, and Anbar officials have threatened to sue the oil ministry. Some believe the provinces will keep quiet if they get a cut of the deals.

The main problem is the absence of a legal framework on natural resources management and contracts. Until a law is passed, the power struggle between the oil ministry and local authorities is likely to continue and could escalate.

Will the disputes affect natural resources development in Iraq?

Possibly. Without the support of local governments, international firms could face logistical challenges, or even possibly security threats, which could affect their operations. The biggest tests will be in Anbar and Diyala, where residents and officials are clearly angered by the deals. Both provinces have been hotbeds of the insurgency. Anbar’s provincial council, which warned Baghdad that it would not accept the deals, spearheaded governorate-wide protests that drew hundreds of demonstrators during the Baghdad auction.

However, David Bender, a Middle East analyst and oil expert with the Washington-based Eurasia Group, told me that despite the risks, international oil companies are eager to invest in Iraq given the country’s huge reserves. For example, Basra’s massive Rumaila field, which produces about 40 per cent of Iraq’s oil, is being developed by BP and the China National Petroleum Corporation. Reuters reported this week that the oil ministry is finalising a 12 billion US dollar Basra gas contract with Royal Dutch Shell and Japan's Mitsubishi.

As Bender points out, risks vary by province and region: Basra is considered more stable than Anbar and Diyala, while big firms are reluctant to work in the Kurdish north – Iraq’s safest region – until the Kurdistan Regional Government and Baghdad settle their dispute over who has the authority to sign contracts.