Report pans Iraq oil contracts, further politicizes oil policy

By BEN LANDO, UPI Energy Editor  |  Feb. 13, 2009 at 7:24 PM
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The contract that Iraq's Oil Ministry is using to lure oil field development by the world's largest oil companies has been panned in an analysis conducted at the request of Parliament's Energy Committee chairman, whose party opposes the oil minister, and it adds to the troubles ahead for Iraq's oil politics.

Details of the contract are evolving as the Oil Ministry and international oil companies meet in Istanbul this week. While the ministry is wary of criticism that foreign firms are given too much room in Iraq's oil sector, it also must address claims that Iraq's oil policy should be decentralized.

The report, obtained by United Press International, questions whether the contract will give international oil companies the incentive to keep costs low and sufficiently guard against graft.

The report is also being viewed as politically motivated.

"I believe it definitely is," Abdul-Hadi al-Hasani, deputy chairman of Parliament's Oil, Gas and Natural Resources Committee, told UPI. "There is no doubt about it."

Ali Balo, chairman of the committee, authored a Jan. 5 letter to Pedro van Meurs, president of the Van Meurs Corp. oil consultancy, requesting the analysis. Balo is a member of the Kurdistan Alliance, a major force in national politics. The alliance opposes Oil Minister Hussain al-Shahristani's oil efforts, largely because Shahristani has labeled as illegal the controversial deals signed by the Kurdistan Regional Government, representing the three autonomous northern provinces. The KRG has called for Shahristani's removal; Shahristani has blacklisted companies that signed with the KRG from oil purchases or future contracts.

The KRG last year hired van Meurs to author two reports, one analyzing the KRG's oil terms -- a production-sharing contract, favored by oil companies but opposed by the oil unions -- and the other comparing the KRG contract to the draft national oil contract at the time. Both favored the KRG.

UPI was unable to reach Balo or the Oil Ministry spokesman.

In the analysis, van Meurs writes the Iraq Oil Ministry contract is "an improvement on drafts previously proposed by the Ministry." As international oil companies bid to develop Iraq oil fields, however, the "process contemplated" in the contract "will not lead to transparency, and the possibility for changes to the contract after it has been approved and signed opens the door widely for improper practices."

International oil companies are being given their first large-scale opportunity to produce oil in Iraq -- home of the world's third-largest reserves and potentially much more after thorough exploration -- since the oil sector was nationalized four decades ago.

"In terms of maximizing benefits to Iraq, the economic structure of the Draft Technical Service Contract remains far inferior compared to a modern advanced production sharing contract or other possible forms of risk service contracts," van Meurs concludes.

He adds that contractors would increase profits if the cost of work is increased -- a deterrent to efficiency.

The ability for the Oil Ministry to "renegotiate fees and the convoluted decision-making process," the report states, "would be 'corruption inducing' or 'strongly corruption inducing.'"

Hasani, the committee deputy chairman, countered that the contract and the process is transparent. Hasani is a member of Prime Minister Nouri al-Maliki's Dawa Party, to which Oil Minister Shahristani is aligned.

"Everybody sees what we are doing, sees what is going on, whether good or not," he said, criticizing the KRG for conducting direct negotiations with oil companies instead of open bidding. "Everybody sees what is happening. That is transparency."

Iraq is producing about 2.43 million barrels per day of oil, according to global energy information firm Platts, and according to preliminary data supplied by the Oil Ministry, Iraq is exporting 1.89 million bpd. This is much lower than its reserves could handle. The infrastructure throughout the value chain -- from oil well to export pipeline -- needs a major cash and technology infusion, and Iraqi oil workers require modern training following the continuous misuse, wars and sanctions under Saddam Hussein and the war-zone environment since 2003.

The 2005 Iraqi Constitution calls for new hydrocarbons legislation to chart the course for investment and development of the prime resource, which accounts for nearly all state income. The politics of the post-invasion power vacuum, however, have stalled the new law, largely over two key issues: the extent foreign oil firms will be allowed into Iraq's oil sector and the level of control the national government will have over oil policy -- including signing deals -- as opposed to the local governments.

Without a new law, the Oil Ministry is using the legal cover held over from the Saddam era to bring foreign investment and increase production of oil. Initial efforts last year to negotiate two-year development deals with big oil firms including Shell, BP, Exxon Mobil, Chevron and Total were scuttled as the sides couldn't agree on terms. Now the ministry is offering 17 oil fields split into two bidding phases, open to prequalified oil companies.

The ministry and the 41 companies OK'd for the first phase are meeting in Istanbul now, partly to explain the process to potential investors, partly to receive and address criticism over the contract terms and bidding process.

Much of Iraq's capacity to negotiate deals have been lost -- experts fled the former dictator, were forced out by the U.S. or Iraqi leadership after 2003, retired or resigned because of the security threat or were killed -- and this has delayed contract development.

Iraq's Oil Ministry is keen on realizing increased exports -- and more state income -- and is balancing domestic political pressure not to give up too much to foreign oil companies by restricting the contract to a technical-service contract. This keeps control of the oil for Iraq, not the oil companies, but the companies aren't clear enough about the terms and whether the rewards for work and risk are great enough.

Many of the same oil companies bidding for oil deals now -- or their predecessors -- were part of the Iraq Petroleum Co., which controlled development of Iraq's oil and determined how much income the state would receive from the early 20th century until nationalization. This has led to a widely negative view of foreign oil firms in Iraq. The oil workers, especially, as well as various political parties and non-government organizations, have said foreign firms are welcome to contracts but warn against too generous a deal or situations where state oil efforts are supplanted. Unions nationwide, led by the powerful oil unions, are meeting next month, and the oil issue is foremost on their agenda.

In the Kurdistan region of Iraq, greater autonomy of the three northern provinces since 2003 and a slow national political and oil policy development led the Kurdistan Regional Government to sign oil deals of its own. Repressed by Saddam Hussein -- like most other segments of Iraqi society -- the heavily Kurdish north received nearly no hydrocarbons investment. Knowing there were resources to be found, the KRG began signing oil deals. After oil law negotiations stalled, it passed its own regional oil law and signed nearly two dozen more contracts.

Both the KRG and Iraq Oil Ministry claim the constitution backs their oil policies. Regardless, Iraq's political powers have just finished local elections and are gearing up for parliamentary elections later this year, which means oil policy will be highly politicized. Stalled along with the draft oil law are pieces of legislation governing revenue, reconstituting the national oil company and redrawing the role of Oil Ministry, all for Parliament to decide.


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