Key Issues

The main points of contention among Iraqi politicians and citizen groups with regard to energy policy include the proper roles and authorities of federal and regional bodies, the terms and extent of potential foreign participation in oil and gas production and development, and potential formulas and mechanisms for equitably sharing oil and gas revenue. Concurrent negotiations regarding constitutional amendments have had direct implications for the hydrocarbon legislation debate, particularly efforts to clarify the specific authorities granted to federal and regional governments to regulate oil and gas development and export activities under Articles 111 and 112 of the Iraqi constitution. In the run-up to Iraq's March 2010 national elections, candidates' positions on oil- and natural gas-related policy questions received scrutiny from voters, although most candidates did not appear overly inclined to defend uncompromising positions on energy policy as a means of garnering popular support. Political, Legal, and Constitutional Questions

The Iraqi constitution's ambiguity about the roles and powers of federal, regional, and governorate authorities has fueled division between the national government, the Kurdistan Regional Government (KRG), and other political actors. Hydrocarbon Sector Legislation

A package of hydrocarbon sector and revenue-sharing legislation originally proposed in 2007 remains stalled amid ongoing disputes about broader political questions. U.S. officials and lawmakers have viewed such legislation as an important benchmark that would indicate the Iraqi government's commitment to promoting political reconciliation and providing a sound basis for economic development. The IAMB provides periodic reports on Iraq's oil export revenue, Iraq's use of its oil revenues, and its oil production practices. However, the IMF estimated that Iraqi budget deficits in 2010 and 2011 would create a $5 billion financing gap after domestic resources have been tapped that will need to be met with international financial support. Article 112 of Iraq's constitution requires the Iraqi government to distribute revenues:
in a fair manner in proportion to the population distribution in all parts of the country, specifying an allotment for a specified period for the damaged regions which were unjustly deprived of them by the former regime, and the regions that were damaged afterwards in a way that ensures balanced development in different areas of the country, and this shall be regulated by a law. Similarly, revenue distribution mechanisms that reward producing governorates may create resentment in non-producing areas. In the near term, experts and industry professionals are closely focused on the outcome of the March 2010 national elections, the makeup of the new Council of Representatives, and the formation of a new cabinet. While many expect that the new cabinet will continue along the oil sector management path outlined by the current government, some stakeholders harbor concerns that the terms for international investment in Iraq's oil and gas sector could be significantly revised under a new administration or under pressure from members of the new parliament. The current military strategy employed by U.S. forces in Iraq seeks to support Iraqi forces as they maintain a secure environment in which elected leaders can resolve core political differences. In light of the U.S. military commitment and persistent Iraqi political differences, Members of Congress and U.S. policymakers face a number of challenging questions: As the U.S. role in providing security in Iraq diminishes, how will the United States influence the pace and content of Iraqi energy policy debates? How can the United States effectively encourage Iraqis to adopt equitable revenue-sharing mechanisms? Congressional Benchmark and Other Legislation

In recent years, Congress has sought to ensure that appropriated funds are not used to control Iraq's oil resources and has sought to influence the development and course of U.S. policy in Iraq by requiring the Administration to report on key oil and oil revenue related benchmarks. Federal Oil and Gas Council
The central element of the draft hydrocarbon framework legislation is the creation of a Federal Oil and Gas Council (FOGC) to determine all national oil and gas sector policies and plans, including those governing exploration, development, and transportation.
Development in Iraq's oil and natural gas sector is proceeding, amid ongoing debates. Iraqis differ strongly on a number of key issues, including the proper role and powers of federal and regional authorities in regulating oil and gas development; the terms and extent of potential foreign participation in the oil and gas sectors; and proposed formulas and mechanisms for equitably sharing oil and gas revenue. Concurrent, related discussions about the administrative status of the city of Kirkuk and proposed amendments to articles of Iraq's constitution that outline federal and regional oil and gas rights also are highly contentious.
Both the Bush Administration and the 110th Congress considered the passage of oil and gas sector framework and revenue-sharing legislation as important benchmarks that would indicate the Iraqi government's commitment to promoting political reconciliation and providing a solid foundation for long-term economic development in Iraq. Obama Administration officials and some Members of the 111th Congress have expressed similar views. In the absence of new comprehensive legislation to manage the energy sector and distribute energy export revenues, interim revenue-sharing mechanisms have been implemented, while both the national government and the Kurdistan Regional Government have signed oil and natural gas contracts with foreign firms.
The central importance of oil and gas revenue for the Iraqi economy is widely recognized by Iraqis, and most groups accept the need to create new legal and policy guidelines for the development of the country's oil and natural gas resources. However, Iraq's current Council of Representatives (parliament) did not take action to consider proposed energy sector reform legislation because of broader political disputes. Observers and U.S. officials remain focused on the outcome of the March 2010 Iraqi national election as an indicator of future trends.
In January 2010, the Council of Representatives adopted Iraq's 2010 budget, which includes a deficit of more than $19 billion because of increased spending and stagnant oil production and export levels in Iraq. The budget also includes a controversial revenue distribution mechanism that will reward specific energy resource producing governorates. Iraq has secured a $3.6 billion stand-by arrangement with the International Monetary Fund (IMF) and a total of $500 million in loans from the World Bank to cover a portion of the expected 2010 deficit, as U.S. officials continue to warn that reduced revenues and spending may jeopardize Iraqi investments in infrastructure and security forces needed to fully stabilize the country.
The military strategy employed by U.S. forces in Iraq has sought to create a secure environment in which Iraqis can resolve core political differences as a means of ensuring national stability and security. However, it remains to be seen whether proposed oil and gas legislation and ongoing interim efforts to develop Iraq's energy resources will promote reconciliation or contribute to deeper political tension. U.S. policymakers and Members of Congress thus face difficult choices with regard to engaging Iraqis on various policy proposals, related constitutional reforms, and oil and natural gas development contracts, while encouraging Iraqi counterparts to ensure that the content of proposed laws, amendments, and contracts reflects acceptable political compromises. This report reviews policy proposals and interim contracts, analyzes the positions of various Iraqi political actors, and discusses potential implications for U.S. foreign policy goals in Iraq. See also CRS Report RL31339, Iraq: Post-Saddam Governance and Security, by [author name scrubbed].