The legality of post-sanctions contracts awarded in recent
years by the current Iraqi regime will have to be evaluated. Contract
holders may resort to legal means to assert their rights even
under circumstances of regime change. Prolonged legal conflicts
over contracts could delay the development of important fields in
Iraq and hamper a new government’s ability to expand production.
It may be advisable to pre-establish a legitimate (possibly UN
mandated) legal framework for vetting pre-hostility exploration
agreements.
It remains to be seen how eager a new Iraqi leadership will be
to welcome back foreign direct investment. In the past, Iraqi oil
technocrats have favored a return of such capital.However, the experience
of Kuwait after 1991 should temper expectations of a windfall.
After hiring Western firms to put out its oil-field fires and repair
surface facilities,Kuwait’s parliament has routinely voted against
contracting with foreign firms for oil-field development, despite
a loss of production capacity that has been experienced over the
last three years. Given Iraq’s desperate economic situation, its
leadership may not have the luxury Kuwait had to try to go it alone.
But with a new government and greater plurality of views, Iraqi
oil nationalists could pursue a variation on the Kuwaiti approach.
Iraq and OPEC.
The Working Group is unconvinced that a
new Iraqi government will quit the Organization of Petroleum Exporting
Countries (OPEC) as some have speculated. As a founding
member of OPEC, Iraq will experience a strong historical pull to
remain within the organization. As important, if not more so, is
the fact that producing outside of an OPEC quota will not necessarily
bring increased resources. Every producer must balance between
restraining output to create generally higher international oil
prices and expanding individual production capacity to seek higher
revenues through rising market share but potentially at lower
overall international price levels. Operating outside of OPEC will
not necessarily garner increased profits, as Iraqi oil decisionmakers
are also well aware of the fact that Saudi Arabia may
punish Iraq by flooding the market with its own oil, if Iraq
chooses to quit OPEC.
