Iraqi officials have agreed a final draft of a law that sets rules for
sharing Iraq's oil wealth and aims to bring in billions of dollars of
foreign investment to rebuild the mainstay of the economy.

But crucially, international oil firms waiting for access to the
world's third biggest oil reserves will find little detail in the
draft about the form future deals will take. They are likely to hold
off major commitments until there is clarity.

The draft calls for a federal committee headed by the prime minister
to oversee future contracts and review deals signed under Saddam
Hussein or by the Kurdish regional government, oil ministry spokesman
Asim Jihad told Reuters.

"The committee finalised the draft of the law last night. It was
approved unanimously and it will go before the cabinet early next
week," Jihad said.

Passing an oil law to help settle potentially explosive disputes among
Iraq's ethnic and sectarian communities over the division of oil
reserves has been a key demand of the United States in providing
further military support to the government.

Iraq's Oil Committee of senior national and regional leaders has been
drawing and redrawing the document for months and missed its own
deadline of finalising it by the end of 2006.

"Everybody sees this law as a big achievement and as a national
project," Jihad said.

The Oil Committee, headed by Deputy Prime Minister Barham Salih, will
send the draft to cabinet next week for approval. After that it will
go to parliament. Officials hope that the broad base of the
negotiating team means it will pass easily.

The final draft was in line with earlier versions described last month
after a previous round of talks.

A national oil company will be set up to develop production and
exports and the law is intended to ensure development of the oil
industry across Iraq's regions, Jihad said.

It establishes a mechanism for centralising oil revenues and
distributing them to the regions.

"The law sets clear restrictions that all contracts will ensure the
best benefit for Iraq," Jihad said.

Jihad refused to say who will negotiate with the international firms
but explained a federal council will have the final word on approving
the contracts.

Regional divisions

Senior oil industry sources told Reuters last month that the regions
will negotiate with big oil companies on crude contracts and oilfields
developments but the centre must approve them.

Norwegian company DNO is already drilling in the Kurdish north. Its
shares eased on the news.

Iraq desperately needs foreign investment to revive its shattered
economy, which relies heavily on oil export revenues.

The division of oil is a key factor in communal tensions in Iraq. The
southern oil fields around Basra lie in territory controlled by
competing factions of the dominant Shi'ite Islamist political forces,
some of whom are close to Iran.

The northern fields lie on the edge of Iraqi Kurdistan around the city
of Kirkuk. Kurds want to annexe the city as their regional capital and
ethnic Arabs and Turkmen accuse the Kurdish militants of ethnic
cleansing before a referendum on the city's future which, under the
constitution, is due this year.

The Sunni Arab minority dominant under ousted president Saddam Hussein
is concentrated in Baghdad and regions immediately to the north and
west where there are few known hydrocarbon reserves - though some
potential future finds.

Sunnis have been particularly insistent that the central government in
Baghdad control the oil industry, despite a new, US-sponsored
constitution, opposed by most Sunnis, which gives newly created
federal regions some powers over oil and gas.

Question marks

Oil Ministry sources told Reuters Iraq is aiming to find the best
model for its future contracts with international oil companies by
studying existing agreements in Norway, Britain and the United States.

The ministry has sent a 20-strong team to Britain to study contracts
there, the sources said. From there it will travel to Norway. Another
group will head to the United States soon.

Jihad said the percentage of profit that investing companies could
expect to earn had not been set. Iraq would not differentiate between
companies based on nationality, he added.

One oil company source said government officials had told him the
government was leaning towards a system that used a type of production
sharing contract, rather than the royalty-based contracts favoured by
industrialised countries.

Industry insiders said however advantageous the terms may be, Iraq
would struggle to attract big foreign oil firms.

"If the legal problems are solved by the oil law, that's good news,"
said a senior Western oil executive.

"But security issues are a much bigger issue. The big money will not
go to Baghdad unless it's convinced that employees and contractors
won't be abducted, shot or killed."

"Companies from countries such as Russia, India and China - they may
have different criteria."

Smaller oil firms are also more willing to take a risk.

"What the industry needs is a workable law. At the moment we have
uncertainty... we'd prefer to negotiate with the central government,"
said David Horgan, chief executive of Petrel Resources, which is
developing fields in southern Iraq.