Iraq Oil Development: Lack Of Direction And Decision-Making
By Walid Khadduri
Iraqi oil policy has finally surfaced on the radar screens of local politics, five years after the US-led invasion. However, much confusion and misunderstanding still surrounds the exact process of how the industry would develop and what role would be retained for the proposed National Oil Company (NOC) and its affiliates, and how wide a door would be opened for International Oil Companies (IOCs).
While the Ministry of Oil has strived to retain a clear role for the federal authorities in drawing up an oil policy, it has faced persistent challenges from both the Kurdistan Regional Government (KRG) and from federal institutions in Iraq, including the cabinet, as well as private interests, who point to the fact that the KRG has been able to sign 22 contracts with the IOCs, while the federal Ministry of Oil has not signed a single development agreement so far. Iraqi Oil Minister Husain Shahristani visited Beijing at end-August 2008 to discuss with the Chinese authorities the possibility of a Chinese consortium to develop al-Ahdab oil field in the Misan Governorate (capacity 90,000 b/d), in accordance with a 1997 production-sharing agreement (now revised to a service contract).
There are many problems facing the evolution of a new Iraqi oil policy. First and foremost is the question of security. There is furthermore the constant mayhem among the ruling parties, and the lack of a sufficient number of experienced officials in the Ministry of Oil to carry out the negotiations with the IOCs. There is also the sustained political pressure from the US administration to have parliament pass the draft Hydrocarbon Law, raising much suspicion among the lawmakers and the public about the real reasons behind the launching of the 2003 war. It will be recalled that the draft Hydrocarbon Law defined the oil decision-making process, creating new authorities to ensure checks and balances. Meanwhile, there are many reports afloat in Baghdad about a possible secret oil annex to the Status of Armed Forces Agreement (SAFA) currently being negotiated by Washington and Baghdad, concerning US-Iraqi oil relations and the future role of US oil firms in Iraq.
The cabinet sent the draft Hydrocarbon Law to parliament in February 2007. It has not been deliberated on yet. The draft bill has been revised several times, due to much bickering between the federal authorities and the KRG.
Efforts To Award Upstream Contracts
On 30 June 2008, Dr Shahristani announced at a press conference in Baghdad that six oil and gas fields have been offered to IOCs, this being the first licensing round since the 2003 invasion. Baghdad's goal is to increase production capacity to 4.3mn b/d, compared with the current level of 2.5mn b/d. The minister emphasized that the contracts would be awarded on a production-service basis, and refused categorically to award any production sharing agreements (PSAs). This means, in effect, that the IOCs would be paid fees for their services and not allowed any equity in the reserves, as they prefer. In the second phase of the production-service contract, and after three years, the IOCs would be expected to introduce Enhanced Oil Recovery (EOR).
Around 40 IOCs pre-qualified for this licensing round. The fields included are: Kirkuk and Bai Hasan in the north; Rumaila and West Qurna 1 in the Basra Governorate; Buzurgan, Fauqa and Abu Ghirab in the Misan Governorate; and the ?Akkaz and Mansuriya gas fields in the far west and central areas, respectively. The minister explained in his press conference that the oil producing fields constitute the bulk of Iraqi oil production today (around 2.1mn b/d out of 2.5mn b/d in June 2008). He also noted that some of those fields have matured, with declining production, hence technical assistance and enhanced recovery are needed to increase their production levels and stop the decline process. He added that the contracts would be signed by June 2009, and that the IOCs, must take a local partner with up to 25% interest, and open offices in Iraq.
Meanwhile, the Ministry of Oil had been negotiating, and was scheduled to sign in summer 2008, Technical Service Agreement (TSA) contracts for six fields. The companies involved include: BP (Rumaila), ExxonMobil (Zubair), Chevron/Total (West Qurna 1), Shell/BHP(Misan), and a consortium consisting of Anadarko/Vitol/Dome (Luhais). Each contract requires an investment of around $500mn and aims to increase production by 100,000 b/d from each field over a period of two years.
The Iraqi oil authorities adopted the TSA process as a stop-gap measure to buy time and to increase production over a short period of time (a total of approximately 500,000 b/ d over 48 months), as well as to ensure that it has sufficient public and parliamentary support to sign upstream contracts with IOCs and also to silence the critics among the politicians in Baghdad who accuse them of not moving fast enough to reach agreements with IOCs and increase production.
Uncertain Future Of Upstream Contracts
The future of the TSAs is now uncertain. The Ministry of Oil has changed the terms of reference of the TSAs on several occasions. Even after assigning a date for signature at Baghdad airport in early June, the ministry changed its mind at the last minute, telling the companies that they should reach the production targets within one year, instead of two years. The IOCs are not clear whether the ministry is still seriously considering the TSAs, having been told that any further negotiations would require cabinet approval. There have been reports, subsequently denied by the IOCs, that the TSA talks have collapsed. Moreover, the general consensus is that the delay in signing the TSAs has made them redundant since the production-service agreements are scheduled to be signed in 2009.
Meanwhile the cabinet, showing its frustration with the lack of new oil development, decided in early July 2008 to establish a National Council for Reconstruction and Development to accelerate, among other things, the approval of oil upstream contracts. No information was provided as to the procedure that the cabinet would take to negotiate with the IOCs, nor which areas it would focus on. To confuse matters even further, the oil minister was quoted as saying that, his view was that the new Council would not deal with oil field contracts, but would possibly be required to make speedy decisions on strategic pipelines or refineries. 1
Fragile Peace Hampers Oil Operations
The cabinet proposal to establish a Council for Reconstruction was introduced after a series of military victories achieved by the Iraqi army against al-Qa?ida terrorists and sectarian militias in the capital Baghdad, the southern city of Basra and Mosul in the north.
However, while security has improved during the past few months, there is still a fragile peace prevailing, with scores of daily casualties among civilians and security personnel. Iraqis and Iraqi firms still find it difficult to carry out their work normally in certain parts of the country. Hence, it is still difficult for IOCs to open offices in Iraq, or to send their engineers and workers to the fields. The government still cannot provide international and local firms with the necessary protection. Iraq remains far away from the normal peace enjoyed by other states.
While al-Qa?ida and sectarian militias have lost battles during the past several months, they remain capable of carrying out their terrorist and destructive activities throughout the country, as they continue to demonstrate, but at a lesser pace and with lesser frequency than before.
The city of Kirkuk remains a flashpoint, witnessing daily armed conflicts, and awaiting a referendum as to whether it should remain within Iraq or annexed to the Kurdistan region.
The new Iraqi army and police have been established on a sectarian and ethnic basis, not as integrated forces, and as long as this is the case, it will be difficult for them to ensure peace and security throughout the country.
Meanwhile, a crucial factor that would determine the security of the country will be the details of the Status of Armed Forces Agreement (SAFA) security agreement with the US, and what policy the next US President will adopt towards the country. How will the future President perceive the threat to the US, and what priorities will he assign to Iraq as against other challenges facing US policy? How will Washington and Baghdad react to the expected opposition to the SAFA security agreement among the Iraqi public?
Finally, would the US and Iran reach a diplomatic or a military solution to the latter's nuclear program, and what kind of an understanding would be reached between them over Iranian influence and interests in Iraq? The outcome of the conflict, between Washington and Tehran, would impact the security and peace of Iraq. Iranian influence in Iraq since the 2003 invasion has grown too strong to be ignored any longer in future settlements.
Long Term Impact Of Occupation
Upstream contracts are long term in nature, extending to around 20-25 years. Iraqi society has serious polarized political and sectarian conflicts, which spill over onto the oil scene. It is conceivable during the duration of these contracts that they would be reviewed, if not even annulled at some time in the future. Such moves would not be novel to Iraq. The recent history of Russia and Venezuela is full of such examples.
Another challenge facing agreements with IOCs is the unprecedented corruption throughout the country. Non-governmental organizations specializing in transparency have placed Iraq among the most corrupt in the world. Several investigative reports by the US and Iraqi authorities have revealed similar conclusions, whether corruption in the award of infrastructure contracts or oil smuggling, with estimates of as much as $10mn worth of crude oil and/or petroleum products being smuggled daily over the past few years. The billions of dollars involved has led to the rise of local interests, criminal gangs and local political parties that would want to see the corruption continue. One would also presume that they would do their best to sabotage any reform movements.
Constitutional Problems For Oil
Another problem facing the oil industry is the vague hydrocarbon articles in the constitution that open the door to different interpretations in fact they already have as to who is responsible for negotiations and the signing of exploration and development contracts with IOCs, whether it be the federal Ministry of Oil, the National Oil Company, or the provinces. The KRG has already set the precedent and example for other provinces. The question is how will the Ministry of Oil deal with future upstream contracts between the Governorates and IOCs outside the Kurdish region.
Whether the constitution would be amended or not, it is doubtful that the federal authorities would challenge the sanctity of the contracts signed with the KRG. The decision-making process in Iraq today is such that Kurdish acquiescence is necessary to retain national political alliances, whether in the cabinet or parliament.
The KRG agreements have all been of the production sharing type, which has put pressure on the Ministry of Oil to sign similar contracts, but which it has refused to do so far. The oil authorities know that they need the assistance of IOCs to enhance production and stop the decline from some of the mature fields, as well as to raise the recovery rate from the current low level of around 15-20% to approximately 40-50%. The question is how to entice the IOCs to invest in Iraq with a service contract a model which they do not find enticing rather than the production sharing model which they prefer. The oil authorities argue that the major IOCs want a foothold in the Iraqi oil industry, and that they recognize that the road ahead is long and difficult, but nonetheless they want to be there for the long haul and definitely not be left out at the beginning of the race. Hence the oil authorities believe they can set their terms. The question is, would the local politicians, the security situation and special interest groups give the Ministry of Oil the space and time to achieve its goals?
Walid Khadduri is MEES Consultant and former Editor-in-Chief of MEES. Petroleumworld
does not necessarily share these views.
Editor's
note:
This commentary was published by Middle East Economic Survey (MEES), VOL. LI, No 34, 25-Aug -2008 Petroleumworld reprint this article in the interest of our readers. Petroleumworld
reprint this article in the interest of our readers.
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