April 2003: State Department Oil and Energy Working Group Publishes its Formal Policy Recommendations for Post-Invasion Iraq

The State Department’s Oil and Energy Working Group, part of the Future of Iraq project, completes its formal policy recommendations for Iraq’s post-Saddam Hussein oil policy. The group comes out in strong favor of an oil policy that would rely on production sharing agreements to manage the relationship between Iraq and oil companies. It states: “Key attractions of production sharing agreements to private oil companies are that although the reserves are owned by the state, accounting procedures permit the companies to book the reserves in their accounts, but, other things being equal, the most important feature from the perspective of private oil companies is that the government take is defined in the terms of the [PSA] and the oil companies are therefore protected under a PSA from future adverse legislation.” The group further specifies that the terms of any PSAs signed with Iraq must be attractive to foreign capital. “PSAs can induce many billions of dollars of foreign direct investment into Iraq, but only with the right terms, conditions, regulatory framework, laws, oil industry structure and perceived attitude to foreign participation.” The Financial Times notes, “Production-sharing deals allow oil companies a favourable profit margin and, unlike royalty schemes, insulate them from losses incurred when the oil price drops. For years, big oil companies have been fighting for such agreements without success in countries such as Kuwait and Saudi Arabia.” [US Department of State, 4/2003; Financial Times, 4/7/2003; Muttitt, 2005]