Oil firms should beware of the risks in Iraq

05 January 2010

Lack of a national oil law means none of the oil firms can be certain their contracts will be legally secure

Baghdad appears to have succeeded at last in attracting oil majors to develop its energy resources. After awarding just one licence in the auction round in July last year, the Oil Ministry managed to hand out seven of the 10 permits on offer in late December.

The ministry will be understandably pleased it has delivered these contracts, but for the companies that signed them, there are as many reasons for caution as for optimism.

Security will remain an issue for years, but logistical challenges will occupy the minds of oil company executives in the short term.

Previous hopes that the government would provide the infrastructure necessary to exploit the oil fields were unfounded and oil majors are resigned to doing much of this work themselves. There is also a risk of shortages of everything from pipelines to processing plants, given the volume of work planned.

These problems are at least quantifiable. What is harder to judge is the political risk.

The continued lack of a national oil law means that none of the oil firms can be certain their contracts will be legally secure for the lifetime of their deals.

For that reason the results of parliamentary elections expected in March will be critical. If a new government emerges with a different approach to exploiting the country’s resources, the progress made to date could vanish.

For that reason above all others, caution is still advisable, regardless of the rewards.

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