MIDDLE EAST: Iraq. Security environment the key element

While the lack of a settled fiscal and legal regime governing oil contracts in Iraq represents a major uncertainty, as does the ability to improve internal infrastructure, the security environment remains the key element in whether technical service agreements can be translated into real action on the ground

The negotiations for oil contracts are likely to be conducted outside of Iraq, mainly in Jordan. As there will be practically no security risks during this process for international oil companies (IOCs), the question is what will the Iraqi political and security environment be like post-2009? In December 2007, the US military warned that despite a drop in violence, there is still no place in the country that is safe from attack by extremists.

"We have made no projections of peace at hand. We realize that security is very fragile and that at any moment any attack could occur at any place in Iraq," military spokesman Rear Admiral Gregory Smith said.

With a drawdown expected in US troop levels from summer 2008 and possibly a more radical change in US policy hinging on the year's US presidential election, companies will have to consider whether the recent improvements in security represent more than just a holding operation.

The US government has been relatively upbeat in its assessment of progress in stability and security in Iraq over the course of 2007, but there can be little doubt that the country remains in a highly fragile state.

Assessing the US Department of Defense's latest report on Measuring Stability and Security in Iraq, Anthony Cordesman of the Washington based Center for Strategic and International Studies had some serious reservations about recent progress.

Cordesman argues that Iraq's stability will require years of sustained US effort, writing that "2008 cannot be a decisive year in building stable accommodation, only a beginning."

Despite some legislative progress, Cordesman says "there are no timelines, for tangible action to either legislate major progress towards accommodation or to actually implement it."

Referring to the Department of Defense's assessment of internal tensions, and highlighting the weakness of Iraq's central government, he writes, "there remains a strikingly unrealistic contrast between the regional tension . . .and the data on provincial security transition assessment.

The provinces shown as "transitioned" or "ready for transition" are all either under the de facto control of the Kurdish Pesh Merga or competing Shi'ite factions in the south, and not transitioned to real world Iraqi Security Forces (ISF) responsibility or central government control.

This highlights a critical apparent gap between the plans for accommodation and the plans for developing the ISF."

Threats to security and stability

These concerns appears to be borne out by current events. The southern city of Basra saw an outburst of renewed violence at end-March as the ISF took on local militias in an attempt to control the city.

This battle is a major test of the reconstituted Iraqi army and the central government's ability to impose control on virtually lawless areas of Iraq.

In Baghdad, clashes have been reported between Iraqi and US forces and militants of the Mehdi army, led by Shia cleric Moqtada Sadr, who has called for a campaign of civil disobedience.

This raises the question as to whether the US military surge has had anything but a temporary impact on security. A major success, according to the US Department of Defense has been the 'tribal awakening movement' or 'Concerned Local Citizen' ('CLC') program, which is proving "crucial to the counter insurgency effort."

Cordesman notes this is a critical risk area for 2008, arguing that the unplanned Sunni uprising against Al Qaeda has been the real key to improvements in security. Any cuts in US forces will increase the dependence on the success of the CLC program.

The US Department of Defense itself recognizes the importance and risks attached to the CLC program, writing in its report, "the slow pace of integrating the CLC members into Government of Iraq institutions, lack of alternative employment and fears by the Maliki government that these forces may return to violence or form new militias are of concern

. . . Shi'a extremist and criminal activities have become growing threats to security and stability as the role of insurgents and Al Qaeda in Iraq wanes. The conflicts among communal groups for political power and resources continue."

It would appear that as nearly all foreigners in Iraq are currently either military or paramilitary personnel, the US surge has engendered a false sense of security. Iraq's regional and ethnic divisions are only being held at bay.

If IOCs do start work on the ground, there will be a much larger number of less well-protected foreign targets.

It would be very difficult for long-term service contracts to be run remotely or by proxy with contracting companies. If security cannot be guaranteed then major foreign investment in Iraq's oil industry is unlikely. It is possible that IOCs will take on more risk than they might normally assume because of the size of the oil resources at stake.

In addition, they are well aware that competitors, in particular state-owned Asian oil firms, have shown a larger appetite for risk in other countries.

With a drawdown of US forces in sight, discussions on a new licensing round may prove of little significance, if Iraq's central government cannot bring the regions under its control.

IOCs will be keen to keep the door to Iraq's oil riches open, but will be unlikely to commit resources until a safe operating environment can be established. Given that the prospect of an improved security situation remains a medium to long-term prospect, this suggests there will be no rush to conclude negotiations taking place in the calm provided by Jordan.

Source: Platts|

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