Abdulkarim al-Luaibi’s first day in office after nine months of forging political alliances looked like it was his easiest. His first task as Iraq’s new oil minister was to announce that the country’s oil output now stands at more than 2.7 million barrels a day (b/d), up from 2.4 million b/d in 2010.

For the long term, Al-Maliki’s big challenge will be rebuilding Iraq’s power infrastructure

The promotion of the 51-year-old engineer has been welcomed by the international oil companies (IOCs) in Iraq. However, Al-Luaibi’s old boss, Hussain al-Shahristani will still wield considerable power. The architect of Baghdad’s oil and gas licensing rounds is now deputy prime minister for energy, a role which will see him maintain overall control of Iraq’s hydrocarbons sector.

It has taken more than nine months, but Prime Minister Nouri al-Maliki has finally succeeded in forming a government from a patchwork alliance of political blocs, just days before a 26 December constitutional deadline. Despite winning fewer seats than his opponent Ayad Allawi in the March elections, Al-Maliki’s has brought together a coalition of Iraq’s disparate ethnic and religious groups. How much he has given away to keep them in place will be critical to the country’s future. 

Focus on oil in Iraq

The formation of a new government means foreign oil companies will breathe easier now. Al-Luaibi will provide a degree of continuity for the firms who have spent the past nine months anxious whether their oil field contracts will be honoured. Al-Maliki’s closest rival, Allawi had hinted that he would seek to renegotiate the contracts. With hindsight, it can now be read as the last throw of the dice from Allawi, appealing to nationalist elements among Iraq’s politicians. 

“There is a huge sigh of relief from the IOCs. But they were pushing ahead regardless of the politics. Some of the IOCs took advantage of the lack of new government to renegotiate their contracts, changing signature bonuses,” says Thomas Donovan, partner at the Baghdad-based Iraq Law Alliance.

Sources close to the Oil Ministry expect production to average approximately 2.8 million b/d in 2011. Of the eleven signed oil fields, the most advanced are Rumaila, awarded to the UK’s BP and Chinese National Petroleum Corporation; and Zubair, which went to Italy’s Eni, Korean Gas Corporation, and US’ Occidental Petroleum. Oil fields such as Badra, Halfaya and Gharraf are so far undeveloped.

Al-Luaibi has spent more than three decades in Iraq’s oil industry, starting as an engineering assistant at South Oil Company in the 1980s.  He will need this experience to lead the development of national projects quickly.

Beyond increasing production, Luaibi’s priority will be developing Iraq’s aged infrastructure to cope with rising oil production. Exports to the north via the Kirkuk pipeline to Ceyhan in Turkey are restricted to 500,000 b/d and Iraq’s southern export routes can only handle 1.6 million b/d. Basra could see its export capacity increase by the end of the year with the completion of a new 900,000 b/d floating terminal. Logistics are not the only problem. Al-Luaibi also faces political roadblocks.

Political concerns in Iraq

Al-Maliki may have won a second term as prime minister, but his State of Law party managed only 89 seats in Iraq’s parliamentary elections in March 2010. Relying on a disparate coalition has left Al-Maliki weakened and forced to reconcile demands from all sides.

He has been heavily reliant on the support of Shia blocs to consolidate his position, in particular the 40 seats of firebrand cleric Moqtadr al-Sadr. His bloc has previously called for a review of the oil contracts by the new parliament and Al-Sadr has indicated his hostility to IOCs. But after being included in the government, Al-Sadr seems to have backed away from his initial opposition.

The Kurdish Alliance, comprising of the two major Kurdish parties, won 57 seats in the 325-seat Iraq parliament. Despite being more divided now than in 2005, the Kurds remain a political force that cannot be ignored. For their participation in Al-Maliki’s government, the Kurds submitted a 19-point list of demands in August. Key among these was the Kurdistan Regional Government’s (KRG’s) call for the passage of revenue sharing and oil laws in 2011. The Kurdish Alliance is also pushing for the KRG’s laws to decide any disputes over the legality of its contracts with international oil companies, overriding Iraq’s federal laws.

The priority for the Kurds is to get the new oil law signed. Once passed, the law will provide a mechanism for the KRG’s oil and gas contracts to become part of the federal law. “This will un-stick the tricky contractual situation in the North and resolves issues there,” says a source close to the KRG.

Al-Maliki and Al-Shahristani fought hard to centralise authority in the oil sector, which provides around 90 per cent of Iraq’s revenues.

“There is an independent tone to the KRG’s list of demands, so they must have given away some serious concessions. They wanted to push the KRG on their oil contracts,” says Donovan.

It remains unclear how much Al-Maliki conceded to bring the Kurds in, and this will not be seen until parliament begins to debate passing the two main laws in question. It is unlikely to happen quickly.

“Parliament is already seated and a budget has been approved. It was one of the first and only things they have done so far. They will not tackle any of the hot billboard items yet, such as the oil law. It will be mostly low-end stuff,” says Donovan

Iraq’s $79bn budget for 2011 will be funded largely by 2.25 million b/d of oil exports. This includes 150,000 b/d from the KRG via the Kirkuk to Ceyhan export pipeline. This is likely to be another source of contention. If the KRG fails to meet its target, it risks a reduction in its 17 per cent share of the federal budget. With such a fragile coalition, this could force the two parties apart again.

Here Al-Luaibi’s experience at handling negotiations between Baghdad and Irbil will be critical and many will hope he can develop a better relationship with Natural Resources Minister Ashti Hawrami, than his predecessor, Shahristani, did.

“Al-Shahristani is well respected in IOC circles because he has been around for so long and his reputation for being incorruptible. He was very aggressive on the KRG oil deals. Al-Luaibi will follow his line. He won’t do anything revolutionary. Al-Maliki will have to back away from this to make concessions,” says a source in Baghdad. For the long term, Al-Maliki’s biggest challenge will be rebuilding Iraq’s power infrastructure. At the end of December, the Electricity Ministry unveiled a comprehensive 20-year power masterplan. It includes a private power programme, along with engineering, procurement and construction schemes, carried out by the US’ Parsons Brinckerhoff. About $29bn of investment will be necessary between 2015-30. Of this, about $21.13bn is intended to be funded by international investors.

Iraq ministries must work together

To get such an ambitious programme off the ground will require the Oil Ministry, Electricity Ministry and National Investment Commission to work together, under the watchful gaze of Al-Shahristani. His new position is expected to give him a wide remit, with extended powers to clear bottlenecks in the ministries and get projects moving.

It will also allow some breathing space for Al-Luaibi to handle the Oil Ministry’s relationship with the KRG and other regions, defusing some of the conflicts and personal gripes with Al-Shahristani.

“This could be where Al-Shahristani’s task lies … Getting the independent power projects up and running. They need to start delivering on power, which is where most of the frustration comes from,” says Donovan.

“There will be revolution if they don’t. There will be marches on the street. This summer [2010] was horrible, with only two hours of power a day. The IOCs cannot operate without power. They are building their own power stations. To stop the Kurds from going independent, they have to provide power”.

Al-Maliki has been in office since May 2006. During his tenure, Iraq have seen security improve, but the government has so far failed to deliver on its promises on power.

Sweltering summers without the comfort of air-conditioning became the enduring theme of his first term. Oil production is rising and with prices at more than $80 a barrel, Al-Maliki now has the chance to fix the failings of this first term. “This year will be the year of electricity,” says Donovan. “It has to be.”