For A Few Dollars More…

The New York Times has a report on the proposed law regulating oil contracts. There’s no mention of production-sharing agreements there, but there is something a little fishy about the law, which centralizes the approval procedure for contracts for the oil under regional control. Here’s the relevant text from the NYT:

[The law allows] regions to initiate the process of tendering contracts before sending them to Baghdad for approval. To limit the powers of the committee, they also have drawn up an exacting set of criteria to govern the deliberations of the committee rather than simply relying on its independent discretion. And in a bow to the Kurds, who objected to the use of the word “approve” in describing the committee’s duties, the draft law says instead that the committee may review and reject contracts that do not meet the criteria.

In order to preserve a degree of regional autonomy, especially for the Kurds who obviously want nothing to do with the rest of the country, the districts of Iraq are being allowed to negotiate singly rather than taking advantage of collective bargaining. In fact, it seems clear that they’ve mostly already negotiated these contracts, since most of the relevant interests have been in Iraq, wooing their prospective clients for months:

“The international companies keep contacting me — every week, without exception,” Mr. Shahristani said. “They are all very, very keen.”

It seems like the regions will be competing with each other, which will depress prices, but then, so will the oil companies. All told, it looks like there will be a lot of people trying to take advantage of the system, which is sort of a promising context in which to form a market. On the one hand, every oil company executive in the world would sacrifice her grandmother’s eye teeth to get a hold of one of these contracts. On the other hand, the Iraqis are staring down the barrel of instability and poverty, while standing on the second largest accumulation of fossil fuel wealth in the world. That’s what brokers and arbitrageurs like to call a motivated seller. If they’re truly making thirty-year deals… well, I imagine that a number of oil companies are going to achieve some record profit margins over the next few years: “oil company rates of return from investing in Iraq would range from 42% to 162%, far in excess of usual industry minimum target of around 12% return on investment.” (via) Yet, as a deal-maker for a big oil company, how much of those absurd profits would you bargain away to keep the rest, especially knowing your competition is angling to do the same?

Even as I write this, I have to say I approve of the overall institutional design that the Iraqis are working up for federal oversight of oil contracts. This kind of loose federation of oil interests strikes me as pretty well managed; the opportunities for corruption are manifold, but there’s also great potential for oversight, if the federal government chooses to exercise it. It just might work! And once these deals are inked, there’s no reason for Americans to stick around getting blown up. Send in the blue hats, and let them keep the oil people safe….

Okay, maybe I’m still a little bitter. The situation is so explosive that it’s hard to say what kinds of policies will be best for the Iraqis. Maybe corrupt oil executives are actually good for regime stability. (Works for the US, right?) At least there’s someone there thinking about money instead of religion. That’s good politics, I suppose.

Second Opinions