Iraq's oil law dispute worsens business outlook

By Ahmed Rasheed - ANALYSIS

BAGHDAD (Reuters) - Iraq's parliament could still pass a draft oil law within weeks, but a dispute between the central government and Kurdish officials has worsened a foreign investment climate already damaged by spiraling violence.

Iraq's central government and autonomous, oil-rich Kurdistan are at loggerheads over legislation that will decide control of the world's third largest oil reserves.

The two sides will meet as early as the weekend to try to reach an agreement Washington says is key towards reconciling Iraq's warring sects and ethnic groups.

But analysts and Western oil officials said that even if parliament rubber-stamps the law, a perceived lack of legal clarity and poor security on the ground means it will take years for Iraq to develop an environment conducive to business.

An oil law is vital to securing foreign investment to boost Iraq's oil output, stuck at around 2 million barrels a day, and rebuild its shattered economy.

"Lack of security is already keeping out the international oil companies and the added public objections to the oil law will make the situation even worse," said Muhammed-Ali Zainy from the London-based Centre for Global Energy Studies.

"Who would dare come to Iraq to develop and explore when they know there is widespread resentment towards them, the oil law and the constitution?"

A senior Western oil executive said major oil companies will not jump to invest in Iraq until they see a stable government, security on the ground and legislative clarity.

"We're not going to drill and produce oil for Iraq when we aren't sure of how it will get sold," he said. "We won't sign at any price -- not with billions of dollars at stake."

For political reasons, however, companies from China, Russia and India might be willing to sign oilfield contracts, he said.

DEADLINE

Deputy Prime Minister Barham Salih, chief architect of the landmark draft oil law, said he hoped Baghdad and the Kurdish regional government will reach a compromise when they meet after an international conference on Iraq in Egypt on May 3-4.

"There are some points of contention regarding the appendixes and the oil revenues management law. I think that all players should be patient but determined to resolve these problems," he told Reuters on Tuesday.

"We have a deadline. I think all the key leaders recognize we need to solve this problem."

The draft, passed by the cabinet in February and hailed at the time by Prime Minister Nuri al-Maliki as a pillar of Iraqi unity, did not formalize divisive issues such as how revenues would be shared and who would control discovered but undeveloped oilfields -- the federal or regional governments.