Home
Dialogue on Contentious Oil Issues in Iraq
Posted on 19 August 2013.
By Ahmed Mousa Jiyad.
Mr Jiyad is an independent development consultant, scholar and Associate with Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway.
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
The first independent newspaper in Kurdistan-Iraq, Hawlati, e-interviewed me on mid-July. The Q&A is in English then translated into Kurdish and the edited text was published in two parts: numbers 1104 and 1105 dated 23 and 24 July 2013, and their “Pdf” files are available upon request.
The dialogue covers nine intriguing issues mostly focusing, as expected, on the contentious oil maters between the federal and KR governments. Hawlati’ contact person and the Editor had assured me the edited translated text reflects the essence of my answers. May I take this opportunity to sincerely thank Aland Mahwi, Fazil Hawrami and the Editorial staff of Hawlati for their good work and for taking the initiative.
The following provides full text of the questions and my answers.
1: As you are aware, on 27 June, the UN Security Council removed Iraq from the Chapter 7 and now Iraq is preparing the energy strategy (2013-2030), after these important changes where is Iraq heading?
AMJ answer on Q1:
Though the two issues are not connected except in timing (both occurred in June 2013) they will likely have serious impacts on the future of Iraq if proper policies are adopted and implemented. The removal of Iraq from Chapter 7 simply restored full sovereignty to the country. This by itself will surely have significant ramifications from diplomatic, political, economic, legal and financial perspectives, among others.
By exiting Chapter 7 Iraq will be freed from the direct and indirect impacts of so many restrictions imposed by UNSC decisions and those imposed unilaterally by other countries, organizations, entities, companies, financial institutions and alike. Accordingly, international trade activities-export and imports-; international service activities; insurance premiums- on individuals, business and frights-; the country’s risk and credit ratings; financial charges-interest rates and various back charges and fees- all will be impacted by lowering the cost of such activities for Iraq.
The most immediate consequences for Iraq will be the orderly end of the requirements to despite oil export revenues in the Development Fund for Iraq-DFI account at the Federal Reserve Bank of New York- FRBNY. This matter entails reactivating and improving the Iraqi operational procedures and functioning modalities pertaining to oil export revenues that existed prior to the imposition of Chapter 7, involving the related Iraqi entities such as the federal Ministry of Oil including SOMO, the Central Bank of Iraq-CBI, the federal Ministry of Finance, and the Iraqi banks, as the case may require.
As for the second issue of the Integrated National Energy Strategy-INES, this is the first ever, most thoroughly researched and well-articulated study on Iraqi energy sector. The preparation and consultation process for INES lasted more than 18 months involve holding 40 workshops and more than 150 interviews, including several senior officials from Region of Kurdistan.
INES describes the current challenges facing and the opportunities presented by Iraq’s energy resources. Its scope includes all the major components of Iraq’s energy sector: upstream and downstream oil, natural gas, power, and linked industries, with time horizon extends to 2030
To deliver its results INES calls for specific actions on short and medium to long term horizons. If all goes well Iraq could generate revenue of approximately $6 trillion from approximately $620 billion ($530 billion as capital expenditures and $90 billion as operating expenses) between 2012 and 2030, including all contracted payments to the IOCs involved in the technical service contracts.
Also INES calls for significant institutional settings and governance structures comprising all related ministries and high level decision making.
The implementation and the outcomes of INES are not automatic or granted. It has to be fully, effectively and properly integrated to and harmonized with the National Development Plans-NDPs. The first and immediate test is the organic link between INES and current NDP and the necessary budgetary measures to allocate needed funding for INES short terms requirements.
In conclusion, Iraq exit from Chapter 7 and the adoption of the INES would have very significant and critical consequences for Iraq, but this requires sound, timely and effective policies, and this represent serious challenges the decision makers will face.
2: Samer Khazban, the Iraqi representative in 2013 Iraq Petroleum Conference held in London said that Kurdistan is not part of the strategic plan, because Kurdistan is not trustworthy, why Khazban is making this statement and is it possible for Kurdistan to be disregarded?
AMJ answer on Q2:
To begin with I am not aware of such a name, “Samer Khazban”, but most likely you are referring to Thamir Ghadhban. He is former oil minister and currently the head of Prime Minster Advisory Committee-PMAC.
I did not read the text of his speech yet, but what was reported in the professional and industry sources is rather different from what your question asserts.
What Thamir Ghadhban was reportedly said are two things: the first is “The 4.5 million barrels a day is based on the development of the resources within the 15 governorates excluding Kurdistan because of this issue.” The “issue”, as he states it, is “Baghdad had lost confidence in Kurdistan after the region stopped exporting oil through the federal pipeline system.”
My interpretation is that because the 4.5 mmbpd is the “minimum target production level”envisaged under INES for 2014 and since the “exporting of the Region oil through the federal pipeline system” has not been restored the Region therefore was not included in this short term threshold. So the exclusion of Iraq Kurdistan Region is confined to 2014 production and export targets only unless the confident between the Federal and KR governments is restored and exporting of the Region oil through the federal pipeline system resumed prior to 2014.
The second is that Thamir Ghadhban was also reportedly said, “The three production scenarios outlined in Iraq’s “Integrated National Energy Strategy” included output from the KRG”.
This clearly indicates that neither INES nor Thamir Ghadhban had disregarded Kurdistan.
Once again I must emphasis that I did not read the text of Mr. Ghadhban’s speech, and thus I base my opinion on what he was said as reported by the media.
3: Kurdistan government claims that the oil pipeline to Turkey will be completed by the end of this year, what is your reading for this step by Kurdistan government? Is this a step against Iraq? Or does Iraq need another pipeline?
AMJ answer on Q3:
I am aware of the pipeline you refer to, and equally aware of the latest development pertaining to it and foreign interests behind it.
In short, if this pipeline is seen as exclusive matter for KRG and Turkey alone then Iraq might see it as a move against Iraqi national interest; a violation of its sovereignty and a breach of the Constitution. This could prompt Iraq to pursue different legal actions under international law; under the bilateral agreements with Turkey; and under the Iraqi Constitution, Budget Laws and other Iraqi Laws (including customary law). Any legal action by Iraq would create significant degree of legal uncertainty and could put the pipeline and the petroleum it carries at significant legal risk, and put the involved parties at risk of committing felony and illicit trade.
Moreover, such a pipeline will give Turkey too much leverage over KRG and thus give Turkey strong position to extract the highest share of the economic rent of petroleum. Eventually, Turkey and the IOCs operating in Kurdistan could come out as the main winners while the Kurdish people get the smaller share of the oil-cake.
The operational and export revenues management matters complicate the issue even deeper, and the proposed “escrow account” managed by Turkish bank or entity would be out of the question for Iraq to consider, let alone accept. Iraq has just been freed from Chapter 7 and DFI requirements, and Iraq will certainly reject any new attempt to have such oil export revenues become under the tutelage, patronage or mandate of Turkey or any other external entity.
On the other hand if this pipeline is considered and used as part of the Iraqi pipeline network under the INES’ crude oil evacuation infrastructure, then it would surely benefits Iraq including KRG as well as Turkey. But, as I said in answering question 2, this depends on restoring confidence and good working relationship between the Federal and KR governments, and mutual adherence to the principle of the best interests for the Iraqi people as the Constitution asserts.
4: Does Iraq need to consolidate its economic policies in all parts of the country? Or does it have to be divided between Baghdad and Erbil?
AMJ answer on Q4:
The term “economic policies” is rather wide. However, the Constitution provides some guidance in defining the prerogatives, authorities and powers of the federal, regional and provincial governments pertaining to different economic issues, matters and policies. The Constitutional provisions pertaining to various economic policies should be translated into specific laws and operating modalities to implement such laws.
That said, regretfully and as admitted by many scholarly and professional observers as well as many Iraqi politicians the Constitution was written in such a vague language that permits different interpretation and more often than not even contested interpretation. Such ambiguity, different political interests, lack of mutual trusts among influential political blocks, and political immaturity, sectarian/ Muhasasa politics among others had contributed to prevent the enactment of laws pertaining to various economic matters.
5: You are aware that Iraq does not accept the agreements of Kurdistan government, but the oil companies are heading to Kurdistan, which side, Baghdad or Erbil is right?
AMJ answer on Q5:
The Iraqi government adopted Long Term Service Contracts-LTSC while KRG signed Production Sharing Contracts-PSC (probably except one).
LTSC model is a hybrid and mostly unique in combining some features of the conventional service contracts and some of the conventional PSC. KRG’ PSC follow known form used by countries. So the issue is not the “type” or “name” of contracts, rather it is the substantive components, conditions and the provisions of the contract and their implications.
The comparative assessment of the singed LTSCs and KRG’s PSCs would lead to one conclusion: the LTSCs give more to Iraq while the KRG’PSC is more attractive to IOCs. If one applies the Constitutional principle of “best interest for the Iraqi people”, LTSCs serve, in my views, the best interest of the Iraqi people more than KRG’s PSCs do. This is even correct if one considers the LTSCs for exploration blocks concluded under bid round four held by the federal ministry of oil.
As a matter of fact the “oil companies are heading to Kurdistan”, as your question puts it, fall into four categories:
Category one includes small companies that were not, or could not, be prequalified by the federal ministry of oil to take part in the bid rounds;
Category two includes companies that were prequalified by the federal ministry of oil to take part in the bid rounds but then “blacklisted” after they signed PSCs with KRG;
Category three includes companies that were prequalified by the federal ministry of oil to take part in the bid rounds but they failed to win any bid;
Category four includes companies that had concluded LTSC with the federal ministry of oil and afterwards they signed PSCs with KRG. This category includes the three IOCs – Exxon Mobile, Total and Gazprom. Available information indicates that these three IOCs are using all efforts to keep these contracts with Baghdad. To what extent they will be able to keep these contracts with the federal ministry depends on the resolve of the government in Baghdad. Only time will tell!
6: What are the differences between Iraq and Kurdistan agreements in protecting the interests of the country?
AMJ answer on Q6:
As I mentioned in answering Q5 the LTSCs serve the interest of the country much more and better than KRG ‘s PSCs. The reasons are briefly as follows:
1- The PSC, by definition, implies sharing in the ownership of the petroleum reserves. This means KRG gives the IOCs what is known in the international business a “marketable title” and this constitutes the base for “book-reserve” practice under this type of contracts. Any foreign sharing, claim, title in the ownership of oil and gas contravenes the ownership principle of oil and gas enshrined in the Iraqi Constitution.
2- Financially, the “marketable title”, which gives shared ownership under PSCs, could become liability to the KRG. Under such PSC the IOC is entitled to recover all its capital/ investment expenses under the term “cost oil” and part of the “profit oil”; both types are, eventually, donated in barrels and constitute the net interest or “booked reserves” for the IOC.
Let me take the following case to explain this issue.
DNO International annual report for 2012 assert that proved and probable oil reserves for the Tawke field were 722.2 MMbbls, of which 447.7 MMbbls were net to DNO International on a company working interest (CWI) basis as at yearend 2012.
This means DNO has 62% net interest in the discovered reserves of this oilfield. At $50/b the liability to KRG for not delivering the title for Tawke field to DNO would be $22.4 billion. At a higher oil price the liability to KRG would be proportionally higher too.
In other words if KRG decides, for whatever reason, to terminate DNO Tawke PSCs then KRG has to compensate DNO with an amount commensurate with the value of the remaining booked-reserves at the then prevailing price of oil, taking into consideration relevant provisions in the related PSC.
If we take all the signed PSCs the liability to KRG would obviously be a huge burden on the shoulders of the Kurdish people.
This is in my view why and should the federal government oppose these PSCs, and if the federal government approves these PSCs concluded by KRG that could make the federal government itself legally liable too
3- As for the LTSC of the federal government the IOCs has no claim on the reserves, do not share the increases in oil prices, and all their entitlements (Capex, Opex and remuneration fees) are donated in dollars not barrels. So all the economic rent associated with higher oil prices belong to the Iraqi people. What the IOCs get is their actual investment and remuneration fee- adjusted by deducing the share of the state partner and taxes.
My calculation for all LTSC of the involved oilfields gives a weighted average remuneration fee of $1.9/barrel, and Iraq retains 51.25% of this amount. In other words the maximum remuneration fee the IOCs would get is $0.974 a barrel, leaving the effect of R-factor, the performance factor and other possible deductions. This is by far much lower than the lowest “profit oil in barrel” of what the IOCs get under the KRG’PSCs. In conclusion, the IOCs get much higher profits under the KRG’ PSCs compared with what they earn in remuneration fee under the LTSC of the federal government.
7: Some experts claim that Kurdistan has given more concessions than what is necessary to oil companies that is why they heading to Kurdistan, what is your view?
AMJ answer on Q7:
Yes. Most available studies, opinions and reports in the professional and industry sources would support such assertion. As I mentioned in my previous answers the KRG’ PSCs offers very lucrative and tempting concessions to the IOCs, and naturally the IOCs grab such opportunities.
IOCs, like any market driven/affected company, are usually guided by the Internal Rate of Return-IRR to make investment decisions. The KRG’ PSCs offer the IOCs conditions that could lead to exceptionally high IRR.
8: How do you see the membership of Iraq in the Extractive Industry Transparency Initiative (EITI), is Iraq capable of meeting this organizations’ conditions?
AMJ answer on Q8:
I have been and am following this subject constantly. My assessments of the IEITI Reports are published and I participated in providing capacity development and training activities in this regard.
Though IEITI Report 2010 (released in December 2012 and officially launched in April 2013) is good step in the right direction, nevertheless it suffers from many serious flows and weaknesses.
In December 2012 Iraq was declared “Compliant” member of the EITI, and this was celebrated officially in April 2013, and I think Iraq is keen to remain compliant, but much needs to be done properly and timely
In my views future IEITI reports (for 2011 onwards) would be more detailed, comprehensive and challenging due to the following:
First: The 2011 Report should address the flaws, shortcomings and the “missing items” of the previous two IEITI reports and also identify and demonstrate lessons learned so far;
Second: The implications of the New EITI Standard and the requirements to comply with them;
Third: The concluded contracts have already begun showing impacts.
Therefore in my recent contribution on this issue I made specific suggestions to the IEITI Secretariat and the Multi Stakeholders Group-MSG in preparation for the Report 2011/2. I hope they listen!
9: Some observers state that Iraq and the World Bank did not help Kurdistan to prepare its chapter for the EITI report?
AMJ answer on Q9:
To begin with let me emphasis emphatically that EITI report is and should be seen as purely technical not political matter, I must re-emphasis the non-political non-partisan nature of the reporting process.
Required data and submitted by all involved parties and included in the report has to be independently reconciled and verified by known international accounting, auditing and consulting firm (the Reconciler). The reconciliation and verification process involves, among other things, detailed templates, which has to be completed by the involved parties, permitting compilation and comparison of the received data and information.
That said and putting the “blame game” aside, my follow-up of the IEITI report preparation process during 2012 I am not sure what those “observes” have stated was the case. Actually the official statement by KRG on the Report 2010 asserts KRG has, “produced a comprehensive chapter covering the activities of the Kurdistan oil and gas sector in 2010” and posted the chapter on its website.
The KRG Chapter has to comply with the same principles, follow same procedure and adhere to the same verification and reconciliation process as required by EITI and apply to the entire country.
My understanding is that KRG, the Kurdish SCOs and IOCs working with KRG are/will be represented on the MSG of the IEITI. Hence it is vital for them to take active role in the report preparation process to ensure that the KRG Chapter comply with the same mandatory EITI requirements that apply to the entire IEITI. And once again they – the KRG, the Kurdish SCOs and IOCs working in KRG represented on the MSG, should remember that EITI report is purely technical not political matter.
[You must be registered and logged in to see this link.]
Posted on 19 August 2013.
By Ahmed Mousa Jiyad.
Mr Jiyad is an independent development consultant, scholar and Associate with Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway.
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
The first independent newspaper in Kurdistan-Iraq, Hawlati, e-interviewed me on mid-July. The Q&A is in English then translated into Kurdish and the edited text was published in two parts: numbers 1104 and 1105 dated 23 and 24 July 2013, and their “Pdf” files are available upon request.
The dialogue covers nine intriguing issues mostly focusing, as expected, on the contentious oil maters between the federal and KR governments. Hawlati’ contact person and the Editor had assured me the edited translated text reflects the essence of my answers. May I take this opportunity to sincerely thank Aland Mahwi, Fazil Hawrami and the Editorial staff of Hawlati for their good work and for taking the initiative.
The following provides full text of the questions and my answers.
1: As you are aware, on 27 June, the UN Security Council removed Iraq from the Chapter 7 and now Iraq is preparing the energy strategy (2013-2030), after these important changes where is Iraq heading?
AMJ answer on Q1:
Though the two issues are not connected except in timing (both occurred in June 2013) they will likely have serious impacts on the future of Iraq if proper policies are adopted and implemented. The removal of Iraq from Chapter 7 simply restored full sovereignty to the country. This by itself will surely have significant ramifications from diplomatic, political, economic, legal and financial perspectives, among others.
By exiting Chapter 7 Iraq will be freed from the direct and indirect impacts of so many restrictions imposed by UNSC decisions and those imposed unilaterally by other countries, organizations, entities, companies, financial institutions and alike. Accordingly, international trade activities-export and imports-; international service activities; insurance premiums- on individuals, business and frights-; the country’s risk and credit ratings; financial charges-interest rates and various back charges and fees- all will be impacted by lowering the cost of such activities for Iraq.
The most immediate consequences for Iraq will be the orderly end of the requirements to despite oil export revenues in the Development Fund for Iraq-DFI account at the Federal Reserve Bank of New York- FRBNY. This matter entails reactivating and improving the Iraqi operational procedures and functioning modalities pertaining to oil export revenues that existed prior to the imposition of Chapter 7, involving the related Iraqi entities such as the federal Ministry of Oil including SOMO, the Central Bank of Iraq-CBI, the federal Ministry of Finance, and the Iraqi banks, as the case may require.
As for the second issue of the Integrated National Energy Strategy-INES, this is the first ever, most thoroughly researched and well-articulated study on Iraqi energy sector. The preparation and consultation process for INES lasted more than 18 months involve holding 40 workshops and more than 150 interviews, including several senior officials from Region of Kurdistan.
INES describes the current challenges facing and the opportunities presented by Iraq’s energy resources. Its scope includes all the major components of Iraq’s energy sector: upstream and downstream oil, natural gas, power, and linked industries, with time horizon extends to 2030
To deliver its results INES calls for specific actions on short and medium to long term horizons. If all goes well Iraq could generate revenue of approximately $6 trillion from approximately $620 billion ($530 billion as capital expenditures and $90 billion as operating expenses) between 2012 and 2030, including all contracted payments to the IOCs involved in the technical service contracts.
Also INES calls for significant institutional settings and governance structures comprising all related ministries and high level decision making.
The implementation and the outcomes of INES are not automatic or granted. It has to be fully, effectively and properly integrated to and harmonized with the National Development Plans-NDPs. The first and immediate test is the organic link between INES and current NDP and the necessary budgetary measures to allocate needed funding for INES short terms requirements.
In conclusion, Iraq exit from Chapter 7 and the adoption of the INES would have very significant and critical consequences for Iraq, but this requires sound, timely and effective policies, and this represent serious challenges the decision makers will face.
2: Samer Khazban, the Iraqi representative in 2013 Iraq Petroleum Conference held in London said that Kurdistan is not part of the strategic plan, because Kurdistan is not trustworthy, why Khazban is making this statement and is it possible for Kurdistan to be disregarded?
AMJ answer on Q2:
To begin with I am not aware of such a name, “Samer Khazban”, but most likely you are referring to Thamir Ghadhban. He is former oil minister and currently the head of Prime Minster Advisory Committee-PMAC.
I did not read the text of his speech yet, but what was reported in the professional and industry sources is rather different from what your question asserts.
What Thamir Ghadhban was reportedly said are two things: the first is “The 4.5 million barrels a day is based on the development of the resources within the 15 governorates excluding Kurdistan because of this issue.” The “issue”, as he states it, is “Baghdad had lost confidence in Kurdistan after the region stopped exporting oil through the federal pipeline system.”
My interpretation is that because the 4.5 mmbpd is the “minimum target production level”envisaged under INES for 2014 and since the “exporting of the Region oil through the federal pipeline system” has not been restored the Region therefore was not included in this short term threshold. So the exclusion of Iraq Kurdistan Region is confined to 2014 production and export targets only unless the confident between the Federal and KR governments is restored and exporting of the Region oil through the federal pipeline system resumed prior to 2014.
The second is that Thamir Ghadhban was also reportedly said, “The three production scenarios outlined in Iraq’s “Integrated National Energy Strategy” included output from the KRG”.
This clearly indicates that neither INES nor Thamir Ghadhban had disregarded Kurdistan.
Once again I must emphasis that I did not read the text of Mr. Ghadhban’s speech, and thus I base my opinion on what he was said as reported by the media.
3: Kurdistan government claims that the oil pipeline to Turkey will be completed by the end of this year, what is your reading for this step by Kurdistan government? Is this a step against Iraq? Or does Iraq need another pipeline?
AMJ answer on Q3:
I am aware of the pipeline you refer to, and equally aware of the latest development pertaining to it and foreign interests behind it.
In short, if this pipeline is seen as exclusive matter for KRG and Turkey alone then Iraq might see it as a move against Iraqi national interest; a violation of its sovereignty and a breach of the Constitution. This could prompt Iraq to pursue different legal actions under international law; under the bilateral agreements with Turkey; and under the Iraqi Constitution, Budget Laws and other Iraqi Laws (including customary law). Any legal action by Iraq would create significant degree of legal uncertainty and could put the pipeline and the petroleum it carries at significant legal risk, and put the involved parties at risk of committing felony and illicit trade.
Moreover, such a pipeline will give Turkey too much leverage over KRG and thus give Turkey strong position to extract the highest share of the economic rent of petroleum. Eventually, Turkey and the IOCs operating in Kurdistan could come out as the main winners while the Kurdish people get the smaller share of the oil-cake.
The operational and export revenues management matters complicate the issue even deeper, and the proposed “escrow account” managed by Turkish bank or entity would be out of the question for Iraq to consider, let alone accept. Iraq has just been freed from Chapter 7 and DFI requirements, and Iraq will certainly reject any new attempt to have such oil export revenues become under the tutelage, patronage or mandate of Turkey or any other external entity.
On the other hand if this pipeline is considered and used as part of the Iraqi pipeline network under the INES’ crude oil evacuation infrastructure, then it would surely benefits Iraq including KRG as well as Turkey. But, as I said in answering question 2, this depends on restoring confidence and good working relationship between the Federal and KR governments, and mutual adherence to the principle of the best interests for the Iraqi people as the Constitution asserts.
4: Does Iraq need to consolidate its economic policies in all parts of the country? Or does it have to be divided between Baghdad and Erbil?
AMJ answer on Q4:
The term “economic policies” is rather wide. However, the Constitution provides some guidance in defining the prerogatives, authorities and powers of the federal, regional and provincial governments pertaining to different economic issues, matters and policies. The Constitutional provisions pertaining to various economic policies should be translated into specific laws and operating modalities to implement such laws.
That said, regretfully and as admitted by many scholarly and professional observers as well as many Iraqi politicians the Constitution was written in such a vague language that permits different interpretation and more often than not even contested interpretation. Such ambiguity, different political interests, lack of mutual trusts among influential political blocks, and political immaturity, sectarian/ Muhasasa politics among others had contributed to prevent the enactment of laws pertaining to various economic matters.
5: You are aware that Iraq does not accept the agreements of Kurdistan government, but the oil companies are heading to Kurdistan, which side, Baghdad or Erbil is right?
AMJ answer on Q5:
The Iraqi government adopted Long Term Service Contracts-LTSC while KRG signed Production Sharing Contracts-PSC (probably except one).
LTSC model is a hybrid and mostly unique in combining some features of the conventional service contracts and some of the conventional PSC. KRG’ PSC follow known form used by countries. So the issue is not the “type” or “name” of contracts, rather it is the substantive components, conditions and the provisions of the contract and their implications.
The comparative assessment of the singed LTSCs and KRG’s PSCs would lead to one conclusion: the LTSCs give more to Iraq while the KRG’PSC is more attractive to IOCs. If one applies the Constitutional principle of “best interest for the Iraqi people”, LTSCs serve, in my views, the best interest of the Iraqi people more than KRG’s PSCs do. This is even correct if one considers the LTSCs for exploration blocks concluded under bid round four held by the federal ministry of oil.
As a matter of fact the “oil companies are heading to Kurdistan”, as your question puts it, fall into four categories:
Category one includes small companies that were not, or could not, be prequalified by the federal ministry of oil to take part in the bid rounds;
Category two includes companies that were prequalified by the federal ministry of oil to take part in the bid rounds but then “blacklisted” after they signed PSCs with KRG;
Category three includes companies that were prequalified by the federal ministry of oil to take part in the bid rounds but they failed to win any bid;
Category four includes companies that had concluded LTSC with the federal ministry of oil and afterwards they signed PSCs with KRG. This category includes the three IOCs – Exxon Mobile, Total and Gazprom. Available information indicates that these three IOCs are using all efforts to keep these contracts with Baghdad. To what extent they will be able to keep these contracts with the federal ministry depends on the resolve of the government in Baghdad. Only time will tell!
6: What are the differences between Iraq and Kurdistan agreements in protecting the interests of the country?
AMJ answer on Q6:
As I mentioned in answering Q5 the LTSCs serve the interest of the country much more and better than KRG ‘s PSCs. The reasons are briefly as follows:
1- The PSC, by definition, implies sharing in the ownership of the petroleum reserves. This means KRG gives the IOCs what is known in the international business a “marketable title” and this constitutes the base for “book-reserve” practice under this type of contracts. Any foreign sharing, claim, title in the ownership of oil and gas contravenes the ownership principle of oil and gas enshrined in the Iraqi Constitution.
2- Financially, the “marketable title”, which gives shared ownership under PSCs, could become liability to the KRG. Under such PSC the IOC is entitled to recover all its capital/ investment expenses under the term “cost oil” and part of the “profit oil”; both types are, eventually, donated in barrels and constitute the net interest or “booked reserves” for the IOC.
Let me take the following case to explain this issue.
DNO International annual report for 2012 assert that proved and probable oil reserves for the Tawke field were 722.2 MMbbls, of which 447.7 MMbbls were net to DNO International on a company working interest (CWI) basis as at yearend 2012.
This means DNO has 62% net interest in the discovered reserves of this oilfield. At $50/b the liability to KRG for not delivering the title for Tawke field to DNO would be $22.4 billion. At a higher oil price the liability to KRG would be proportionally higher too.
In other words if KRG decides, for whatever reason, to terminate DNO Tawke PSCs then KRG has to compensate DNO with an amount commensurate with the value of the remaining booked-reserves at the then prevailing price of oil, taking into consideration relevant provisions in the related PSC.
If we take all the signed PSCs the liability to KRG would obviously be a huge burden on the shoulders of the Kurdish people.
This is in my view why and should the federal government oppose these PSCs, and if the federal government approves these PSCs concluded by KRG that could make the federal government itself legally liable too
3- As for the LTSC of the federal government the IOCs has no claim on the reserves, do not share the increases in oil prices, and all their entitlements (Capex, Opex and remuneration fees) are donated in dollars not barrels. So all the economic rent associated with higher oil prices belong to the Iraqi people. What the IOCs get is their actual investment and remuneration fee- adjusted by deducing the share of the state partner and taxes.
My calculation for all LTSC of the involved oilfields gives a weighted average remuneration fee of $1.9/barrel, and Iraq retains 51.25% of this amount. In other words the maximum remuneration fee the IOCs would get is $0.974 a barrel, leaving the effect of R-factor, the performance factor and other possible deductions. This is by far much lower than the lowest “profit oil in barrel” of what the IOCs get under the KRG’PSCs. In conclusion, the IOCs get much higher profits under the KRG’ PSCs compared with what they earn in remuneration fee under the LTSC of the federal government.
7: Some experts claim that Kurdistan has given more concessions than what is necessary to oil companies that is why they heading to Kurdistan, what is your view?
AMJ answer on Q7:
Yes. Most available studies, opinions and reports in the professional and industry sources would support such assertion. As I mentioned in my previous answers the KRG’ PSCs offers very lucrative and tempting concessions to the IOCs, and naturally the IOCs grab such opportunities.
IOCs, like any market driven/affected company, are usually guided by the Internal Rate of Return-IRR to make investment decisions. The KRG’ PSCs offer the IOCs conditions that could lead to exceptionally high IRR.
8: How do you see the membership of Iraq in the Extractive Industry Transparency Initiative (EITI), is Iraq capable of meeting this organizations’ conditions?
AMJ answer on Q8:
I have been and am following this subject constantly. My assessments of the IEITI Reports are published and I participated in providing capacity development and training activities in this regard.
Though IEITI Report 2010 (released in December 2012 and officially launched in April 2013) is good step in the right direction, nevertheless it suffers from many serious flows and weaknesses.
In December 2012 Iraq was declared “Compliant” member of the EITI, and this was celebrated officially in April 2013, and I think Iraq is keen to remain compliant, but much needs to be done properly and timely
In my views future IEITI reports (for 2011 onwards) would be more detailed, comprehensive and challenging due to the following:
First: The 2011 Report should address the flaws, shortcomings and the “missing items” of the previous two IEITI reports and also identify and demonstrate lessons learned so far;
Second: The implications of the New EITI Standard and the requirements to comply with them;
Third: The concluded contracts have already begun showing impacts.
Therefore in my recent contribution on this issue I made specific suggestions to the IEITI Secretariat and the Multi Stakeholders Group-MSG in preparation for the Report 2011/2. I hope they listen!
9: Some observers state that Iraq and the World Bank did not help Kurdistan to prepare its chapter for the EITI report?
AMJ answer on Q9:
To begin with let me emphasis emphatically that EITI report is and should be seen as purely technical not political matter, I must re-emphasis the non-political non-partisan nature of the reporting process.
Required data and submitted by all involved parties and included in the report has to be independently reconciled and verified by known international accounting, auditing and consulting firm (the Reconciler). The reconciliation and verification process involves, among other things, detailed templates, which has to be completed by the involved parties, permitting compilation and comparison of the received data and information.
That said and putting the “blame game” aside, my follow-up of the IEITI report preparation process during 2012 I am not sure what those “observes” have stated was the case. Actually the official statement by KRG on the Report 2010 asserts KRG has, “produced a comprehensive chapter covering the activities of the Kurdistan oil and gas sector in 2010” and posted the chapter on its website.
The KRG Chapter has to comply with the same principles, follow same procedure and adhere to the same verification and reconciliation process as required by EITI and apply to the entire country.
My understanding is that KRG, the Kurdish SCOs and IOCs working with KRG are/will be represented on the MSG of the IEITI. Hence it is vital for them to take active role in the report preparation process to ensure that the KRG Chapter comply with the same mandatory EITI requirements that apply to the entire IEITI. And once again they – the KRG, the Kurdish SCOs and IOCs working in KRG represented on the MSG, should remember that EITI report is purely technical not political matter.
[You must be registered and logged in to see this link.]
