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Iraq KRG oil minister explains oil deal breakdown

By BEN LANDO, UPI Energy Editor   |   June 30, 2008 at 10:54 AM   |   Comments

ERBIL, Iraq, June 30 (UPI) -- The contracts have not been published, but Ashti Hawrami, Iraq's Kurdistan Regional Government natural resources minister, insists everything needed to know about what's in the dozens of contracts signed between the KRG and international oil companies is in the public domain.

In a recent interview with United Press International from his office in Erbil, the capital of the KRG, Hawrami explained the breakdown of contract ownership by the companies and how much control the government has in the contract.

He says the Kurdish government not only takes the majority of the profit after the companies recoup their costs, but has rights to enter into the deal via the state companies or a private company of the government's choosing.

Hawrami said the companies also are required to pay a signing bonus to the government and commit millions of dollars in local development projects.

He said the details of all this will be published in the coming months, including an account held in an Erbil bank of all the funds collected in the oil deals, to be turned over to Baghdad once a revenue-sharing law is signed.

Since 2004 the KRG has signed more than 20 contracts to explore for and develop oil in the region, with two contracts commercially producing oil already. While the Iraqi Oil Ministry in Baghdad claims the deals are illegal, it apparently can't stop the KRG, which signed a handful again last week.

The KRG deals range from small international firms to some of the largest state-owned and independents, like Dallas-based Hunt Oil, India's Reliance, MOL from Hungary, OMV of Austria and the Korea National Oil Corp.

The production-sharing contracts were negotiated outright, not up for bid, and the KRG has been criticized for not being transparent.

While Hawrami refused to make the contracts public, he told UPI "the government takes about 90 percent or so through the public company and royalty and profit oil, and the contractor's take is generally about 10 percent."

Hawrami said much of the details are on the KRG Web site, published when the deals were announced.

"The government takes 10 percent from the top, as a royalty, that is 10 percent of the total oil produced before the contractors get anything towards their cost recovery. The contractor is then allowed, typically, a maximum of 40 percent of the remaining oil to offset its costs. And that is effectively net 36 percent, because it's 40 percent of the remaining 90 percent after royalty. And then what is left (54 percent) is profit oil. If the contractor doesn't have any costs remaining, then 36 percent cost oil will also be added to the profit oil, which makes the whole 90 percent after royalty profit oil," he said.

"While the contractor is in the cost recovery stage, he starts with a slightly higher cut of the profit, but ultimately that's only for a short window of time, so it comes down to around 15 to 16 percent, and the government gets the rest, effectively 85 percent. But then before that, the government has taken 10 percent of the gross revenue as royalty. So, that means that the government gets 85 percent of the 90 percent (i.e., 76.5 percent) plus 10 percent as royalty, thus 86.5 percent overall cut," he said.

"Also in the contract, on the contractor's side, one of the partners is the Kurdistan National Oil Co. or the Kurdistan Exploration and Production Co., either as an option to be exercised or it is named upfront. There's the option for a government to exercise an interest option through a government company.

"And typically that is 20 percent. In some contracts this is 25 percent," he said. "When you subtract that 20 percent to 25 percent from the contractor's share, the foreign contractor's net share becomes really about 11 percent, this is because KEPCO will be taking 20 percent or so from the contractor's share of its profit. Also, we still typically have about 15 to 20 percent more in these contracts reserved for the government to exercise that option in favor of a new contractor (a third party). We are doing that to allow us to broaden the consortium to include an additional party, either bringing a friendly company from another friendly country or to increase the government stake via KNOC or KEPCO, or to bring in a domestic private sector company, if it can demonstrate adequate resources."

--

(e-mail: blando@upi.com)

© 2008 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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