Crude politics

US soldiers began leaving Iraq's cities on 30th June—the same day that Iraq's oil ministry began to sell off the rights to drill its lucrative oil and gas reserves. It was a victory, of sorts, for a sovereign Iraq. But western oil companies, with one exception, spurned the auction. The politics of the country's oil wealth now threaten to undermine its limited political progress—and the economic designs of western business.

Three forces are conspiring to keep the west away from Iraq's 115bn barrels of oil— the world's third largest reserve. Violence is one. On the day of the auction a bomb in the northern city of Kirkuk killed 37 people. More bombs in Baghdad and near Mosul killed dozens in July. It looks like a grim pattern: Iraq's death toll has been on the rise since the turn of 2009, and June was the bloodiest month since last December.

Oil companies rarely shy from danger, and some (like Chevron and Norway's StatoilHydro) have been working in Iraq. But as a herd they have become more risk averse—a legacy of the financial crisis and this year's oil-price collapse. As a result, rights to Iraq's eight biggest oilfields yielded only one contract, as most companies judged Iraq's terms too steep. The contract went to a partnership between BP and China National Petroleum Corporation (CNPC), one of a host of state-owned Asian firms searching for new energy supplies. The government will pay them to turn the Rumaila field into the world's second biggest, capable of pumping 2.85m barrels a day, or about 3 per cent of world demand. But they will be paid only $2 per barrel, half what BP asked for, and a fraction of what other companies wanted.



Iraq's parliament demanded such tough bargaining from the country's urbane oil minister, Hussein al-Shahristani. Some MPs had previously accused him of being too friendly to western companies and called for his dismissal. Many of the companies, one of their advisers told me, thought this made him a lame duck—and his contracts unreliable. But if the companies were trying to play Iraqi politics, they may have misjudged. In the event, Shahristani's surprisingly hard stance may have consolidated his position in Iraq's government. That's certainly the way he tried to spin the auction's failure, saying that he had sent a "message" to western interests. Emboldened, Iraq's parliament may now challenge the legality of BP's contract.

But the biggest problem is constitutional. Iraq's parliament has long debated a new oil law to govern overall exploitation of its reserves; but it is unlikely one will be agreed before the 2010 elections. Debates about such a law go to the heart of other problems undermining Iraq's unsteady progress; in particular how to keep the disparate elements of its federation happy. All parties want a share of the country's oil wealth, but not all live in oil-rich areas. And while oil is found across Iraq, some large reserves are in areas controlled by Kurds, or in places, like Kirkuk, that they lay claim to.

As Baghdad's oil plans stall, Kurdistan's government, the Kurdistan regional government (KRG), has ploughed ahead, signing contracts with companies and pressing on with a new constitution—one which again claims Kirkuk and its giant oilfield. The KRG says it has the right to develop its reserves; Baghdad says that they belong to the federation, and that Baghdad alone will govern their development.

This is a political dispute, but one that risks turning violent. In 2008 Iraq's army sent its 12th division to Kirkuk, a move that antagonised the Kurds. There have already been skirmishes along the border, and oil is a potential trigger for more violence. The KRG's oil minister told me last year that his government would not bow to Baghdad's "illegal" demands. Meanwhile the KRG has been busy badmouthing Shahristani and his "lousy" contracts, which they say are no more than a "trap" for investors. This combination of violence, spiky politics and absence of a legal framework could also undermine Iraq's wider efforts to tempt western developers—with their expertise and capital—into its oil sector. Shahristani wants output to hit 6m barrels a day by 2017, compared with 2.4m now. At today's prices, that would bring an extra $80bn a year in revenue to Iraq. But without heavy investment soon that won't happen.

Nonetheless, Iraq's oil isn't going away and neither is the world's need for oil. China's state-controlled companies in particular are now nicely positioned to move in. In June, one, Sinopec, paid $7bn to buy a company already operating in Kurdish Iraq. One theory is that with Sinopec in Kurdistan and CNPC in Iraq, the Chinese could even reconcile the Kurds and Baghdad. Certainly, it would be uncharacteristically risky for Beijing to send two of its biggest companies into disputed territory without a diplomatic strategy to support them. The western oil giants aren't finished yet either, and will lobby hard for better terms. But if the Iraq war was a quest to secure reserves for western consumers, the plan is failing. In fact, it might turn out that the US and its allies have liberated Iraq-—and handed its oil to China.