By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Below is the full Arabic text and source of what was reportedly said by Abdul Alal AL-Yassiry, the Chairman of the Iraqi Centre for Economic and Investment Consultation in Karbala.

What prompts me to write this commentary is only the inaccuracy of data and information he cited regarding SOMO. In other words I am not defending SOMO; its staff can and should defend themselves. Also, I am not discussing here the corruption issue, which undoubtedly and emphatically plaguing Iraq, particularly by the political parties and provincial councils; these can be discussed separately.

I will provide what he says then make my comment.

First; He says “SOMO sales 4 million barrels daily-4mbd”!

Official data does not support this assertion at all; oil exports by SOMO during the last ten years increased from 1.879 mbd during July 2008 to 3.543 mbd in July 2018. Hence, his figure is absolutely incorrect.

Second; He also says “SOMO sales oil to the companies at $10 discount of the bourse price; this is called commission”.

This is also incorrect for the following reasons;

  1. SOMO does not sale all its oil through bourse (stock exchange) or according to bourse prices; however, SOMO sold a few shipments, of 2 million barrels each, through Dubai Mercantile Exchange-DME auctions since April 2017;
  2. SOMO’s marketing procedure and modality is primarily based on annually arranged “Term Contract” and the monthly export price is decided by a ministerial committee using at least three pricing equations for the three major market destinations (North America, Europe and east Asia) with different marker crudes taking into consideration the quality of the crude (API) and, specifically, sulphur contents;
  3. I have been following SOMO for years and never observed such discounts or “commission” of $10 a barrel! Between January 2016 and June 2017 oil export price for a barrel ranged between $22.21 and $42.2; can anyone believe or imagen that SOMO gives 45% and 23.7% of its officially adopted and declared price that easy without causing devastating outcry against it and the Ministry of Oil!!!

Third; in his explanation or justification for this “commission” it “compensates loading loses and what is known vaporisation”

Actual loading of oil into the tanker is rather rigorous operation done in the presence of the “measurement committee” and after issuing at least 13 different certificates; then SOC/now Basra Oil Company-BOC submits all these certificates to SOMO before loading oil to the tanker takes place.

Nothing in these certificates refers to vaporisation that justifies such huge discount or commission. Moreover, neither oil chemistry nor different metering instruments support his claims.

Fourth; Then he asserts, “What is important, these companies came through the political parties”

According to Iraqi and international data the annual number of companies that buy Iraqi oil- international oil buyers-IOBs during the last 15 years ranges between 34 to 45 IOBs. Most of these IOBs are well known and many of them were also SOMO’ clients well prior to 2003.

Therefore, to claim that these IOBs came through the political parties is, apart from been erroneous, it elevates the international networking and impacts of these political parties, which is laughable, but, more seriously, accuse these IOBs with “collusion”, which renders him subject to legal action.

Moreover, all IEITI annual reports (prepared by different international specialised firms) provide, among others, reconciliation of oil export revenues paid by IOBs, received by SOMO and deposited in a New York bank, and provide explanation of any discrepancies over small “materiality threshold”. None of these reports provide any information supportive of his allegations.

Fifth; He alleged that, “the political parties take $2 a barrel from that commission while the companies keep the $8”

But he did not explain or tell:

  1. When, where and how this 2:8 split of the commission was agreed between all political parties and all IOBs;
  2. Was SOMO involved in that agreement?
  3. Oil exports occur through many shipments to each IOB for each year, so what are the modalities each political party uses to secure its share from the commission for each shipment?
  4. What are the modalities for actual payments from each IOB to each political party; to which banks these payments were transferred and deposited and what are the material evidences for such payments etc.?
  5. How come there was no discrepancy in distributing that commission as if all political parties and all IOBs work in perfect harmony!!

From and based on the above comments I conclude:

  1. His knowledge and understanding of oil export system need serious revision and improvement;
  2. Allegations he made are very serious indeed and without strong, emphatic evidence, he could face legal action by SOMO/Ministry of Oil, each political party and each IOB;
  3. As he is the chairman of a consulting centre, what he had said undermines, damage and tarnish the credibility, objectivity and professionalism of his centre.

Ahmed Mousa Jiyad,

Iraq/ Development Consultancy & Research,

Norway.

12 August 2018

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11-08-2018  23:57  0  1102

اقتصادي عراقي :هكذا تستحصل احزاب السلطة بالعراق على الاموال

يرى رئيس المركز العراقي للاستشارات الاقتصادية والاستثمارية في كربلاء ان رواتب مجلس النواب ومجالس المحافظات لا تساوي جميعها  ارباح يوم واحد من الكومشن الذي تتقاضاها  احزاب السلطة  من البنك المركزي ووزارة النفط  مبينا  ان الانتخابات في ظل نفس الشخوص والرموز الحزبية والجهوية معناه بقاء كل شيء على ما هو عليه.

بين عبد العال الياسري لوكالة نون الخبرية بأمثلة والأرقام عن كمية المبالغ المستحصلة بطرق مختلفة بقوله ان  كل الاحزاب لديها مصارف اهلية وقد تقاسمت مبيعات البنك المركزي العراقي من الدولار حيث يباع يوميا من ١٥٠ الى ٢٠٠ مليون دولار بسعر ١١٨ الف دينار في حين وصل سعره بالسوق التجاريه الى معدل ١٢٧ الف وبعمليه حسابيه بسيطه فان معدل ارباحهم من ٥ الى ٨ مليون دولار يوميا!!! اي ١٥٠ مليون دولار شهريا ولا يقل عن ٥٠٠ مليون سنويا وبدون اي تعب فقط فواتير مزوره” , فضلا عن المنافذ الحدوديه وسيطره الصفره.

وأضاف مثلا اخر وهي شركة سومو النفط والتي تبيع يوميا ٤ مليون برميل نقط للشركات حسب سعر البورصه ناقص ١٠ دولار هو مايطلق عليه الكومشين هو مبلغ يعطى للشركات كتعويض للضائعات اثناء التحميل وما يعرف بالتبخر.المهم هذه الشركات جاءت عن طريق احزاب السلطه وهي تستوفي دولارين من الكومشن من تلك الشركات وهي تعطيها بكل سرور لانها رابحه ٨ دولارات وبحسبه بسيطه ٢٤ مليون برميل =٨ مليون دولار أرباح الاحزاب الحاكمه.

واختتم الياسري الذي كان يشغل منصب رئيس مجلس محافظة كربلاء سابقا حديثه ان من يعتقد ان مجالس المحافظات هي الممول للأحزاب الحاكمة فهو غير مدرك للامور فما تصرفه تلك المجالس ليست سوى نقطه في بحر ما تدره العاصمة لتلك الأحزاب“.

اسامة الخفاجي

http://www.non14.net/102748/

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Introduction

KRG’ gross oil export revenues, for 2017, stood at $7.9billion but it was left with only $3.9billion as net earnings.

When the Region receives less than half of its gross oil exports revenues, this is alarming situation indicating something has been seriously wrong and, thus, should be meticulously addressed in most transparent, truthful and evidenced-based manner. Otherwise, Kurdistan Region’s economy remains stranded in debt-trap through mortgaging future oil sales arrangements.

That is one of my conclusions after analyzing two half-yearly reports. 

Deloitte, a known international firm, was appointed by the Regional Council for Oil and Gas Affairs (RCOGA) of the Kurdistan Regional Government in Iraq (KRG) to review oil production, export, consumption and revenue for 2014 through 2017.

The company, i.e. Deloitte, produced so far two half-yearly reports for 2017 covering KRG, “Oil production, export, consumption and revenue”.  The first report was dated 13 January 2018 and covers the period 1 January to 30 June 2017; hereinafter refer to by H1-2017. The second was dated 31 July 2018 covering the period 1 July to 31 December 2017; hereinafter refer to by H2-2017.

After thoroughly analyzing these two reports I conclude that:

  1. they add very little qualitative or substantive improvements on previously published reports, though it took the company 22 months to produce a report for only one year;
  2. what was produced by Deloitte was far below the requirements of known transparency thresholds, e.g. EITI Standard, since too many important data and vital information were missing and not addressed;
  3. the fact that Deloitte adopts KRG formal views and uses data held and provided by MNR to produce its only one table of data, this surely tarnish Deloitte independency of reporting; and finally,
  4. these reports offer absolutely no analyses of the provided data, particularly their fiscal impacts on the economy of the Region.

This study is composed of four parts: part one provides brief description of the structure and components of Deloitte reports; part two discusses the integrity, credibility, transparency of the process and compliance with EITI Standard; part three unifies and analysis all data of the two half-yearly reports and part four offers concluding remarks.*

I-Structure of the report and its parts

The half-yearly report comprises three different parts that are produced and disseminated separately.

The first part is entitled and contains “Questions and Answers- Kurdistan Region – Iraq Oil & Gas Sector”, hereinafter referred to in this assessment as “Q&A part”.

This part is the longest and provides narratives on 27 selected topics; they mostly represent the official views of KRG and it is therefore, the same text in both half-yearly reports.

The purpose of this Q&A part is “to help readers better understand different sections of the report.”

The second part provides data on “Oil production, export, consumption and revenue” for the related period. This 3 page part comprises introduction, one data schedule/table and explanatory notes on the schedule.

The third part is one page of infographic with a few illustrative charts of the data provided by the second part. However, this part has not yet produced for the second half-yearly report.

Each part was produced in English, Kurdish and Arabic.

This assessment focuses primarily on the data contents of part two (in both half-yearly reports), since such data constitutes the core of the entire purpose of the report, and to the clarification given in “Q&A part”.

Before going further, a few words are due.

The tri-lingual report produced concurrently contributes to disseminate information among wider readership, particularly among the local citizens (mostly Kurdish) and other Iraqis (mostly Arabs).

Also, producing the report after six months’ time-lag (for 2017) is, in comparative sense, by far better than the National Secretariat of Iraq EITI-IEITI, which its last annual report was related to 2015!

Moreover KRG’ RCOGA anticipates that data for 1 January 2018 to 31 March 2018 to be publically available in August 2018.

Timewise, all these reports are commendable achievements that deserve support and encouragement.

 

Having said that, on the downside there are two remarks.

First, the related contract with Deloitte was signed, in a closed ceremony, early October 2016; intended to cover years 2014 to 2017. Hence, taking 22 months to produce one year report is hardly a commendable performance. Moreover, it is not known when the reports for the remaining three years (2014:2016) would be ready.

Second and most important, a thorough reading of the data, the methodology and provided explanation generates many more serious remarks, concerns and identifies missing vital items; as discussed below.

 

II-The Integrity, Credibility, Transparency of the Process and Compliance with EITI Standard

The World Bank proposed and sponsored Deloitte contract in 2016 and the Bank is partially financing Iraqi EITI (Extractive Industry Transparency Initiative) activities; in 2016, Iraq was an EITI compliant country.

Yet, Deloitte’ two half-yearly reports make no reference at all to EITI and they, in my humble views, are not in compliance with or adhere to the requirements, process and procedures outlined by EITI Standard. Needless to say, this Standard provides the most practical, comprehensive and widely adopted guide on transparency in the extractive industry. Moreover, transparency thematic issues and modalities of the Standard are much more than just data review as covered by the two reports under discussion.

In other words, absence of such compliance to EITI Standard would seriously undermine the credibility or claim of transparency of any report.

Therefore, it is legitimate to ask why the World Bank did not compel KRG and Deloitte to fully comply with EITI Standard in preparing the reports.

 

The above concern was premised on the observed immature claim of transparency and biased interpretation of these half-yearly reports. For example, KRG’MNR asserts Deloitte reports, demonstrate KRGs commitment to transparency and they set a precedent to further increase transparency.  And by the way this intentional flawed interpretation of such reporting is not peculiar to KRG; Iraqi authorities expressed similar position when IEITI issued its first annual report and such wrong understanding generates a sense of self-satisfaction, mission accomplished and complacency that eventually led to suspending Iraq status with EITI.

 

When the funding for the contract was approved , “the “big four” international audit firms (Deloitte; PwC; EY; KPMG) were called upon to submit their technical and financial proposals, and which were consequently carefully reviewed and assessed, according to the international standards of the World Bank, in order to shortlist the chosen firm based on clear criteria and key performance indicators.”

Excellent! However, no information was provided on any of these “clear criteria and key performance indicators”, what are they, how the “big four” were assessed and ranked accordingly and timelines for bidding, selection and contracting activities among others. No answers!!

Obviously, that indicates an impacting lack of process transparency prior, during and after the selection. Strangely enough, the report claims, “The selection of Deloitte to carry out the review, meanwhile, was also made based on a diligent procurement and tendering process”

Without providing supporting evidence-based information on how the entire process was conducted, its diligence and transparency becomes questionable.

 

Each contract for such mission usually and preferably has, or should have, a detailed Terms of Reference-ToRs; this contract does not have any since no mention was ever made to the ToRs in any part of the reports.  Why?

 

Absence of the ToRs for the mission probably explains the apparent confusion in the interchangeable use of different terms or concepts e.g. “review” “audit” “validation” as if they are the same. They are not!!

The following example exemplifies the confusion. In its welcoming statement on the first Deloitte report MNR says, “KRG can demonstrate its commitment to transparency in the reporting of oil production and revenue, and the reviews by Deloitte and EY will help to set a precedent to further increase transparency and strengthen independent auditing and verification in the Kurdistan Region.” (Bold added)

From technical, legal and operational perspectives these particular three terms or concepts are very different in their requirement and also implications. No doubt the “big four”, as reputable known international specialized entities, aware of the fundamental differences of the above three concepts; but the current two report do not demonstrate so!

 

The report asserts, “Our review was dependent on documentation provided by all stakeholders (oil producers, refineries, oil traders, the pipeline operator, and the KRG’s Ministry of Natural Resources), and the accuracy and completeness thereof.” (Bold added)

Fine! But again, the report did not produce any data or basic information that was provided by any of the above mentioned stakeholders. Refers to “stakeholders” without identifying them, except MNR, and without providing specific data pertaining to each of them shed big cloud of doubt on the accuracy and credibility of the “aggregated” data!!!

Colleting, verifying and validating process requires producing all data submitted, independently, by all involved stakeholders using specified templates, among other means. For example, all IEITI annual reports used such methodology though the number of involved stakeholders is much more than those in KRG and the magnitudes of production, export, domestic consumption and revenues are many folds that of KRG.

Moreover, the report assumed and relied on “the accuracy and completeness” of the provided documentation! But the report did not mention whether there was any test for such “accuracy and completeness”! Obviously, this “trust me/us” orientation and approach does not serve transparency very well, if at all!

 

The “trust me/us” approach was further evidenced by using another term, i.e. “misstatement”. By intention or omission, the two half-yearly reports affirm repeatedly and emphatically, “We did not identify any misstatements” regarding Oil export and consumption and oil sales during the covered year, 2017.

Such assertion and use of “misstatement” is surprising and causes suspicion. The reports deal with different stakeholders operating at various chains in the petroleum sector in the region; some operating internally while others externally; some are locals while others international etc., and surely each stakeholder has its own accounting, invoicing, contracting, reporting, auditing procedures. Experience, from IEITI (and also other EITI documents and reports) annual reports, tells that reconciliation of data provided by the stakeholders comprises many, significant and otherwise, “discrepancies”; the ToRs for such reports decide the “materiality threshold” for and the obligation to explain, by evidence-based, such “discrepancies”.

The point here, there are many reasons for “discrepancies” to occurs and that is usual and expected, but they have to be identified, quantified and explained.    “Discrepancies” are not necessarily “misstatements”; thus using the later term by Deloitte is ratter unfortunate since it is conceptually and methodologically inaccurate, operationally misleading and politically comforting.

 

Currency issue is not addressed by the report, which says, “Apart from export sales and IOC bonuses, oil revenues are derived from local sales and from the sale of refined products.”

The report presents the values of these oil revenues that are derived from local sales (and the valuation of swap operations ) and from the sale of refined products in USD; but it did not mention anything regarding the used exchange rates between Iraqi Dinars-ID and USD. When locally generated revenues have significance in total revenues, then the issue of exchange rate becomes important variable that needs attention and recognition. Moreover, exchange rate could be a source of “discrepancies”. Deloitte should cover this issue in its forthcoming, or when revising, reports.

 

Oil production is the core of any report, particularly when it comes to transparency in the extractive industry. Though the title of the second part of the report starts with “oil production”, the report does not cover oil production at all!

Moreover, the Regional Council for Oil and Gas Affairs-RCOGA, in its statement on the second Deloitte report, “reiterates its commitment to the people of Kurdistan and stakeholders in the sector that the two international audit firms, Deloitte and Ernst & Young, will continue to independently review the oil and gas sector, inclusive of all the streams.” (Bold added). Clearly enough “all the streams” covers production and the expression “will continue” implies ongoing covering of oil production streams; Deloitte reports did not provide such cover.

But Deloitte report says, “production contributions for the individual fields is subject to additional reconciliation and verification procedures and this exercise is currently in progress”. Production from the fields is the main pillar for the entire data, so how reliable and trustworthy are such provided data when reconciliation and verification of production data are not done?

Strangely enough and despite the above remarks, the report asserts, as discussed above, “We did not identify any misstatements” in “oil export and consumption” and “oil sales”; oil production was not covered!

On this issue the report says, “It should be noted that currently Deloitte did not report on the KRG’s oil production data, pending the completion of a historical oil production reconciliation for 2014, 2015 and 2016.”

The above statement could be interpreted that oil production reconciliation for 2017 has been done and ready. If so, what are the compelling justifications for not disclosing them in the released two reports?

 

In addition to the above rather substantive remarks, there are others that tarnished the quality of Deloitte reports.

 

A matter that worth mentioning is related to “oil sales” item. In the report for the first half of 2017 it is mentioned “oil sales data and the net amount received in the month by the KRG”, while the corresponding item in the report for the second half refers to “oil sales data and the net amount received in the period by the KRG.” (Bold added). If that is an error, it must be corrected, but if it is not then it should be explained.

 

The reports that took 22 months to cover, partially, 2017, provides no clear work plan, its phases, timeliness, consultation process (with whom, when, about what etc) and whether the final text of either of the two half yearly reports were subjected to any sort of consultation process with or discussing the findings; or they were presented on the base of “trust me/us”.

 

The reports refer to the Regional Council for the Oil & Gas Affairs by two acronyms: (RCOGA) and (RCOG); A possible sign of inconsistency or carelessness.

 

Apart from the fact that most contents of “Q&A part” represent KRG official views, except a few relating to Deloitte, this part of the report contains a couple of referencing inaccuracies e.g. in items 11 and 13.

 

Finally, the report warns, “No party, other than the RCOG, is entitled to rely on this report for any purpose whatsoever”. In addition to such statement is clearly anti-transparency, it emphatically contravenes items 18 and 19 in the “Questions and Answers- Kurdistan Region – Iraq Oil & Gas Sector” part of the reports.

 

In conclusion and based on the above remarks I am of the opinion that KRG, RCOGA and Deloitte should consider seriously these remarks and make the necessary modification, correction, explanation, clarification and addition, among others to improve the quality, credibility, integrity and usefulness of the reports.

 

Based on the above remarks there is apparent doubts on the integrity and credibility of the process that need addressing by Deloitte, KRG and RCOG/A.

I will turn now to data analysis of the two reports.

 

III-Data Analysis and Assessment

As mentioned earlier the second part in both half-yearly reports provides data on “Oil production, export, consumption and revenue” for the related period. This three page part comprises introduction (one page of almost the same text in both reports, except the dates of the covered period), one schedule/table comprising data (one page) and explanatory notes on the schedule (one page).

 

The one and only schedule covers data relating to four main items, each has many sub-items. The main items are: Oil Exports and Consumption; Pipeline Export Sales Analysis; Trucking Export Sales Analysis and Financial Flows. The following offers analyses for these four main items.

Before proceeding further, it is useful highlighting the following:

First, H1-2017 report says, “All figures in Schedule 1, … , are based on the records held by the KRG”,  while H2-2017 report says, “All figures in Schedule 1, … , are based on the records provided by stakeholders to the KRG.”

This is clearly a contradiction to what Deloitte asserts, “Deloitte corresponded directly with the various stakeholders to obtain and verify the information contained in Schedule 1”

Second and as mentioned earlier, the reports do not provide data on production though the title of the part of the report mentions “oil production”; this constitutes a major flaw;

Third, the reports do not contain analytical assessment of the covered data, I have done that hereunder;

Fourth, the two parts were not combined in a yearly 2017 report or provide the annual data in one table, so I have to do that;

Fifth, the Q&A part provides no explanation or clarification of the items covered by this part; it only lists them.

 

First: Oil Exports and Consumption  

This item covers eight sub-items and a total with half yearly aggregated data; all data are expressed in number of barrels (bbls)

To begin with there is a methodological and coverage problem relating to item “crud allocated to oil producers”;

First, it is neither included in the export data nor in the consumption data. So where had these volumes gone?

Second, why this item was not mentioned in the second half-yearly report? Where there no crude allocated to the oil producers or it was reporting error? The report for the second half clarifies this,   “Total exports and consumption does not include: (1) crude oil and condensate allocated as compensation to producers; and (2) condensate sales by Dana Gas. These amounts have not been included in total exports and consumption on Schedule 1 as the MNR is not entitled to any of the proceeds from the sale or consumption of this crude oil / condensate.” But again, that report gives no data on these two types of excluded volumes!! Also, Deloitte did not explain why it includes and quantifies this item i.e. “crud allocated to oil producers” in H1-2017 report and avoids that in H2-2017; is there any politics here?

 

Also different categorization, regarding “Local sales, Sales to refineries and swap” was applied in the H2-2017 report making it difficult, or meaningless, to make sub-item comparison.

 

On the aggregate, KRG total oil “exported & consumed” in 2017 was 201.85 million barrels (bbls), 55% of which was in the first half of the year while the rest in the second half. This 10 percentage points could be attributed to post-referendum in the Region of September that year and retaking of Kirkuk by federal authority.

 

2017 oil export occurred through pipelines and trucks totaled over 187 million bbls (94.8% of which was through pipelines). It is worth mentioning that piped export includes “KRG and NOC contribution”, as the reports mention, but they do not quantify both contributions.  On a periodic comparison, piped oil export declined from 95.8 million bbls in first half of 2017 to 81.5 million bbls in the second half.

 

Second; Pipeline Export Sales Analysis

This part of the report provides data on net oil lifted by the buyers through pipeline, gross value of crude oil sold and average barrel price.

Comparing the data in this section with the corresponding data in the first section indicates discrepancies, which the report attributes to “Increase (decrease) in storage at oil terminal”

Volume of net oil lifted by the buyers through pipelines totaled 177.773 million bbls for the entire year. However, it declined from 95.937 million bbls in the first half to 81.836 million in the second half; a decline by 14.7%.

These volumes had “gross value” of $7.61 billion, with only 7.1% decline in second half of the year compared with first half; that is obviously explained by oi price improvement, as discussed next.

Average oil price increased from $41.297/b to $44.584/b in the two parts of the year respectively.

 

Third, Trucking Export Sales Analysis

Unlike piped oil export, trucking exports registered significant improvements for all three sub-items in second half of 2017 comparing with the first half. Volume-wise, trucked exports increased from 4.231million bbls to 5.147 million bbls in the two halves of the year. Gross value of these volumes almost doubled: increased from $108million to $205million. Similarly, average price a barrel increased from $25.452 to $39.883 in the same period.

 

What should be highlighted is that pipeline-truck oil price differentials for the two halves of the year declined, in favor of pipeline exports, from $15.845/b to $4.701/b. In the meantime trucking transportation costs per barrel was $10 during H2-2017.

This calls for specific research to better understanding trucking export economics; why there was such a significant price differentials, what are the main causes, who are the trucking stakeholders and was there influential political connection with or interests for individuals, groups or parties in KRG and or Turkey.

 

Fourth, Financial Flows

Data provided in this section is probably the most vital for understanding fiscal conditions and performance of the petroleum sector in Kurdistan Iraq.

This section contains 11 items without, as mentioned earlier, comparison, analyses and explanation, except 3 notes on data relating to H2-2017 report.  However, notes provided on the other three sections of this report should be kept in mind.

To avoid possible confusion or mixing-up, I will use the same terminology used by the report as titles for the sub-items of the financial flows, but give and use in the analyses what each term could mean. But I must mention, at the outset, the number of items under this section in Schedule 1 are more, by two items, than those listed in the Q&A part; and again, no explanation was provide. Thus, this is added flaw of the report let be inconsistency or inaccuracy.

 

Gross value of crude oil sold (Piped and Trucked exports) USD

The report uses the above term, which implies valuation, but I will take this as gross revenues; the rationale is premised on the fact that what matters is the stream of revenues (gross and net) from exported (or sold) oil. Evidence is provided by item 10 in this section, which asserts “Net cash balance received..”. So, why Deloitte uses such ambiguous terminology??

Also this item deals with “exports”, but what about revenues from oil and refined product sold and swapped locally (as mentioned in “Oil Exports and Consumption” addressed above)!

 

Gross oil export revenues for 2017 totaled little more than $7.9billion. This would give an average price of $42.338/b.

Comparing these to the corresponding average oil prices realized by SOMO of $49.185/b respectively would give significant price-differentials in favor of federally marketed oil of $6.245/b; a 14.8% price differentials represent voluminous financial losses for KRG economy, which suffers from deep fiscal crisis. Why and what for!?

Deloitte justifies these price differentials this way, “In the case of KRG, a considerable portion of its oil is heavy and sour, which partly explains why it is sold at a discounted price. Competitiveness is another reason, whereby the disagreement with Baghdad and the limited exporting routes has meant that KRG had to render its oil exports more competitive in order to sell its output and generate critical funds for the Region.”

Again, Deloitte conceded to KRG /MNR views without discussing the economic and financial implications of such price differentials on the local economy of the region.

 

Net movement in buyer account balances (excluding advance payments) USD

Probably this item deals with payment made by KRG to what it borrowed from the oil buyers outside the advanced payment arrangements. But how, what deals and which oil buyer? No answer was provided!

This payment was mounted to $634 million and cuts 8% of gross revenues; too much for debt repayment!  

Moreover, Deloitte says nothing regarding the remaining balance of these debts (or estimate the balance of buyer account)!!

 

Interest and other charges from the buyers (USD)

This also represents payment by KRG to oil buyers in interest on debt from these buyers and “other charges”! These “other charges” were explained for the second part of the year only.

KRG paid more than $108million (almost 1.4% of its gross revenues) to oil buyers for “interest and other charges”.

The report mentions $13.2million in H2 2017 as interest charges and fees, but says nothing regarding such payment for the first half of the year; or the rate of interests and the balance of debt.

 

Payments made to oil producers by, or on behalf of the KRG (USD)

This is major item that cuts close to $1.2 billion (or 15.1%) of gross oil export revenues of the Region.

However, the report does not specify why and for what these payment were made: for cost oil, for profit oil, for previous entitlements etc.  Also, which producers were paid and how much for each were not mentioned.

 

Payments made to third parties by, or on behalf of the KRG (USD)

Another major cut of $1.3billion (16.8% from KRG gross revenues) was paid to undisclosed “Third parties”; who are they? How many of them? Where are they? Why did they take such a significant chunk from region revenues?

This is no simple matter; it symbolizes utter secrecy and trivializes and makes mockery of transparency claims that are repeated throughout these reports.

 

Payments made against arbitration settlement (USD)

KRG paid, from its export revenues of the second half of the year, more than $518 million in connection with an arbitration settlement agreement. The report did not disclose the name of the parties to that agreement or total payable settlement; it only says “The total settlement was higher than this amount and the balance was provided from other KRG revenue sources.” Another evidence for lacking transparency!

 

Net cash balance received by the KRG for the period sales USD

In addition to the above, other amounts of $247million were deducted from this year gross revenues, leaving only $3.892billion as net cash balance received by KRG; meaning KRG received only 49.1% of gross revenues.

But KRG received $1.436billion in “Additional advance payments made by buyers against future sales”; thus, the Region’s economy remains stranded in debt-trap by mortgaging future oil sales! Ironically, Deloitte reports and the Q & A part say nothing on these “advanced payments” and their specifics!

 

Concluding Remarks

KRG/MNR used to issue monthly reports the last of which was for October 2016. That practice was ended, paving the way for Deloitte to do the job, presumably better!

After 22 months, Deloitte’s report for only one year adds, if any, very little qualitative or substantive improvements on MNR’ previous reports.

 

What was offered by Deloitte’s reports, like those of MNR, are far below the requirements of known transparency thresholds, e.g. EITI Standard. Hence, claims of transparency by these reports were absolutely not supported by the contents of these reports; too many important data and vital information were not addressed.

 

Deloitte adopts KRG/MNR views and uses data held and provide by KRG/MNR to produce its only one table of data; this surely tarnish Deloitte independency of reporting.

 

When the Region receives less than half of its gross oil exports revenues, this is alarming situation indicating something has been seriously wrong and, thus, should be meticulously addressed in most transparent, truthful and evidenced-based manner. Otherwise, Kurdistan Region’s economy remains stranded in debt-trap through mortgaging future oil sales arrangements.

 

* For work necessities, all references and footnotes were removed

 

Norway

7 August 2018

 

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

 

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

The Fifth Energy Bidding Round: Poor Management, Dubious Contracts and Bad Results – Attracted Unprecedented Opposition

Prominent Iraqi oil experts and professionals drafted and endorsed a unified position’ statement (UPS) addressed to the three Presidencies; of the Republic, of the Cabinet and of the Parliament.

The UPS provides thorough assessment of both the outcome of this bid round and related dubious two model contracts; it opposes and rejects the results and calls upon the Presidencies not to ratify any contracts relating to this bid round. The UPS, written in Arabic, was disseminated widely inside Iraq and was posted on 9 May onwards on many websites.

Most of the 31 Iraqi oil experts who issued, and their names appears in, the UPS have many decades of leading positions and extensive work experience in the petroleum sector.

For nearly ten years, this is the first time that so many well-known and respected petroleum technocrats come together to issue a unified, strong and specific statement. This in fact is a manifestation of their concern on the gravity of the danger that could undermine the national interest by these contracts and those behind them.

UPS came as a culmination of individual and collective efforts and contributions that were provoked by the fact that these contracts offer unprecedented concessions to the IOCs in post 2003 Iraq, especially when the model contracts were posted and analyzed.

In addition to been the Coordinator for UPS, I wrote a series of contributions (in Arabic) and shared them with my very extensive network of contacts as well as posting them on many websites for wider readership.

There was considerable attention to this bid round since it was first perceived by the Ministry of Oil-MoO in July last year (

http://www.iraq-businessnews.com/2017/07/21/important-oil-projects-dubious-non-transparent-contracts/ ) but the recent debate had actually impacted directly by the sequence of events pertaining to the bid round.

Much of the concerns prior to holding the bidding focused primarily on the “secrecy of the contracts”.  MoO announced on 13 April it has prepared two model contracts: The first is for the already discovered and, some, producing oilfields- Development and Production Contract (DPC); and the second is for the exploration blocks- Exploration, Development and Production Contract (EDPC).

The Ministry said it sent the two model contracts together with the Final Tender Protocol-FTP and Bidding Information to the IOCs that bought data package.

But the Ministry broke with its transparent practices, followed by the previous bid rounds, of announcing and posting the model contracts, the FTP and bidding information well ahead of the bid round. This time, it did not. And when I asked why, their answer was it is a matter of “confidentiality”.

That prompted me to not only refuting the confidentiality alibi based on comparative assessment with past practices, but also put that within the environment of secrecy and non-transparency that dominates the ministry since the last ministerial shakeup of August 2016 (see my article in Arabic سرية عقود وزارة النفط ومخالفتها للتوجيهات؛ لماذا ولمصلحة من؟

http://www.akhbaar.org/home/2018/4/243077.html posted on 17 April 2018)

As usual, I posted the above article to my network, including one particular list comprising the three presidencies, senior officers at the Council of Ministers, former oil ministers and most seniors at the ministry of oil. This list witnessed an exchange of lengthy emails between the DG of PCLD at the MoO, Abdul Mahdy Al-Ameedi, and I.

The bidding round finally took place on 26 April. The formal announcement by the MoO was extremely brief and just mentioned a few names of IOCs. One contact posted to me the actual bids on each “area”, by whom, who were the winners, what was the bidding parameter that was announced by the Ministry prior to each bid and other information.

Based on the communicated information it became apparent how dreadful the results were for Iraq. I, again wrote a new article analyzing the process, the legal questions regarding IOCs qualifications, the lack of competition, the outcome of the bidding, among others.

Similar to previous article I disseminated a new article highlighting how disadvantageous the outcomes are for Iraq and, thus, called for immediate and complete rejection of the bid round (جولة التراخيص الاخيرة: نتائجها سيئة جدا ويجب الغائها فورا http://www.akhbaar.org/home/2018/4/243448.html posted on 27 April 2018).

The Ministry was compelled to post the two model contracts two days after convening the bid round; and there was a further shock!

After reading the DPC model I wrote and communicated a third article specifying the main flaws of the contract, its poor text, shaky premises, wrong price equation and how it favors IOCs against Iraqi interests; it was posted on 4 May and also in Arabic (عاجل للغاية- عقود جولة التراخيص الاخيرة اسوء من نتائجها http://www.akhbaar.org/home/2018/5/243755.html posted on 4 May 2018)

In this last article I reiterated the call to cancel the bid round not only for its disadvantageous results but also due to extremely bad contract models. Moreover, I called the Cabinet to refute the contract for East Baghdad oilfield recently concluded with a Chinese company because this contract has similar structure to those used for this bid round.

The last two articles led to another, but more heated, exchange of emails between Al-Ameedi and I within the same list of high government officials. In this debate I requested a launching of formal investigation to be done collectively by the Independent Integrity Commission, the Parliamentary Integrity Committee, the Inspector General at the Ministry of Oil and the Federal Supreme Board of Audit. The debate was interrupted by the national election and hopefully would be resumed regardless of the election results!!!

Below is the full Arabic text of the unified position by the 31 Iraqi oil experts above mentioned and was posted on http://www.akhbaar.org/home/2018/5/243940.html

 

خبراء النفط في العراق يعارضون ويرفضون نتائج وعقود جولة التراخيص الاخيرة

السيد رئيس الجمهورية المحترم

السادة رئيس وأعضاء مجلس الوزراء المحترمون

السيدات والسادة رئيس وأعضاء البرلمان العراقي المحترمون

السيدات والسادة المستخدمون لوسائل الاعلام والتواصل الاجتماعي المحترمون

 

نحن خبراء النفط العراقيين المذكورة اسماءنا ادناه، وبعد الاطلاع على نتائج جولة التراخيص النفطية الاخيرة (الخامسة) وتحليل العقود الخاصة بها، وحرصا منا على المصلحة الوطنية وللتاريخ نعلن بكل وضوح وقناعة:

معارضتنا التامة ورفضنا المطلق لكل من نتائج وعقود هذه الجولة؛ ونناشد كل من مجلس الوزراء والبرلمان على عدم المصادقة على أي من عقود هذه الجولة وعلى العقد الخاص بحقل شرق بغداد.

 

بعد التقييم المهني والموضوعي للعقود المذكورة والتصريحات المنشورة لمسؤولي وزارة النفط كانت نتيجة التقييم سلبية للغاية لان تلك العقود تمنح امتيازات مالية سخية للشركات النفطية الاجنبية بالضد من مصلحة العراق مما يكلف العراق مليارات من الدولارات كتنازل من عوائده الصافية للشركات.

تتلخص هذه الامتيازات السخية المتنازل عنها للشركات الاجنبية بما يلي:

‌أ-    اعتماد اسعار نفط منخفضة في معادلة سعرية مبسطة جدا وبدائية وغير رصينة تستخدم لاحتساب حصة الشركات من العوائد الصافية لعقود تتراوح مددها بين 20 عام و34 عام؛

‌ب-  اعتماد اسعار مرتفعة للغاز الجاف؛

‌ج-    الغاء آلية ربط ربحية الشركات مع نفقاتها الرسمالية المسترجعة (المعروفة بمعامل آر)؛

‌د-     اعتماد آلية لربط استرداد الكلف الرأسمالية بأسعار النفط لا توفر مطلقا أية حماية او منفعة للعراق؛

‌ه-   عدم تحديد العديد من المتغيرات المهمة لكل حقل وتركها للشركات (مثل انتاج الذروة ومدته؛ الانتاج التجاري؛ تخصيصات صندوق التدريب؛ تخصيصات صندوق البنى التحتية)؛

‌و-     معاملة الحقول المكتشفة على انها رقع استكشافية مما يسبب تجاهلا  لحقيقة إنعدام وجود المخاطر التي تتصف بها عادة الرقع الاستكشافية وليس الحقول المكتشفة.

يتلخص هذا التقييم ونتائجه بما يلي:

اولا: يوجد في العقد عدد “هائل” من الاخطاء المطبعية ربما نتيجة للاستعجال في عقد الجولة قبل الانتخابات. كما وتمت الاشارة الى بعض المفاهيم والمصطلحات المهمة والمعرفة ولكن دون استخدامها مثل “معدل المردود الداخلي” و “اعلان الاكتشاف التجاري”.

ولابد من التأكيد هنا ان من اهم اساسيات العقود، وخاصة ان كانت باللغة الإنكليزية، هو دقة النص ووضوح التعبير وسلامة الصياغة؛ وهذه جميعا تتأثر سلبا وبشكل كبير في حالة وجود وتكرار عدد كبير من الاخطاء وعدم تعريف ما يذكر من مفاهيم، مما يؤدي في النتيجة الى ان يكون العقد سيء من حيث التطبيق وخطر من ناحية النتائج ومكلف للغاية في حالة التحكيم الدولي.

ثانيا: عدم وجود الشريك الحكومي

لم يتضمن هذا العقد الشريك الحكومي مما يعني خسارة في حصة العراق تتراوح بين 5 % (بسبب تخفيض حصة الشريك الحكومي في بعض عقود الجولات السابقة) الى 25 % من “العوائد الصافية”. وهذه تشكل خسائر مالية ضخمة جدا للعراق وعائداً اضافياً للشركات. وهنا لابد من التأكيد ان خسارة حصة الشريك الحكومي لا تعوضها حصة الريع Royalty البالغة 25% لان الموضوعين منفصلين تماما.

ثالثا: انعدام التخصيصات السنوية لصندوق التدريب والتأهيل وصندوق البنى التحتية

تمت الاشارة الى كل من الصندوقين في هذا العقد ولكن بدون تحديد التخصيصات السنوية لكل منهما، بخلاف ما كان معمول به في الجولات السابقة.

 

رابعا: عدم تحديد مستوى انتاج الذروة ومدته   Plateau Production & Period

على خلاف كل العقود لجولات التراخيص السابقة لم يحدد عقد هذه الجولة مستوى انتاج الذروة ومدة استمراريته، بل ترك ذلك لحين تقديم الشركة لخطة التطوير النهائية التي تقدم بعد ثلاث سنوات من دخول العقد حيز التنفيذ.

خامسا: مستوى الانتاج التجاري Commercial Production Rate

يحدد هذا المستوى بداية احتساب مستحقات الشركة من العوائد الصافية وحسب الضوابط المفصلة في العقد. ولكن الغريب انه تم تحديد هذا المستوى وبشكل موحد لكل الحقول المشمولة وبكمية 10 ألف برميل يوميا لكل عقد. ومن الجدير بالذكر ان خمسة من “العقود” من مجموع ستة تمت احالتها، تحتوي على تسعة حقول مكتشفة وقسم منها تم فيها حفر خمسة ابار وبنتائج مشجعة جدا.

 

سادسا: تسعيرة الغاز الجاف

حدد العقد سعر الغاز الجاف بما يعدل 50 % من سعر نفط التصدير التمهيدي (للبرميل المكافئ).

ونرى ان الوزارة هنا ارتكبت أكثر من خطا ستترتب عليها نتائج مالية كبيرة لصالح الشركات الاجنبية ونتائج كارثية على العراق للأسباب التالية:

1-    ان هذه العلاقة بين سعر النفط وسعر الغاز الجاف سبق وان تم استخدامها في عقود جولة التراخيص الرابعة فقط؛ لان تلك الجولة كانت للرقع الاستكشافية فقط ولم يتم استخدامها مطلقا لعقود الحقول المكتشفة كما هي عليه الحال في العقود الحالية. وقد سبق لبعض من الموقعين على هذه الوثيقة ان حذروا ونبهوا الوزارة الى ذلك وعدم إطلاق تسمية “رقع استكشافية” على حقول مكتشفة لسبب جوهري يتعلق باعتبارات مخاطر عدم الاكتشاف وضرورة تغطية هكذا مخاطر.

2-    كانت “اجور/مكافئة الخدمة او ربحية الشركة” في جميع عقود الجولة الرابعة (كغيرها من عقود الجولات الثلاث السابقة لها) محددة بعدد ثابت من الدولارات لبرميل النفط (المكافئ)؛ اما في هذه الجولة الخامسة فان ربحية الشركة تكون على اساس “صافي العوائد” كما سيناقش لاحقا. والفرق كبير جدا ولصالح الشركة الاجنبية وخاصة عند ارتفاع اسعار النفط.

3-    تضمنت جميع عقود الجولة الرابعة (كغيرها من عقود الجولات الثلاث السابقة لها) ما يسمى بمعمل-آر    R-factor والذي تنخفض بموجبه ربحية الشركة بتزايد عوائدها على نفقاتها. وتطبيق هذا المعامل من الناحية الفعلية يعني تزايد حصة العراق بعد بلوغ الانتاج مستوى الذروة المتعاقد عليها في الحقل المعني. ولم نجد اي اشارة الى معامل-آر في عقود هذه الجولة مما يعني خسائر مالية كبيرة للغاية يتحملها العراق وتذهب لصالح الشركات الاجنبية.

سابعا: معادلة تحديد “العائد الصافي” وحصة الشركة الاجنبية منه

وهذه تعتبر من أكبر اخطاء الوزارة واكثرها خدمة للشركات الاجنبية واضرارا بمصلحة العراق. وبسبب خطورة هذه المعادلة وافتقارها لأبسط الاسس المهنية والاقتصادية والاحصائية، سنقوم ببيان اخطاء الوزارة وكما يلي:

معدل اسعار النفط العراقي

اعتمدت الوزارة سعر 50 دولار للبرميل “كأساس لسعر النفط” وذلك باعتماد “معدل برنت خلال السنة الماضية وكان بحدود 57 الى 58 دولار مطروح منه 7 دولار”.

اننا نرى ان هذا الرقم وهذه الطريقة تمثل اخطاء فادحة لا تغتفر:

1-    ان مدة هذه العقود تتراوح بين 20 و25 عام بالنسبة لعقود التطوير والانتاج و34 عام بالنسبة لعقود الاستكشاف والتطوير والانتاج. فهل من المنطقي اعتماد معدل سعر النفط لسنة واحدة فقط اساسا لهذه العقود طويلة الامد؟ بالتأكيد ليس منطقيا ولم نقرأ او نسمع مطلقا مثل هذه الطريقة لعقود نفطية تبلغ عوائدها عشرات ان لم يكن مئات المليارات!!!!

2-    تشير المعلومات الرسمية للوزارة ذاتها ان معدل سعر تصدير النفط العراقي منذ تموز 2008 ولغاية نيسان 2018 (اي خلال 118 شهر) كان 74 دولار للبرميل؛ اي 48 % اعلى من السعر المعتمد من قبل الوزارة!!! فلماذا اهملت هذه الاحصائيات الرسمية ولم يسترشد بها؟؟

3-    خلال الفترة اعلاه كان سعر النفط العراقي اقل من 50 دولار في 34 شهرا فقط من مجموع 118 شهر؛ 6 أشهر من تشرين ثاني 2008 والى نيسان 2009، 3 أشهر من كانون ثاني الى اذار 2015 و25 شهرا من آب 2015 الى آب 2017. وهذا يعني ان 28.8% فقط من مجموع الاشهر منذ تموز 2008 كانت اسعار النفط فيها اقل من 50 دولار. فلماذا لم تنتبه الوزارة الى هذه المسالة ولم تستفد منها!!؟؟؟

4-    من اوليات علم الاحصاء والتحليل الاقتصادي وممارسات التقييس   Indexation ان يتم اختيار سعر او سنة “الاساس” بعناية فائقة جدا وبعد اجراء اختبارات عديدة ولابد من تجنب الفترات الغير اعتيادية. وكان عام 2017 غير اعتيادي بدليل اتفاق الاوبك الذي وضع حدا لانهيار اسعار النفط التي بدأت بالتحسن منذ منتصف العام. فلماذا تم تجاهل هذه الأساسيات العلمية المعروفة!!؟؟

5-    يبدو ان الوزارة لم تقم باستشارة سومو وهي الجهة الوحيدة المؤهلة، فنيا، لإعطاء راي بشأن اسعار النفط ضمن تشكيلات الوزارة؟؟ فلماذا تفردت دائرة العقود بتبني سعر للنفط وبهذه الطريقة البدائية للغاية!!؟؟

6-    معظم التوقعات الخاصة بأسعار النفط التي قامت وتقوم بها المؤسسات الدولية المرموقة تشير الى ارتفاع اسعار النفط من الان فصاعدا وبالتأكيد فوق مستوى 50 دولار للبرميل سواء في المديات القصيرة او المتوسطة او البعيدة. فمعدل سعر النفط العراقي خلال الاربعة أشهر الاخيرة من هذا العام كان 61.85 دولار- اي 23.7 % فوق سعر الأساس المستخدم في عقد جولة التراخيص!!

يستنتج مما تقدم ان تبني سعر 50 دولار كأساس في احتساب حصة الشركة الاجنبية من “العائد الصافي” يعمل بالتأكيد على زيادة تلك الحصة طرديا بارتفاع اسعار النفط فوق سعر الاساس المنخفض اصلا. والحسابات اعلاه تشير ان الشركات حققت زيادة قدرها 23.7 % في حصصها من “العائد الصافي” حتى قبل توقيع العقد.

ربط استرداد الكلف الرأسمالية بأسعار النفط

يشير العقد الى ان “نسبة العائد الصافي” المخصصة لاسترداد الكلفة تكون 30 % عندما تكون اسعار النفط تساوي او اقل من 21.5 دولار وبعكسه تكون النسبة 70%.

وهنا نسجل الملاحظات التالية:

1-    لم تذكر الوزارة كيف تم تحديد هذا السعر؟ ومن قبل من؟ وماهي الحسابات والمبررات التي استند عليها؟

2-    لم تشهد اسعار تصدير نفط العراق مطلقا هذا السعر المنخفض منذ تموز 2008 ولحد الان. وان أوطأ سعر كان 22.21 دولار ولشهر واحد فقط وهو كانون ثاني 2016. فما هي الحكمة والفائدة من تحديد هذا السعر المنخفض ليكون اساساً لتجنب أثر تسديد الكلف الرأسمالية!!!

3-    ونظرا لضعف احتمالية انخفاض اسعار النفط العراقي الى ذلك المستوى ولمدة مؤثرة فان ذكر هذا الشرط في العقد لا يشكل اي فائدة للعراق ولا يوفر من الناحية العملية والفعلية اي حماية؛ وبالمقابل اعطى العقد نسبة 70% للشركة لاسترداد الكلفة.!!

4-    والاخطر من كل ذلك ان العقد لم يحدد بوضوح ماذا يحصل لنسبة العائد الصافي عند استرداد الكلف الرأسمالية بالكامل خاصة وان العقد لا يتضمن معامل-آر كما ذكر سابقا.

يستخلص مما تقدم ان ربط استرداد الكلفة بأسعار النفط وبالصيغة المعتمدة بالعقد تخدم الشركات الاجنبية وبالضد من مصلحة العراق.

ثامنا: التعارض مع الدستور وقوانين الموازنة وسياسة الدولة المعلنة

من الاسس الدستورية المهمة في ادارة القطاع النفطي هو “تحقيق اعلى منفعة للشعب العراقي” (المادة 112 –ثانيا)؛ كما اكدت قوانين الموازنة (منذ 2015) على ” حفظ مصلحة العراق الاقتصادية ….. وتخفيض النفقات وايجاد الية لاسترداد التكاليف بحيث تتلاءم مع اسعار النفط”.

فاين هي مصلحة العراق وكيف تم تحقيق اعلى منفعة للشعب العراقي في عقود هذه الجولة وعقد شرق بغداد؟ وهل اعتماد اسعار النفط المذكورة في العقد- كما ذكر اعلاه- تحفظ مصلحة العراق الاقتصادية؟؟؟

لقد تمت احالة ثلاث من ست “رقع” الى شركة مدرجة في القائمة السوداء لمخالفتها-ومازالت- سياسة الدولة المعلنة منذ 2010. وإننا نحذر وبكل قوة ان التعامل مع شركة مدرجة في القائمة السوداء سيترتب عليه نتائج قانونية سيئة للغاية وعلى المستوى الدولي على قدر تعلق الامر بسيادة العراق على ثرواته النفطية والغازية وخاصة فيما يتعلق بعقود الاقليم وقضية التحكيم الدولي ضد تركيا امام غرفة التجارة الدولية في باريس.

 

في ضوء ما تقدم فإننا نناشد كل من مجلس الوزراء والبرلمان على عدم المصادقة على أي من العقود الخاصة بهذه الجولة وعلى العقد الخاص بحقل شرق بغداد.

الموقعون

1-طارق شفيق؛ 2-عصام عبدالرحيم الجلبي؛ 3-عبد الجبار الوكاع؛ 4-د. هاشم الخرسان؛ 5-د. طارق الارحيم؛ 6-د. محمد علي زيني؛ 7-فؤاد قاسم الامير؛ 8-د. طلال  عاشور كنعان؛ 9-د. ثامر حميد العكيلي؛ 10-د. موفق اديب  الصمدي؛ 11-منير الجلبي؛ 12-د. اسامه فرحان عبد الكريم ؛ 13-د. محبوب الجلبي؛ 14-عبدالزهرة جودة كاظم المحمداوي؛ 15-سمير كبة؛ 16-عبد يوسف بولص اسمرو؛ 17-ناطق خضر عباس البياتي؛ 18-د. فالح  حسن الخياط؛ 19 -علي حسين عجام؛ 20-نوري العاني؛ 21-ضياء إبراهيم  الحسن؛ 22-سعد الله  الفتحي؛ 23 -فلاح كاظم الخواجة؛  24-محمد مصطفى الجبوري؛ 25-علي عبد الباقي الحيدري؛  26-علي نوري علي الصالح؛ 27- ضياء شمخي البكاء؛ 28 -دـ حسن علي الناجي؛ 29 – د. نبيل توحلة؛ 30- احمد  موسى جياد (منسق هذا الموقف الموحد) .

يرجى تعميمه ونشره على اوسع نطاق ممكن

مع فائق التقدير والاحترام

احمد موسى جياد

(منسق الموقف الموحد لخبراء النفط العراقيين)

استشارية التنمية والابحاث/ العراق

النرويج

8 أيار 2018

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Immediately after the Iraqi parliament voted the new INOC Law and after thorough and critical examination and analysis of the law it becomes apparently clear that the law is full of shortcomings, ambiguity, contradictions and above all it contrives the Constitution repeatedly and thus it is unconstitutional. Hence, an appeal to the Federal Supreme Court becomes urgent necessity to revoke this devastating law.

Due to the importance of the law and its highly likely damaging impacts on the petroleum sector and on the Iraqi economy at large, it is imperative and of vital necessity to adopt inclusive and participatory methodology for combating the law. For this purpose I adopted four phases AMTA approach: Awareness, Mobilization, Teaming-up and Action.

Awareness phase aims at highlighting what is seriously wrong with the law by, first, providing preliminary evaluation of the law. The evaluation, written in Arabic on 8 March, was posted on many websites, such as (http://www.akhbaar.org/home/2018/3/241534.html ) and disseminated among my very extensive network of contacts inside and outside Iraq (ca. 2000 contacts). Similarly, an English article was posted on 12 March on IBN website (http://www.iraq-businessnews.com/2018/03/12/inoc-law-dysfunctional-unconstitutional-and-disintegrative/ )

Further article in Arabic was shared, on 20 March, among my network and also published widely provides further specific and with economic evaluation on how this law could violate the constitution, weaken INOC itself and contribute to the disintegration of the country, (http://www.akhbaar.org/home/2018/3/242198.html)

 

Mobilization phase began by calling upon Iraqis, collectively or individually, to protest the law and file “open” appeal to the Federal Supreme Court; two articles in Arabic were shared and posted on 26 and 27 March respectively:  http://www.akhbaar.org/home/2018/3/242229.html   and http://www.akhbaar.org/home/2018/3/242284.html

The call aims at prompting the citizens to know their constitutional rights and empower them with the knowledge base to act as was enshrined in the constitutional article 93, which says the Federal Supreme Court shall have jurisdiction over the following, among others: “Overseeing the constitutionality of laws and regulations in effect” and “The law shall guarantee the right of direct appeal to the Court to the Council of Ministers, those concerned individuals, and others.”

Much of my writings were in comparative and structuralist methodology: by comparing this law with first, the constitution, second, with previous INOC laws, third, with other laws of direct relevance to the topic and fourth with lessons learned from INOC history and structural progression since its foundation in early sixties of the last century.

 

Team working phase began when many oil professionals, lawyers, civil society organization, politicians, parliamentarians and media sources among others supported the idea of appealing to FSC.

Three groups of Iraqi lawyers volunteered to provide legal support on substantive and procedural matters pertaining to the appeal before FSC and a small group of Iraqi oil professionals was assembled in Baghdad to maintain contacts with the lawyers and follow-up the matter inside the country especially with media sources and events organization. The discussion with the lawyers suggests that at this stage, two fundamental steps must be done: the first is to prepare a draft of detailed appeal against the law on article-by-article base and the second is to provide the lawyers with “Power of Attorney” by me and other plaintiffs.

A detailed appeal (in Arabic) was drafted and circulated, 4 April 2018, among the wider network and also posted on many websites such as,  http://www.akhbaar.org/home/2018/4/242627.html . The draft proves that INOC law contravenes ten constitutional articles in addition to other critical flaws; in total there are 29 identified cases for appeal against the law.

 

Action phase began with many different actions:

–          Many of the contacts in my professional network recirculated the articles above mentioned among their own networks;

–          One lawyer convened a big gathering in one of Baghdad known hotels attended by active parliamentarians;

–          A well-respected journal, Al-Thaqaf al-Jadeda,  convened, on 7 April, in Baghdad,  a roundtable debate on the law attended by known professionals on both side of the isle, my participation was in absentia and the PowerPoint was presented by one of the supporting group there;

–          A report on the debate was published on 8 April on Tareeq Al-Shaab Newspaper;

–          A group of Iraqis abroad launched on 4 April an online-campaign against the law (http://ehamalat.com/Ar/sign_petitions.aspx?pid=1002 )- the number of cite visitors exceeds 8000 (at 13 PM Norway time today 8 April 2018).

Copy of the “Power of Attorney” was circulated among “the  willing and like-minded” to authorize specified two lawyers to pursue the appeal once the law was published on the Official Gazettes- Al-Waqaee Al-Iraqiya. It is also available for anyone willing to pursue the appeal action. 

All components of the AMTA approach are ongoing and continue until this atrocious law is revoked.

Those willing to see the text of draft appeal in Arabic can access it freely through

تفاصيل الطعن المباشر بقانون شركة النفط الوطنية العراقية http://www.akhbaar.org/home/2018/4/242627.html

For endorsing our campaign against the law one can sign on the electronic appeal through

http://ehamalat.com/Ar/sign_petitions.aspx?pid=1002

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

The Parliament voted in its session No. 14 of March 5, 2018 on a law reinstating the Iraqi National Oil Company-INOC.

Briefly, the law passed hastily at a critical pre-election time with clear populist politics orientations and motivations.

The law suffers from serious gaps and inconsistencies between the functions of the company and its organisational structure and composition of its management; creates two competing entities for the management of the petroleum extractive sector; it is a blatant afoul to the Constitution; converts sovereign revenues into commercial proceeds for a public company; assigns tasks that are not at all related to its nature as an oil company and, the most dangerous assertion, it legalises the breakup of the country.

Views expressed by its proponents manifest a tactic of known populist politics taking advantages of the national election campaign and thus contributing to the timing and passing of this damaging law; INOC deserves much better law than this.

The executive authority (the Council of Ministers) should act immediately to stop the promulgation process of the law; ask the State Consultative Council to examine the due legitimacy of the law and finally, challenge the constitutionality of the law before the Supreme Constitutional Court.

This was premised on the following assessment:

At the outset, it is necessary to make a caveat. The “final version” of the law was not published on the website of the Parliament; what was published on March 7 is the text of the “first reading” before the vote. The “final version” was posted to me by three parliamentarians; it is the version that was adopted in this evaluation after ensuring that the three copies were identical.

First, the text of the law is completely different from the draft law submitted by the government in April last year; so why and why now?

In the substantive, this is an imposed law by the parliament on the government, which turns the constitutional process upside-down and, thus, the legislative branch breaches the prerogatives of the executive branch. This would surely prompt the latter to invoke its constitutional rights before Supreme Constitutional Court; and it should do so..

Moreover, one could questions the motives and the timing as the country is in the height of the national election and thus, it is the time for populist politics by the proponents of the law.  They, i.e. the advocates of the law, assume that those in government are preoccupied with the election campaign and thus would dare to object to such populist appealing politics that is translated into specific provisions, i.e. Article 12, as discussed latter.

 

Second, the law attaches INOC to the Council of Ministers-CoM and gives its chairman the status of a Minister. In spite of INOC importance, there are serious concerns on this setup:

  • There are absolutely no compelling and convincing justifications to or merits in attaching INOC, which is an oil producing company, to the highest executive authority in the country; it was never directly attached to CoM since its creation in the sixties;
  • INOC, according to this law, deals with only one sub-sector of petroleum and, thus, this formula may cause damage and conflict in the management of upstream petroleum between two entities, each is headed by a minister. Case to remember is the trade of accusations and blame-game on power shortage and outage between the Ministries of Oil and of Electricity regarding the supply of fuel to power plants;
  • The proponents of the law argued for the need to separate the “regulator”, i.e. MoO from the “regulated”, i.e., INOC. That is really absurd; how is it logically, organisationally and operationally possible to have a healthy and functional regulator-regulated relationship when the two entities have an unequal “legal” status and, moreover, when the regulated is attached to higher authority than the regulator!? Illogical and inconsistency and the outcome could very well be a chaotic relationship that could impact negatively the entire petroleum sector.

Ironically, the proponent of this arrangement consider this as “checks and balances”; they really and apparently do not understand what checks and balances entail and between what authorities.

 

Third: Among the objectives of INOC is, “investment in processing oil and gas industry”; this means investment in refining, gas utilisation and petrochemicals. Leaving rhetorical phrases that dominate the law, there is too much ambiguity regarding the above objective.

  • Does the law consider INOC as “investment agency” and it should or could invest in the above mentioned activities/industries? Will it invest in the current or future projects or in its own projects? How it could do that while the law provide nothing in its structure and tasks on these activities;
  • Currently, refining activities and gas processing are within the domain of MoO, while petrochemicals fall within the Ministry of Industry and Minerals-MIM. Yet, there are no representatives for the refining sub-sector, i.e. the three state refining companies: North-NRC, Central-MRC and South-SRC in INOC Board of Directors-BoDs;
  • It is also strange that the two state gas companies, i.e. North Gas and South Gas were excluded from the list of companies owned by INOC and they are not represented on INOC BoDs. Obviously, gas related activities remain with the Ministry of Oil and this generates further complications, which the law ignores to address: I- it split the upstream petroleum activities between MoO and INOC; II- while INOC, under this law, is responsible for all fields contracted under the licensing rounds, the above split leaves in limbo all free gas fields contracted under third bid round; all gas utilisation provisions under second bid round and all gas discoveries under fourth bid round; III- the organic direct linkage between oil and gas issues since all current gas production is associated gas, which could have detrimental impacts on gas utilization and leaves gas flaring accelerating at a faster pace;
  • Under current modalities, SOMO, the oil marketing company, is responsible for imports and exports of all petroleum products though it could assign some of these tasks to other entities, e.g. export of fuel oil through IOTC. Now, with SOMO been part of INOC and the latter is not part of MoO would create further hurdle especially for exporting excessive fuel oil, LPG, naphtha and condensate/NGL

 

Fourth, among the means INOC has to achieve its objectives is to “manage and operate the main oil pipeline network and ports of export.” However, the state Oil Pipelines Company is not mentioned in the list of companies owned and associated with INOC; the same applies to southern oil export terminals, i.e. al-Basra Oil Terminal-BOT, Khor al-Amaya Oil Terminal-KAOT and the four single point moorings (SPMs). How could INOC manage and operate the pipelines of another company and ports of export it does not own?

To operationalise that, INOC has to conclude arrangements with MoO, but the law avoids specifying such requirements.

 

Fifth, the law did not specify INOC “organizational structure” except the composition of its BoDs, which was assigned that task when drafting INOCs’ bylaws.

But the law returns to restrict BoDs by stating, “INOC Board of Directors can, with the approval of the Council of Ministers, introduce any change to its organizational structure”.

 

Sixth, BoDs functions did not include any reference to the contracts (in terms of type, the power to sign and ratify, and the manner and stages of the contracting modality and other legal, procedural and operational aspects) to be concluded by INOC for the development of petroleum fields. This is a fundamental flaw, whether by intention or omission, and leaves the door open to conclude contracts afoul to the Constitution.

 

Seventh, SOMO occupies critical and significant importance, but this law is rather ambiguous about it.   The article specifying the functions of the Chairman of BoDs does not include any mention of SOMO, while the law links this company to the Chairman where it mentions, “directly responsible for supervising the oil marketing company”.

Apart from the ambiguity of the law, this could create managerial complexities that could undermine SOMO operational flexibility in a highly competitive and volatile international oil market; the history of SOMO justifies very clearly such flexibility and thus it would be a grave mistake to ignore the obvious lessons of the distant and recent past!!

Probably, a way out from this impasse could be through:

  • Appointing SOMO’ DG as INOC Deputy Chairman for SOMO matters;
  • Any decision by INOC BoDs regarding SOMO should be subject to the agreement and approval of SOMO DG;
  • In case of disagreement, that should be resolved by debating the matter before and by the decision of the Council of Ministers.

 

Eighth: The law included a paragraph akin to that has been repeated in the budget laws since 2015 that “obliges INOC to review the concluded service contracts and modify them to ensure the interest of the Iraqi people.”

This rigid and politically motivated mind-set seems to be unaware that these contracts have been amended already and to the detriment of the Iraqi interests and any further amendments would be even more devastating.

It is also apparent that the advocates behind inserting this paragraph are behind leaving the mention of the contracts type (discussed above).

It is strange that this text was included in the specific paragraph on “the management of service contracts that were concluded in the bid rounds “, while the law mentions nothing at all to the, illegal as officially declared by the government, production sharing contracts of the KRG!!!

 

Ninth, the law comprises too many generalities that are not directly related to the nature of national oil company work; undefined terms for BoDs; complete exclusion of KRG petroleum, though the “Undersecretary of the Ministry of Natural Resources in the Region” is includes in INOC BoDs among others.

 

Tenth, but the most ridicule, disintegrative, destructive and unconstitutional aspects of this law is those covered by Article 12. Moreover, the proponents of this law have actually expressed confused inaccurate and shallow understanding of basic issues and known terms and concepts they themselves use such as “Alaska model”, “checks and balances”, “renter state”, “role and functions of INOC”, “oil and gas ownership”, “societal forces” among others.

This (Article 12) must be completely deleted from the law for the following reasons:

  • It considers revenues generated from the export and sale of oil and gas as “financial revenues for INOC”. This is a flagrant violation of the Constitution, which states that oil and gas belong to the Iraqi people and not a financial return to one public company. Moreover and as mentioned earlier, gas industry and gas companies were excluded from INOC so what are the legal premises that make gas revenues income to INOC?
  • Currently, as have been the case since early years of the Iraqi state, petroleum export revenues are, legally considered sovereign revenues, and in the international standards they are managed by sovereign entities namely the Ministry of Finance and Central Bank of Iraq. Thus, such revenues acquire good degree of sovereignty protection under international financial law and international banking and financial institutions. By considering these state sovereign revenues of oil exports as financial revenues for a public company deprives these revenues of the sovereign status and thus exposes them to all forms of seizure and confiscation in implementation of any judicial action in any place where the proceeds exist. This exposes oil export revenues to many high risks.
  • The law gives the unelected limited number of INOC BoDs the supreme powers and authority to effectively determine the contribution of oil export revenues in the annual state budget and thus decides the welfare and development of the entire economy! This means that INOC BoDs becomes more important than the Ministry of Finance, the Central Bank and the Cabinet in determining the level of budget expenses; hence the Fiscal Policy, the Monetary Policy and Development Policy all became captive to INOC BoDs. What a non-sense!!
  • The Law authorizes INOC BoDs to establish, finance and manage financial entities that are not related to the nature of its activities as an extractive oil company. These entities are the “Citizens Fund”, “Generations Fund” and “Reconstruction Fund”. It is rather strange that these entities, which are usually the functions and powers of the government, especially the Council of Ministers and related ministries, become the exclusive authority of INOC BoDs under this law!

The proponents of this article seem to repeat the same misguided views they insisted on more than ten years ago when they inserted the same funds into the ill-fated oil and gas law and thus contributed to the demise of that law. Strangely enough they argue that these measures by INOC BoDs would end the “renter state”! What a gross misunderstanding of a deep and complex macro structural issue, which what renter state really means, and what it entails of structural changes in the real economy sectors.

 

Undoubtedly, these three funds are important and urgently needed but INOC has absolutely nothing to do with them. They should be considered and debated thoroughly, explore best possible way to create, manage and fund them through well-articulated legal and institutional framework and transparent governance; as I have debated them previously.

  • This article provides the legal cover for disintegrating the country by legalising the breakaway of the producing provinces. “One of the architects behind the new law” was reportedly said the following on the importance of Citizens Fund, “If Basra decides for tomorrow to be independent and sell their oil and gas without INOC. INOC is a window for upstream and marketing, okay? If they decide that fine, it’s your decision, but you will not get your share in that fund. Basra people will not [receive] it, because you are not delivering oil and gas to INOC.” What a shocking, irresponsible and misguided statement!!

First, Basra oil company-BOC produced, in January 2018, 73.6% of total Iraqi production; Basra people would be better-off to keep this percentage against losing their share in the Citizens Fund, which is almost nothing compared with what they will keep. Moreover, their action according to this law is fully legal. The same applies to Missan province, which produces 10.6% of total Iraqi oil production, and so on;

Second, if Basra, Missan and any other oil producing provinces apply this law and keep the revenues of “their” oil what will be left to INOC BoDs?? Nothing, and that terminates the existence of INOC!!

Third, if the above occurs then the constitutional basic principle of “oil and gas are owned by all people of Iraq” would be grossly and emphatically violated.

Fourth, in consequence to the above, the country will practically disintegrate and most likely severe civil war irrupts and regional conflicts escalate.

Hence, the unconstitutionality of this law becomes apparent and why it is very doubtful, therefore, that the proponents of this article have never understood the Constitution correctly though they keep referring to it!!!!

  • Also this Article 12 provides the legal cover for formalised corruption and Kleptocracy by assigning to the above three Funds at least 10% of the revenues of the oil exports at the discretion of INOC BoDs. Apart from the high likelihood of abusing such significant funds, a newly reinstated INOC does not and would not have the capacity to manage these funds and thus could derail the company from performing its core functions and duties as an oil company concerns with the development of the upstream petroleum.

In the light of the above it is vital and absolute urgency that:

  1. The Executive Authority (Council of Ministers) to immediately move to interrupt the process of promulgating this law with the President of the Republic (to hold his approval of the law) and with the Ministry of Justice (to suspend publishing the law on the Official Gazettes- Alwaqee Aaliraqiya);
  2. The Council of Ministers should request the State Consultative Council to review and identify the illegality of the law;

3 – The Council of Ministers should challenge the constitutionality of the law by launching an appeal before the Supreme Constitutional Court.

INOC deserves much better law than this as this law would disintegrate the country and thus must be revoked.

Norway

12 March 2018

Earlier Arabic text was circulated 8 March 2018 among my network and posted on many websites including: http://www.akhbaar.org/home/2018/3/241534.html

 

My previous writings on INOC law can be accessed as below:

For Effective and Relevant Law for Iraq National Oil Company-INOC (in Arabic, with Tariq Shafiq), Posted on 19 May 2017 on IBN website http://www.iraq-businessnews.com/2017/05/19/for-effective-and-relevant-law-for-iraq-national-oil-company-inoc/ ) and on many other websites.

The New INOC Law: Brief and Dysfunctional, Posted on 24 April 2017 on IBN website http://www.iraq-businessnews.com/2017/04/24/the-new-inoc-law-brief-and-dysfunctional/ the Arabic text was published by Assabah Aljadeed (NewSabah) Newspaper, Baghdad on 26 April 2017  http://newsabah.com/newspaper/119474

Proposed INOC Law Could Disintegrate Petroleum Sector and Damage the Iraqi Economy, Posted with updated 16 & 22 March 2016 on IBN, http://www.iraq-businessnews.com/2016/03/16/proposed-inoc-law-could-disintegrate-petroleum-sector/  Also posted on the Iraqi Al-Akhbar  http://www.akhbaar.org/home/2016/3/208752.html  and  http://www.akhbaar.org/home/2016/3/209136.html

Article-by-article analysis of INOC Law. Expert Opinion submitted before the Experts’ Hearing Session, Oil and Energy Committee, Iraqi Parliament. 3rd July 2011, Posted on: http://iraqog.com/oil/oillaw/jiyadjuly2011.htm; and http://www.iraq-businessnews.com/2011/07/07/detailed-analysis-of-draft-inoc-law/

INOC Law: Shaky Premises and Doubtful Prospect, MEES v54:n20, Monday 16 May 2011.

Remarks on the Proposed INOC Law. Presentation delivered before MENA 2009 Oil &
Gas Conference, Imperial College, University of London, UK. 28th– 29th September 2009.
http://www.targetexploration.com/MENA09.pdf and published on MEES 52:40, 5 October 2009.

Technical assessment of the INOC Law. Posted on Iraq Oil Report http://www.iraqoilreport.com/the-biz/technical-assessment-of-the-inoc-law-2121/

The new draft INOC law takes us back to square one” posted on Energy Intelligence http://www.energyintel.com/n/portal/iraqs-second-oil–gas-bid-round.aspx

 

Please click here to download the full article in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

The following is an abridged version of the Iraq chapter of Upstream Law and Regulation: A Global Guide, published by Globe Law and Business, which summarises the upstream regulation and the key concerns in over 30 important and emerging oil and gas jurisdictions.

Globe Law and Business offers IBN readers a 20% discount off the normal price. Please enter the code “IBNGLB” on the website checkout page to receive the discount.

Introduction

Iraq’s upstream petroleum sector witnessed three unprecedented interrelated developments post-2003: an opening to foreign direct investment; the offering of the most prized petroleum fields in a rather short period of time; and formulation of the basic model for long-term service contracts.

In the previous edition of this chapter I argued that if things go as planned and contracted, Iraq might become a major contributor to the world petroleum market; a magnet for foreign investment through the involvement of international oil companies, specialised service companies and other related activities; and could introduce a new but significant element in the legal and governing framework, with possible wide and lasting implications for the relationship between host developing countries and international oil companies. However, reality seldom coincides with expectations; and this is exactly the case at the end of April 2017.

This chapter discusses the long-term service contracts for upstream petroleum development in Iraq. Due to the need to limit the extent of the analysis, the corresponding matters in the Kurdish region of the country are excluded, though a few references to the region are made. The analysis is based on the model contracts and, for verification purposes scanned copies of the signed contracts were consulted.

However, because of non-disclosure commitment, no formal references will be made to any signed copies of these contracts. Also this chapter does not address matters relating to subcontracting, or to contracts for front-end engineering and design, engineering, procurement and construction or other types of contract. Finally, limitations of space has prevented the use of data, statistics, annexes, maps and charts that are available on matters covered by this chapter.

Part 2 provides an updated review of petroleum upstream activities in Iraq with regard to exploration, development and production. Because of the importance of exports, a few paragraphs are also included on the expansion and diversification of export outlets.

The complexities, components and interconnections of the petroleum legal regime are addressed in part 3. This part elaborates on three major issues: petroleum law and relevant provisions, government take and payment to and privileges of international oil companies.

Part 4 sheds lights on the main features of and new development in Iraq’s long-term service contracts. Further insight is provided in Part 5 on critical current issues: the legality of concluded contracts, the situation of international oil companies who concluded contracts with the Kurdistan regional government, the reduction of production plateau targets and the renegotiation of contracts and the current status of IOCs’ involvement. The chapter ends with a few conclusions.

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Conclusions

  • The fiscal terms of the signed service contracts indicate Iraq has, undoubtedly, made good deals, though cost recovery modalities proved to be hard to cope with under a low oil price environment. Moreover, if cost control is not properly monitored and professionally audited, costs could escalate to unprecedented levels. Accordingly there is an urgent need to bridge gaps in skills and capacity through a number of measures comprising specific crash-course programmes, short-term training, professional development and specialised capacity-development education. It is vital to create a special unit within the Ministry of Oil to ensure good management of the Training, Technology and Scholarship Fund in collaboration with other entities within the sector and outside it.
  • Considering the importance of upstream petroleum and the number and long duration of the service contracts, it would be advisable to formulate a national strategy pertaining to local content. The suggested strategy could involve creating a specialised agency with a clear mandate, auditing, monitoring and verification procedures, and institutional and legal frameworks.
  • All international oil companies who signed the service contracts asserted, initially, a satisfactory internal rate of return despite what they considered to be tight fiscal terms. But the wide deviation between the bid and final remuneration fees would lead one to question the validity of the companies’ economic model and its main assumptions. Such unexplained but significant deviations could make one suspicious of the companies’ integrity and conduct.
  • The prolongation of the contract period coupled with reduced plateau targets had in fact relived the IOCS from what was contracted and thus reduced the fiscal and work requirements. Moreover, the above has come with an increase in the IOCs share in the remuneration fees at the expense of the Iraqi state partners.
  • Finally, the degree of uncertainty surrounding the legality of all the long-term service contracts agreed by the Ministry of Oil and all the production sharing contracts agreed by the Kurdistan Regional Government, remains technically high.

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

The New Petroleum Bid Round Faces Many Serious Problems

Since the last Ministerial reshuffle of August 2016, the Ministry of Oil has been persistently trying to offer most possible oilfields and exploration blocks to IOCs under new contracts that differ from those adopted by the Ministry in previous rounds. The latest attempt in this regard is the announcement by the Ministry that it has scheduled the date of a new round and has presented the timeliness of the necessary activities.

Briefly, as stated in this intervention, the timing of this round is rather unfortunate; many of the qualified IOCs by the Ministry are blacklisted; absence of transparency on the proposed contracts; method for evaluation and selection of different offers, by IOCs, have not been announced and finally, no feasibility study of any fields or block was available, let alone done. But, the fact that these fields and blocks are stranded on the borders they have special status and thus should deserve attention and prioritization.

At the outset a brief note is probably relevant. Since the national election date was initially proposed there has been a pattern of “pre-election rush” at the Ministry of Oil for announcing many recent events, creating what might be called “election-linked achievement bubbles”: Majnoon oilfield transition deadline was shortened from end June to end March 2018; concluding contract for East Baghdad oilfield; signing agreement on Nehr Bin Omar on associated gas utilization; singing  agreement with BP on Kirkuk oilfield; setting earlier date for border fields and blocks bid round; and sudden announcement, on 28 January, for offering Faw refinery & petrochemical of 300kbd (without any FEED or any further basic information). What next!

In previous occasions I addressed, as mentioned below, all attempts by the Ministry in this regard, especially since its first announcement, in July 2017, on this new round. Therefore, the focus will now be on this new round and by using official statements, especially those issued by the Ministry of Oil.

First: Licensing Date and its Timetable

Petroleum Contracts and Licensing Directorate-PCLD of the Ministry announced recently that it will hold on May 7, 2018 this bid round according to a tentative schedule of activities.

The date is actually over two months earlier than envisaged based on previous announcement by the same entity; resulting into adoption of a brief, unrealistic and impractical timetable that could have negative consequences on the process itself, thus questioning the possibility of holding the round on the designated date.

It is worth recalling that the Minister and PCLD’s DG stated, in their press conference held at the Ministry on November 27, 2017, that “the final tender document will be announced on May 31, 2018, and then the bids from companies wishing to compete in the round will be received.” The Ministry and PCLD announcement did not specify, then, the date of the round. Given the need to provide sufficient time for IOCs to study and evaluate the final tender protocol, the provisions of the contracts and determine their position to submit their bids individually or within consortium, the date of the round could (realistically and technically) be in mid-July 2018 the earliest.

It should be noted that the period between the “announcement of the final tender document of the contracts” and the day of “licensing round” were, for example, more than five weeks in each of the first and fourth bid rounds.

Apparently, the timeliness of activities necessary for holding this round was set at four months between the date of “Data Package” sale on 7 January and 7 May 2018; a very short period indeed compared with previous rounds considering the apparent difficulty and complexity of the new bid round.

Every bid round of the previous four was structured around one type contract only for all offered fields or exploration blocks in the related round; in this round there will, at least, three different types of contracts to be proposed by the Ministry and an unspecified number of “commercial models / contracts” expected from the IOCs!!

Each contract in the previous four licensing rounds involves only one field (with the exception of the three Missan oilfields) or one exploration block; in this bid round, most of what is announced includes more than one field or block, and in fact even more than what was announced in July 2017. The extreme example is Naft-Khana, comprising nine fields and exploration blocks; and this, as discussed later, necessitates the formulation of composite-complex contract that could actually comprises three or even four different contracts- perhaps a unique or the only one of its kind!

All the fields that were included in the first three bid rounds and all exploration blocks of fourth bid round are located inside Iraq; while all the fields and blocks offered in the new round are located along land borders with Iran and Kuwait, except one offshore block on Iraqi territorial waters in north Arabian Gulf. As highlighted below, border fields should receive special consideration seriously and fully.

Finally, international petroleum business environment and IOCs enthusiasm (on Iraq) in 2018 is very different from those prevailed during June 2009- May 2012 when the previous four bid rounds were held.  That could prompt IOCs to propose more complicated contracts with less attractive terms for Iraq, thus make it imperative for the Ministry officials to be extremely careful and devote enough time to assess what IOCs propose. Probably, the current failure (but not yet ended) after many months of direct behind closed door negotiation, with ExxonMobil/CNPC regarding the package for developing Ratawi and Nahr Bin Omar oilfields and the linkage to CSSP and SIIP, provides indications on what IOCs are asking to have.

By comparative analysis, it becomes very clear that the proposed timetable is unrealistic, not practical and very well could derail the bidding event itself. It is therefore legitimate to pose a few questions about the rationale of such hastiness: Does the Ministry have the human, legal and institutional skills and capacity to carry out all the required activities within the times specified in the schedule? Has the three models of contracts been studied thoroughly enough to ensure and protect the rights and interests of Iraq, especially since all the fields and blocks are close to or cross the border with Iran and Kuwait? But the most compelling question is why and under whose directives the date was set at 7 May 2018.

The Ministry did not provide any clarification on why it went for an early bidding date and for such a tight compact timetable of essential activities.

A through daily follow-up of the Ministry news found no compelling reasons or urgency to hold the bidding at the specified date. But, what is surprising that the date was fixed, earlier than previously announced, soon after the date for the national election, on 12 May, was decided by the Cabinet (and now confirmed by the Federal Court and the Parliament).

Was the new timing for the bid round just unfortunate coincidence (though this reflects either political naivety or wrong decision-making or a combination of both) or a deliberate decision with motivations? If it was a bad unfortunate coincidence, why did the Ministry not change it? But, if it was intentional, what is the intention: score an achievement or impose a fait accompli or jump ahead- looking to the next cabinet reshuffle or to fulfill a pledge or “let it go” since everyone will be preoccupied with the election or.. or any other imaginable or possible explanations

Whether the timing is coincidental or intentional, holding the licensing round a few days before the national parliamentary (and possibly provincial) elections could contribute to maximize risk and uncertainty for and by all serious international companies, which could prompt them not to buy the Data Package and pay non-refundable $100,000 fee. In the case of limited purchase of the Package, that means the Ministry has actually contributed to its own failure and that may compel it to postpone the event to another date. But frequent postponement contributes to credibility erosion; as manifested by the refineries that have been re-announced several times over the past 15 months without any material luck!

Increasing risk and uncertainties that are associated with the date of the bid round could, in IOCs due diligence, come from the following possibilities:

  • The period between bidding results (in case of winning) and the agreement on the final version of each contract, obtaining the final approvals by the Council of Ministers, the final signing of the contract and the entry into force of the contract usually takes more than two months, i.e., after the election;
  • Elections may lead to a government change, which may have different agenda and position contrary to the outcome of the bidding and, possibly, dot not approve the contract;
  • Similarly, the election may lead to change the Minister of Oil himself. The new Minister or his political bloc may have a position contrary to the position of the current Minister; that could prevent the finalization of the contract and therefore not to be referred to the Council of Ministers for approval;
  • The formation of the new government takes usually a good deal of time depending on the actual election results and the need to formalize the political alliances, and this could take many months. This practically means that the current government becomes a caretaker government that, constitutionally, cannot take decisions binding the new government to such international contracts. Meaning, the current government cannot and should not ratify any contract resulting from the licensing round, especially with the existence of a new parliament; keeping in mind that all these contracts are for boarder fields- a highly sensitive and complex matter.

It is rather regrettable that the concerned parties, especially the Energy Committee of the Council of Ministers and the Oil & Energy and Legal Committees of the Parliament, have not taken the right action to prevent the Ministry from convening the bid round on the stated date or to postpone it to after the formation of the new government.

Second: Blacklisted Qualified Companies

Since the first bid round, PCLD of the Ministry has adopted a detailed method whereby companies are evaluated for the purpose of ascertaining their eligibility to participate in the field development and exploration projects as operator and non-operator. The evaluation methodology includes several details covering at least the last three years of four sets of indicators or standards:

  1. Financial and Economic Standard
  2. Legal Standard
  3. Technical and Training Standard and
  4. Health, Safety and Environment Standard.

The most questionable about this bid round is the list of qualified companies by the Ministry, which comprises many blacklisted IOCs contrary to its own declared and maintained policy that has been adhered to for many years in implementation of and in conformity with the official position of the Iraqi government, which considers all contracts signed by the KRG are illegal and contravening the Constitution. This means legally, logically and practically that any party that signs a contract that the sovereign authority considers to be contrary to the Constitution shall have knowingly committed a violation of the Constitution. As a result, the application of the “legal standard” directly leads to automatic disqualification of any company that has already committed a flagrant infringement of the Constitution.

PCLD had announced the companies eligible to participate in this round and in the light of available information, blacklisted qualified companies fall in two groups:

The first group comprises companies that signed contract(s) with KRG after had signed a contract through the bid rounds organized by the Federal Ministry of Oil. These companies are ExxonMobil (USA), Total (France) and Gazprom (Russia).

Although these three companies are still working in the oilfields contracted within the first and second licensing rounds, the application of the legal standard should prevent them from participating in this round.

In fact, these companies were excluded from contributing to the development of the field part within the “Nassiriyah Integrated Project-NIP” and were allowed to contribute to the refinery part only (though NIP project was abandoned by the Ministry!)

The second group companies that have signed contract with KRG but have not a contract within the licensing rounds organized by the Federal Ministry. These companies are: Dana Gas and Crescent Petroleum-CP (both in the UAE) and Sinopec (China).

It is worth mentioning that the Ministry of Oil terminated on 8 May 2009 the memorandum of understanding with Crescent Petroleum signed on 28 September 2005 after the company signed a contract with KRG. Then the Ministry qualified Crescent Petroleum (!!) for the ill-fated offering of 12 new oilfields announced in October 2016, only two months after the current Minister took the helm of the Ministry, (http://www.iraq-businessnews.com/2016/10/27/jiyad-min-of-oil-should-withdraw-plan-to-offer-12-new-oilfields/ )

Moreover, the Ministry had introduced the following provision in the contract for bid round four giving related Iraqi contracted entities (NOCs) the power to terminate the contract if, “Contractor, a Company or their Affiliates: either violating in any material respect a Law, including, without limitation, any directive or instruction of the Government (including the Ministry of Oil); or entering into any contractor agreement relating to the exploration, appraisal, development or production of Hydrocarbons in the Republic of Iraq, that has not been approved by, or consented to by, the Government;”

I have already made it clear that granting contracts for field development or exploration blocks to companies that are still operating contrary to the Constitution is only equivalent to rewarding those companies for their violations of the Constitution and the declared policy of the federal government; that should not be allowed (http://www.iraq-businessnews.com/2017/12/26/majnoon-development-plan-important-move-in-the-right-direction/).

The application of the legal standard should prevent these companies from participating in this round. Therefore, I call upon the Parliament/House of Representatives to take a decision, similar to that of January 8 regarding KAR Company, to compel the Ministry disqualify the above six blacklisted companies from participating in the new round.

Finally, it is worth mentioning that PCLD list comprises Shell and Petronas; both formally exited, recently, Majnoon giant oilfield. Probably, we have to wait until 5 February to know whether Shell and or Petronas buys the Data Package or not, and if either does then we should explore to know and explain why. And for Shell does this return has anything to do with its interest in Azadegan oilfield on the Iranian side of the borders?

Third: Transparency Considerations and the Proposed Contracts

According to the proposed timetable for the licensing round, PCLD will, on February 5, “convene a Roadshow to discuss the general principles of the contract and the commercial models submitted by companies”. However, PCLD did not specify the location of the workshop; the number of submitted models; when they were submitted; by which company and whether those models related to the fields or blocks or the offshore one or all of them.

In addition, there is a complete blackout on the type and components of the contract(s) that will be presented by the Ministry in the planned roadshow. Moreover, what complicates the matter even more are the ambiguity and strange statements. For example, the Minister said, “The contracts that are hoped to be concluded with the international companies in this round are an important step towards adopting a new commercial model and financial terms different from the previous contracts. The commercial models, by the companies wishing to invest, will be studied and analyzed then negotiated and select the contract which achieves our objectives”

How can the Ministry achieve its objectives without specifying and disclosing what are those objectives? How can it achieve these goals by relying on models proposed by the IOCs themselves? And when will the “study and analysis of business models provided by companies wishing to invest,” be done knowing that there are 9 groups of fields and blocks; 3 or 4 types of contracts and 21 companies eligible to participate in the round?

As mentioned above, by covering areas for three different types of already producing (brown) fields with discovered by not developed (green) fields and exploration blocks in a single contract necessitates the formulation of a complex difficult contract, largely due to the significant differences between the financial terms, contractual provisions and technical and geological requirements of these three covered areas.

Finally, and this is very important, the contracts of this bid round should reflect the special status and the prioritization of developing fields straddled along borders with Kuwait and Iran, especially with regard to the possibility of joint development through the formula known as Unitization of the concerned field. This is in addition to the need to include in the contracts many of the conditions, provisions and practices recognized by international contracts of border fields.

In the case of complex contracts covering three types of fields and blocks concurrently, they become even more complex and difficult when adopting Unitization formula (by virtue of being structurally tripartite), which requires high skill capacity, professional negotiation, relevant experience and an integrated team covering all technical, legal, contractual, economic and geopolitical operational aspects (http://www.iraq-businessnews.com/2017/07/21/important-oil-projects-dubious-non-transparent-contracts/).

Can the Ministry study and analyze the commercial models that will be submitted by the companies during the period specified in the timetable, which is only ten days? Very doubtful! And the strangest of all, is what the Minister says, “the Ministry was keen to optimize its preparation for this bid round”!!!

In the light of the foregoing, the extent of absent transparency is evident, especially with regard to the types of contracts and their basic financial conditions; but this is, regrettably, not unusual practice at the Ministry. For example, the Ministry did not announce any information on its recent signed deal with Jinhua, a Chinese company, to develop East Baghdad Oilfield or the contract with Orion- a US company.

The Minister of Oil said that “the contract to develop East Baghdad Oilfield is different from previous service contracts, where some important changes were made to the contract formula that serves the public interest.” So far, neither the Minister nor the Ministry clarified what these “important changes” are and what the material evidence and the economic feasibility which prove in figures that these amendments “serve the public interest.” The same applies to the agreement signed by the Ministry on January 8, 2018 with the US company Orion to utilize associated gas from Nahr Bin Omar oilfield in Basrah province, as well as the contract / agreement signed with the GE-US company in July 2017 related to associated gas from Nassiriyah and Gharraf oilfields in Dhi Qar province, among others. As usual, the Ministry did not provide any information about these agreements nor about the contracts or agreements that were signed.

Moreover and worst still, all the above mentioned contracts and agreements were negotiated and concluded without following the usual official contracting procedure that requires public tendering, open bidding and transparent selection.

Strangely enough, this is happening even after the Extractive Industries Transparency Initiative suspended, recently, Iraq’s membership for non-compliance. EITI presented detailed two reports (in both Arabic and English) highlighting what provisions did Iraq not comply with and what it should do to restore its membership in the organization (http://www.iraq-businessnews.com/2017/11/06/eiti-suspends-iraq-membership-a-serious-setback/ )

This clearly indicates the lack of proper understanding of the Ministry leadership of what transparency in the oil sector entails and what requirements that should be clearly disclosed in accordance with EITI Standard.

In conclusion, due to the importance and urgency of the matters I suggested:

  • The Ministry of Oil announces immediately the postponement of the bid round to a later date to be announced after the formation of the new government;
  • If the Ministry fails to do so, the Council of Ministers or the Parliament should oblige the Ministry, by issuing binding instructions, to postpone the round;
  • The Council of Ministers and the Parliament should oblige the Ministry of Oil to implement the policy of the federal government by preventing blacklisted companies from participating in this round;
  • The Ministry of Oil must adopt a realistic and practical timetable that allows its concerned entities, especially PCLD, to study thoroughly and develop the “complex contract” for the border fields;
  • The Ministry should adopt and exercise full transparency by early disclosure of the basic terms of the contracts proposed by it and by the oil companies and provide (in numbers rather than rhetorical statements) how could these conditions serve the national interest of Iraq.

Earlier Arabic text was posted on http://www.akhbaar.org/home/2018/1/239828.htm

Please click here to download the full article in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

Iraq Business News is proud to announce that our Expert Blogger Ahmed Mousa Jiyad has just contributed to a major new book on the regulation of the upstream oil and gas industry.

The second edition of Upstream Law and Regulation: A Global Guide, published by Globe Law and Business, summarises the upstream regulation and the key concerns in over 30 important and emerging oil and gas jurisdictions.

Globe Law and Business offers IBN readers a 20% discount off the normal price. Please enter the code “IBNGLB” on the website checkout page to receive the discount.

This fully updated new edition of the practical handbook, now in two volumes, takes an in-depth look at the most relevant petroleum provinces, summarising upstream regulation and key concerns in over 30 important and emerging oil and gas jurisdictions.

Issues featured include the key terms of petroleum law, the types of legal arrangement in place, the fiscal terms, how to qualify to acquire acreage, governing law, dispute resolution mechanisms, decommissioning and governmental control.

As a result, the book provides a comprehensive global resource for upstream investments. New areas of coverage for this edition include Algeria, Ecuador, Israel, Lebanon, Morocco and Oman.

Mr Jiyad has written the chapter on Iraq, and we are sure that this will be an important resource for oil industry professionals with an interest in Iraq’s most important sector.

Congratulations Ahmed!

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Satarem-Missan Refinery Scandalous Contract Gets Final Termination Notice

The Iraqi Ministry of Oil (MoO) announced on 4th January 2018 that it had obliged Missan International Refinery Company (MIRC) (actually the bankrupt Swiss company Satarem) to sign an undertaking that it should start working on the 150kbd Missan Refinery within 30 days; otherwise the contract will be terminated without having any legal and financial consequences on the Ministry.

This move by the Ministry is long overdue and should be the very final termination warning as more than four years were lost without any tangible progress in the construction of the refinery.

As I have repeatedly argued, through my writings especially the direct debate communications with the Ministry officials and advisors that by concluding such a dubious contract with highly questionable unqualified bankrupt company, the Ministry surely deters serious refinery investors and, thus, defeats its own aspirations.

Please click here to download the full report.

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Developing Majnoon Oilfield by National Effort — Important Move in the Right Direction

On 21st December, the Ministry of Oil (MoO) approved a set of measures relating to the development of the super giant Majnoon oilfield after Shell relingushed it back to Iraq

In addition to my emphatic strong and absolute support for the Ministry of Oil on this action regarding Majnoon oilfield, I find it timely to highlight some related basic issues that MoO and other authorities, especially the Council of Ministers and the Parliament, should pay attention to and take the necessary action on them.

Please click here to download the full report.

Mr Jiyad is an independent development consultant, scholar and Associate with the former 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 (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.