Sunday, November 09, 2008 12:04:49 PM
In response to the controversy over whether the Iraqi oil ministry has the right to award oil field development contracts under its first bid round, former Oil Minister Thamir Ghadhban argues that the ministry relies on a 1987 law that placed the powers to sign contracts into the hands of the oil minister and on the fact that the 2005 Iraqi constitution does not require the legislature's vote on the signed contracts (See The Iraq Oil Debate). The question is whether this legal and constitutional foundation provides international oil companies with sufficient guarantees that a contract signed by the oil ministry in the absence of a hydrocarbon law, even with the endorsement of the Iraqi cabinet, will have the long term validity and durability to sustain the long term investments needed over the contracts' 20 years. Royal Dutch Shell's head of upstream Malcolm Brinded argues that it's the structure of the contract that will determine its long term robustness especially if supported by a transparent award process (www.energyintel.com/DocumentDetail.asp). One CEO of a European major is more adamant that only contracts backed by a hydrocarbon law have the long term legal standing international oil companies need, especially were the contracts to be disputed in the future by subsequent governments.
Under the previous regime, production sharing contracts awarded to China's CNPC for the development of Al Ahdab field and to Russia's Lukoil for West Qurna-phase 2, before its cancellation later by Saddam Hussein -- as well as three other contracts with India's ONGC, Indonesia's Pertamina, and Vietnam;s Petrovietnam -- were approved by decree and had the power of law after endorsement by the Iraqi parliament. Under international law, a change of government has no impact on the enforceability of deals done with an ousted regime. That's one of the reasons why CNPC's 1997 deal could be revived and renegotiated or "re-adapted" under the new regime, even though lawyers can argue that countries have a sovereign right to terminate contracts regardless of enforceability.
Iraq's contract award process as defined by the Iraqi oil ministry in the initial tender protocols sent to international oil companies in late October, is complicated and lacks clarity (www.energyintel.com/n/Portal/iraq-watch-3.aspx). But assuming the ministry was able to conclude the process by June as it has announced, it might still find itself, together with the oil companies involved, in legal limbo when it comes to the validation of the deals.
Ruba Husari, Dubai
Friday, October 17, 2008 1:16:08 PM
Iraq finally unveiled the terms of its big upstream opening. International oil companies now realize that to win a 20-year service contract to rehabilitate and redevelop some of Iraq's giant oil fields, they need to offer high production targets at the lowest cost. In return for committing to spend money on rehabilitating infrastructure, drilling wells and reassessing recoverable reserves in each field -- something that is long overdue -- they will be paid back their capital investment, operating costs and a remuneration fee linked to a weighted index. Since they can choose to be paid in kind and the long-term contract will guarantee a minimum volume of oil, they will be able to book reserves. Beyond the expansion of currently producing reservoirs, which form the basis of the proposed contracts, they will also have the chance to develop other, non-producing reservoirs and even explore for new deeper ones, which could form the basis of new contracts with different terms in line with the associated risk. All in all, it's not a bad contract for an industry suffering from a lack of access to reserves around the world.
Notwithstanding the logic or benefit of signing up foreign companies to develop producing fields on long-term contracts, the deals are not bad for Iraq either. The state will hold a majority stake in any partnership and receive cash, starting with a participation fee for each bid. It will then cash in with a signature bonus for each of the eight fields on offer, which reach as much as $42.5 million for a field like Rumaila, which is currently producing over 950,000 b/d. Iraq will not disburse any payments in the first two years of the contract, as repayment for costs and fees will only be made from incremental oil above the base production rate. The state will also receive taxes at a rate of 35% on net profits.
The greatest win for Iraq might be the fact that no contract will be awarded without fair and open competition. Majors that were involved in negotiating two-year technical service contracts earlier this year sought and failed to get guarantees that they would be picked to develop the same fields once long-term deals were offered. Now, they must compete against other companies, both in their league and not.
Still, a big question mark remains over the role of regional oil companies like North Oil Co., South Oil Co. and the recently created Missan Oil Co., once local operating divisions are set up for each field, as envisaged in the initial model contract. In a bid to stave off criticism of handing over control of the country's prolific oil fields to foreign operators, Iraqi architects of the upstream opening created a set-up that is at the same time complex and vague. By granting the foreign investor the role of co-operator, it is not obvious who will have the upper hand in running field operations and how responsibilities, including for achieving the output target, can be divided between the old and new players.
Opaque formulas might help create consensus where needed in Iraqi politics, but this approach could be disastrous for the oil industry. What Iraq really needs for its oil sector to make up years of missed opportunity is clarity.
Ruba Husari, Dubai
Friday, September 26, 2008 2:10:28 PM
A second bid round for Iraq's upstream sector, currently being prepared by the oil ministry, promises to transform the country's oil industry. If all goes to plan, a second set of oil and gas fields would be awarded by the end of next year, hard on the heels of the first eight fields announced this summer -- and the Iraqi oil industry will be bustling. That's good news for world oil markets and the global industry in general. Iraq is one of the last oil provinces in the Middle East, or even in the world, with huge untapped reserves.
National operators like North Oil Co. and South Oil Co. would be transformed, having had no foreign partners since nationalization in the mid-1970s. The benefits of teaming up with the world's best are huge, but they also face the risk of losing their identity as guardians of Iraq's national resources. In the race with time to return Iraq to its place on the world oil stage, some argue that there should be no sacred cows -- even if this means the two national operators should be diluted and new entities set up.
This makes it a good time to stop and think about Iraq's priorities. So far, the ministry has set short- and long-term targets for production capacity. But it's not clear whether this is part of a well-structured policy that defines where the sector is heading or how it should be run. Output targets are not a policy in themselves, nor are successive bidding rounds, unless they form part of a well-considered plan tying all the components together.
Many oil producing countries went through similar processes of transformation as they reopened their doors to international oil companies. Those that succeeded best had strong, modern laws and regulations that clearly defined the roles and responsibilities of state companies versus the foreign partners.
The rapid developments in Iraq underscore the urgent need for a national oil company to oversee the sector and ensure that every step fits into a long-term strategy. More importantly, the speedy opening creates a stronger need for a hydrocarbon law to provide terms of reference for the new partnerships with international oil companies, and to ensure they are stable and beneficial partnerships in the long run.
By ensuring a successful outcome for the first bid round, the ministry would score several points: It would see some 1.5 million b/d of incremental output come on stream within a few years, raising both its revenues and world standing; it would confound critics by awarding contracts through a competitive and transparent process; and it would prove that international companies are willing to commit to long-term deals for a decent fee under service contracts, showing that production sharing contracts are not the only game in town for successful development of Iraq's oil.
So, what should be the priority at this juncture: a second licensing round with a bumper offering, or a drive to build strong legal and structural foundations for Iraq's oil sector?
Ruba Husari, Dubai
Monday, September 15, 2008 4:16:44 PM
After more than five years of stagnation, Iraq finally seems to be opening its doors to the international oil industry. First China's CNPC concluded a revised contract for developing the Al-Ahdab oil field, then Royal Dutch Shell reached a heads of agreement on a major gas project in the south, which could see Iraq joining the gas exporters' club in the next few years. If all goes to plan, Baghdad by next summer could award at least eight new long-term contracts for international oil companies to help revamp major producing fields ravaged by decades of conflict and sanctions. So far things are progressing swiftly as the ministry is gearing up for an Oct.13 road show to shed more light on the first bid round launched in late June.
All agree the opening is long overdue: It provides an opportunity for Iraq to regain its place in the regional and global oil business, and rebuild an efficient and modern industry as the backbone for the new Iraq. But there are naturally differences of opinion over the nature and conditions of the opening, which in our opinion, is a healthy matter. The debate over which model best serves national interests can pave the way to a common understanding and a win-win situation for Iraq and the oil companies.
For many years, Energy Intelligence has taken the lead in providing thorough and reliable coverage of Iraq's oil industry. It continues to do so today. The Iraq Oil Forum takes that coverage a step further by providing a platform for dialogue, presenting decision-makers with a variety of opinions on key issues and oil executives with insight into the debate.
Three Iraqi oil experts who played a role in Iraq’s oil industry at different times have accepted our invitation to comment on three questions that we raised. With their diverse opinions, we open the platform for a dialogue among all those interested in Iraq. We invite comments on these issues and proposals of other discussion topics.
Ruba Husari, Dubai