5. The Oil Sector

Since the success of the oil sector is critical to the success of the Iraqi economy, the United States must do what it can to help Iraq maximize its capability.

Iraq, a country with promising oil potential, could restore oil production from existing fields to 3.0 to 3.5 million barrels a day over a three- to five-year period, depending on evolving conditions in key reservoirs. Even if Iraq were at peace tomorrow, oil production would decline unless current problems in the oil sector were addressed.

Short Term

RECOMMENDATION 62:

• As soon as possible, the U.S. government should provide technical assistance to the Iraqi government to prepare a draft oil law that defines the rights of regional and local governments and creates a fiscal and legal framework for investment. Legal clarity is essential to attract - investment.
• The U.S. government should encourage the Iraqi government to accelerate contracting for the comprehensive well work-overs in the southern fields needed to increase production, but the United States should no longer fund such infrastructure projects.
• The U.S. military should work with the Iraqi military and with private security forces to protect oil infrastructure and contractors. Protective measures could include a program to improve pipeline security by paying local tribes solely on the basis of throughput (rather than fixed amounts).
• Metering should be implemented at both ends of the supply line. This step would immediately improve accountability in the oil sector.
• In conjunction with the International Monetary Fund, the U.S. government should press Iraq to continue reducing subsidies in the energy sector, instead of providing grant assistance. Until Iraqis pay market prices for oil products, drastic fuel shortages will remain.

Long Term

Expanding oil production in Iraq over the long term will require creating corporate structures, establishing management systems, and installing competent managers to plan and oversee an ambitious list of major oil-field investment projects.

To improve oil-sector performance, the Study Group puts forward the following recommendations.

RECOMMENDATION 63:

• The United States should encourage investment in Iraq’s oil sector by the international community and by international energy companies.
• The United States should assist Iraqi leaders to reorganize the national oil industry as a commercial enterprise, in order to enhance efficiency, transparency, and accountability.
• To combat corruption, the U.S. government should urge the Iraqi government to post all oil contracts, volumes, and prices on the Web so that Iraqis and outside observers can track exports and export revenues.
• The United States should support the World Bank’s efforts to ensure that best practices are used in contracting. This support involves providing Iraqi officials with contracting templates and training them in contracting, auditing, and reviewing audits.
• The United States should provide technical assistance to the Ministry of Oil for enhancing maintenance, improving the payments process, managing cash flows, contracting and auditing, and updating professional training programs for management and technical personnel.