Iraq’s postwar oil bonanza remains a mirage. The country has the second- or third-largest reserves in the world, making petroleum the heart and vast bulk of its economy. Thus in March 2003 did Paul Wolfowitz assure Congress that Iraq would “finance its own reconstruction, and relatively soon.” American planners predicted that Iraq’s oil production would triple to a feverish 6 million barrels per day by 2010.

Instead war, corruption, sectarian slaughter and a massive crime wave have reduced the country’s once mighty petroleum sector to an industrial zombie: still ambulatory, functional but essentially dead.

Despite this, oil majors and the International Monetary Fund have been pressuring Iraq to pass a thoroughly free-market hydrocarbons law that would allow foreign companies to make huge profits from Iraq’s petroleum. A draft of the law has just been released; the Iraqi Cabinet has approved it and sent it on to Iraq’s Parliament for debate and approval in March.

But is Big Oil really poised for total victory in Iraq? Such an outcome is hard to imagine, at least in the near term, given the likelihood of opposition from Iraqis and, more important, the spiraling chaos: Iraq is a society in meltdown with no real state to speak of. Many politicians have fled Iraq, rarely risking trips back to Baghdad, so even achieving a basic parliamentary quorum can be difficult. Controlling and profiting from Iraq’s oil has been the goal of the oil majors, but they do not write history unmolested by the momentum of events and competing agendas.

Nor does the proposed oil law simply serve Iraq up on a plate to the oil giants. One London-based oil analyst who expected a more decentralized and free-market law called it “bloody confused.” On key questions of foreign investment and regional decentralization versus centralized control, the law is vague but not all bad. In general terms it reaffirms state control over oil and binds Iraq’s Sunni center and Shiite south to the Kurdish north by re-creating a single Iraqi National Oil Company, which will in turn dole out oil income to the regions on a per-capita basis. This might help de-escalate sectarian conflict.

But the law leaves plenty of problematic wiggle room: All its important details are left for later resolution by a new Federal Oil and Gas Council to be controlled by the prime minister, which will effectively bypass Parliament. And while the law asserts a set of generally nationalist economic goals, it sets no minimum level for state participation, nor does it cap the amount of profits allowed to foreign firms.

Among the Iraqi political class there is pervasive confusion about the new law, but there is also a deep resource nationalism that opposes selling off the country’s patrimony. My interviews with Iraqi oil experts, politicians and regular people revealed a quite reasonable and balanced view of the situation: Most felt that foreign participation in the oil sector could be helpful in reviving an industry battered by a fifteen-year nightmare of war, sanctions, more war and now anarchy. But no one felt Iraq should have to enslave itself to the will of Shell, BP or ExxonMobil.

If an aggressively liberalizing and decentralizing interpretation of the oil law is eventually pursued, it is not at all clear that it will, in fact, shape the future (if there is one) of Iraq’s petroleum sector. “If an unfair oil law is passed, it will be a bone of contention for years to come,” says Kamil Mahdi, an Iraqi academic now at the University of Exeter in Britain. “It will be remembered as something forced through during the worst period of violence. It will sow the seeds of instability throughout the whole region.”

So what will the new oil law actually stipulate? Will it be passed into law and accepted by the people? And what are the real conditions and potential of the Iraq oil industry?

“The situation is pretty dire and going to get worse before it gets better,” says oil analyst George Orwel, of Energy Intelligence. Orwel follows the Iraq oil industry from New York, working the phones to reach contacts that range from ministers in Baghdad to oil terminal engineers in Basra. He and other analysts paint a horrifically bleak picture.

Before the 1991 Gulf War the country’s oil sector produced as much as 3.5 million barrels per day. But after four years of occupation, Iraq has only recently and momentarily managed to reach an output of 2.1 million barrels per day. And it can rarely manage to export more than 1.5 million barrels per day. Iraq’s current oil production is concentrated in the north and the south. But since the US-led invasion, production in the northern fields has been almost totally off-line because of constant sabotage: 400 major attacks have been recorded on the pipelines that connect the Kirkuk fields to the Baiji refinery and both of those to the Turkish port of Ceyhan. Last year attacks on oil installations and employees killed 289 people and wounded 179.

The Oil Ministry–controlled by the Shiite government–is mired in corruption. Shoddy record keeping, limited accountability, little investment and endemic brain drain set the tone. Many of Iraq’s petroleum engineers and geologists have escaped. “Most of those guys are either hiding in Sunni cities, driving cabs or they have fled abroad because they were listed on death-squad death sheets,” said chief engineer Abdullah of Saladin Province.

Last year the Oil Ministry allotted $3.5 billion for projects like repairing pipelines, but because of abysmal security and a lack of skilled technicians and managers, the ministry had spent only $40 million as of August 2006. The work was assigned to the ministry’s besieged State Company for Oil Projects, which has taken over responsibility for construction, exploration and repair now that Halliburton and Parsons, having been paid billions but done little, have fled.

Exports are now so low and the flow of oil is so intermittent that last year the Iraqi government paid more than $100 million in demurrage charges, or compensation fees to oil tankers that were delayed waiting to load at Basra.

Until the middle of 2006 most of Iraq’s oil pipelines were not even equipped with working meters. Earlier in the occupation US viceroy L. Paul Bremer refused to install new ones–why, no one knows. Now the few meters installed at Basra are not working properly and maintenance was just delayed for another month. Analysts are left to estimate Iraq’s production levels by adding up the amount of petroleum purchased by international shippers.

Smuggling is rampant, with methods ranging from the use of truck convoys and small tankers to legitimate tankers that top up their loads off the books and pay kickbacks to officials to under-record the size of the cargoes.

At the Kurdish-Turkish border oil tanker trucks wait in rows parked three and four abreast, stacked in lines as long as eight miles. The truckers sit by their rigs for days playing cards, drinking tea and tinkering with their engines, waiting for higher-ups to pay bribes and doctor paperwork so they might pass. The Iraqi Oil Ministry’s inspector general recently estimated that a petroleum truck driver willing to brave the country’s highways could expect to pay $500 in bribes and would make about $8,400 profit once he resold his load in a safer country.

The subsidized price of Iraqi gasoline, which is less than half the regional price, makes the resale of legally purchased Iraqi fuels in Jordan or Syria very profitable. But according to the US Government Accountability Office, about 10 percent of Iraq’s refined fuels are stolen. Revenue Watch estimates that this cost the state $4.2 billion in lost income in 2005.

Sunni politicians accuse the dominant Shiite parties of controlling most of this sub rosa petroleum traffic. “Iraqi oil is regularly smuggled out of the country in many different ways,” said an oil merchant in Amman. “Emir al-Hakim [head of SCIRI] is spending all his time in Basra selling oil as if it were his own. People there call him Uday al-Hakim, meaning he is behaving the same way Uday Saddam Hussein was acting. Other merchants like myself have to work through him with the big deals or smuggle small quantities on our own. The petroleum is now divided among political parties in power.”

Given the level of violence in Iraq, it is amazing that any oil gets produced and exported. The industry runs in part on ordinary Iraqis’ desperate attempts to cling to some semblance of normalcy. One engineer at the Oil Ministry who refuses to flee the country now lives in his office with his wife.

The rising mayhem means there is almost no foreign investment in Iraq’s oil sector, other than five small deals between the Kurdistan Regional Government and a mix of independent drilling and exploration firms. Only one of these has panned out; Norway’s DNO operates one well near the Turkish border.

Against this smoldering vista of general disintegration, a small group of Iraqi politicians spent a year secretly drafting the new hydrocarbons law. Weighing in from the outside was the US consulting firm BearingPoint, as well as the American and British embassies, and the US energy secretary, Samuel Bodman, who supposedly showed early versions of the draft law to several major petroleum firms. To add further pressure, the IMF has made passage of a liberalizing hydrocarbons law a condition for canceling about 6 percent of Iraq’s outstanding debt.

It is estimated that Iraq would need $20 billion to $30 billion in new investment to get its petroleum sector back in order. After initial outside loans and technical support from oil service companies, Iraq could again be self-financing and could lure back its engineers. But large oil companies want to use Iraq’s current weakness to gain as much access as possible to Iraqi petroleum. And the Iraqi politicians working on the hydrocarbons law–led by Oil Minister Hussain al-Shahristani, a prominent former exile–have taken a bullishly free-market position.

In an e-mail to me, Minister Shahristani explained the mood toward foreign companies as follows: “Opening the Iraqi oil upstream sector for investment to reputable International Oil Companies with state-of-art technologies and financial resources to fast-track oil and gas fields development through transparent bid rounds that offer the best return to the Iraqi people is not disputed by any party in the government, or outside the government. Even under the previous regime, such cooperation was encouraged.”

But unlike other Iraqi politicians who in recent years attempted to restructure Iraq’s oil industry, Shahristani’s committee had to back away from some of the draft law’s more controversial elements. Early on, US-appointed Prime Minister Iyad Allawi floated a radical privatization plan: giving foreign corporations ownership of the subsoil petroleum. That sort of arrangement is used only in the United States; in all other countries oil is state property, even if private firms drill and sell it. The Allawi plan lasted about as long as the failed plan to redesign Iraq’s flag. (The “new” flag championed by Bremer was rendered in blue and white, like the Israeli flag. It flew for one day in the summer of 2004.) Similar plans to privatize the state-owned vegetable oil and soap industry were quietly dropped when unknown assailants gunned down the company’s pro-privatization manager.

The draft law will leave ownership of the oil in state hands. But according to several reports, early versions of the law included contracts called Production Sharing Agreements (PSAs) that would allow an unusually high average profit rate of 25 percent. PSAs are widely disparaged because they are often predatory and long term. Private oil companies prefer PSAs because they allow the firms to count petroleum reserves on their books–boosting their stock on international markets.

Several weeks ago Minister Shahristani told me, “There is no reference to PSAs in the draft, and there has never been any reference to it in the draft that the ministry proposed to the Energy Committee. The Federal Council for Oil and Gas will decide what type of agreement for which field will maximize revenues for Iraq.” Indeed, the new law does not mention PSAs and it stipulates that firms will have to negotiate on a field-by-field basis.

The law will restructure the oil industry in other important ways: It will appoint a Federal Oil and Gas Council led by the prime minister to oversee all future contracts as well as review existing deals. Those agreements include the five contracts signed by the Kurdish Regional Government and six outstanding PSAs signed between Saddam Hussein and a mix of companies–most notably Lukoil of Russia, Total of France, the China National Petroleum Corporation and Italy’s Eni.

A single state-owned Iraqi National Oil Company will be reconstituted under central government control. This commitment to recentralizing the oil industry could placate Sunni fears that they will be left with no petroleum income, and as such it represents a serious compromise by the Kurds. More generally, centralization could pull the various leadership factions into some sort of corrupt cooperation, de-escalating the centrifugal forces of civil war.

So how will the law be received? Even the cleverest Green-Zone-hatched plans are counterbalanced by anarchy and the still-deep nationalism of the people. As one exiled Iraqi oilman, Dr. Muhammad-Ali Zainy, told me, “For us, oil is a very emotional issue.”

“The whole culture of the ministry opposes liberalization,” says Rafiq Latta, a London-based oil analyst with Argus Energy. “Those guys ran the industry very well all through the years of sanctions. It was an impressive job, and they take pride in ‘their’ oil.” The political parties still wield considerable power over the oil issue and not all of them are so friendly to the Oil Majors. The main Sunni parties adamantly oppose liberalization and decentralization, both of which could allow the north and the south to keep revenues away from the more heavily Sunni center of the country.

“We think that any decision that would be passed in these exceptional circumstances…would be a mistake,” says Saleh Mutlaq, of the Iraqi Front for National Dialogue, a Sunni party that opposes any moves toward breaking Iraq into regional blocs. “It will further complicate the Iraqi scene as well, and it will face a wide public refusal from the Iraqi people.”

A representative from the Islamic Party, a prominent Sunni formation, speculated that the Shiite bloc of Muqtada al-Sadr’s followers would unite with them in opposing any oil law that was excessively permissive toward foreign oil companies.

“In fact, we are scared of the oil investment issue because we don’t trust the political process that was formed during Bremer,” concurs Sheikh Ghaith Al Temimi, a key Sadr spokesman. He accuses most Iraqi politicians of “stealing oil” and “collaborating” with the occupation, but he was not uniformly hostile to foreign participation in the oil sector. His sentiments seem to summarize the position of most Iraqis: “We would welcome any investment in our oil but under certain conditions. We want our oil to be developed, not stolen. If a bad law were to be passed, all people of Iraq would resist it.”

Iraq’s General Union of Oil Employees deeply opposes any moves toward selling off national resources. The GUOE has shut down Iraq’s oil production on several occasions, and they have called on Iraqi parliamentarians to reject the law.

Many regular Iraqis now seem to view oil as a curse. “We are being punished because Saddam nationalized Iraqi oil. I heard from my teachers at school in the 1970s that Europe and America would not let that go unpunished,” said Salim Alwan, a police officer in Falluja.

“I wish we did not have oil in this country,” said Numan Hany, a teacher from Mosul. “That way the United States would not have invaded our country, and we would have lived on the two great rivers and the land on which our grandfathers lived in dignity.”