By Ahmed Mousa Jiyad.

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

IEITI Report on “Register of Licenses” – Another Disappointment

Iraq EITI (IEITI) released recently the above report, which it says, “In accordance with Standard 2.3 of the International Initiative”; in part it is among Iraq efforts to re-instate its “compliant” status with EITI.

The report, written in Arabic, provides important data and information; other narratives and descriptions are rather known for those familiar with bid rounds licensing processes that were followed since 2009.

Apart from the fact that the report has no date and who authored it, there are, unfortunately, too many inaccuracies, unexplained terms, missing items, ambiguities, typing errors, inconsistency in number and table formats and unchecked data, among others.

Such serious shortcomings would surely undermine the credibility and usefulness of the report and some of its content could be misleading.

Reading the report thoroughly, as testifies below, and for the interest of IEITI suggest:

  • IEITI should withdraw immediately the report and stop its circulation;
  • The report should be reviewed, rechecked and corrected by PCLD at the Ministry of Oil since PCLD is the only formal entity that has competence and data on the bid rounds and licenses;
  • Both PCLD and IEITI are advised to take into account the below analyses and remarks when redrafting the report;
  • After the above are done, IEITI publish the redrafted, rechecked and reconfirmed report and all its contents.

This assessment comprises three parts: part one provides “common remarks”; part two specifies remarks on field level and part three addresses the data on corporate income tax-CIT.

Part one: the common remarks

  • Each table for each field has a column with a title “Recovered cost$” and a “number”; the provided “number” apparently has nothing to do with “Recovered cost”, actually it refers to the “contracted Remuneration Fee”. Therefore, it seems the report mixes-up between two very different terms: Recovered cost vs. contracted Remuneration Fee. Incidentally, the report does not use the contractual term “Remuneration Fee”, it uses “Profitability Fee”, which I think is inaccurate and could be misleading. Finally, the report does not mention which year these data belongs!!
  • The format of each first table for each oilfield is rather preliminary and confused: the title of the columns do not corresponds to the contents of the rows!!
  • The report uses a term “Recovered cost for the State Partner”. This is rather ambiguous and also inaccurate since the cost-share of the State Partner, is contractually “carried” upfront, but has to be “paid” by Iraq as per the quarterly payments outlined in the related contracts, thus it is NOT “recovered” by the State Partner. Moreover, why this item was “quantified” for some oilfields and not for others???;
  • Similarly, but for different logic, the report was inaccurate when stating data regarding item “IOCs recovered cost” as this underestimate (or understate) what actually Iraq’s pay to the related IOCs in that year. IOCs’ cost recovery in a particular years includes the total of  “IOCs recovered cost”  PLUS the “Recovered cost for the State Partner”;
  • Why the report focuses only on 2016 when it comes to item “IOCs recovered cost” and to the quantified values of item for “Recovered cost for the State Partner”; what about previous years or the accumulated value of the recovered cost!! I think they should be included and corresponding to date for both production and income tax;
  • The report do not specify the monetary unite (US Dollar or Iraqi Dinar), though it is more likely a US Dollar.

Part two: Remarks to the provided data on field levels

Al-Ahdab Oilfield:

  • Actual annual production has been over the “contracted” Plateau Production Level-PPL that is also mentioned in the report, why? Or that PPL was increased without the knowledge of those who drafted the report!
  • Actual production in 2016 was 321KBD lower than that of 2015, why? In the meantime income tax paid by 2016 is higher than those for 2015, how come??

Missan 3 Oilfields

There are no values for “profitability fee” for the IOCs and for the State Partner!!!

Zubair and WQ1 Oilfields

The values for “profitability fee” for the IOCs and for the State Partners are exactly the same for both oilfields, though they differ in production profiles!!! Also the value of the “IOCs recovered cost” are very close!!!

Halfaya Oilfield

While no production was reported for 2016 there was significant Cost Recovery and the paid income tax for that year was the highest since the commencement of production in the field, why??.

Badra Oilfield

  • 2016 oil production is surely wrong (probably a typing error or due to number format);
  • No “Profitability fee” was reported!!!

WQ2 Oilfield

  • Why 2016 is lower than 2015 by 180kbd??? While income tax for 2015 was “0” and for 2016 was $53.7 million; something surely wrong!!
  • How come the “profitability fee” for the Iraqi SP was more than 50% of that for IOCs!!!!!

Majnoon Oilfield

  • How is it possible that SP “Recovered cost” is three times higher than IOCs “Recovered cost” in 2016!!!
  • Values for “profitability fee” for SP and IOCs are surely wrong (probably a typing error or due to number format)

Gharaf Oilfield

  • The provided data on the “First Commercial Production-FCP” is surely wrong! FCP is close to 59% of the stated Plateau Production; this is contractually incorrect and operationally impossible! (Probably there is a typing error)
  • Because of that error in FCP, the reported annual production data have not, so far (after six years from contract validation) reached and exceeds that FCP!!. Hence, what are the legal and contractual justifications for paying “profitability fees”? And why the IOCs paid taxes from 2015 onwards! Contractually, reaching the FCP triggers fees and cost recover as well as CIT payment.
  • How it is possible that the SP “recovered cost” is three-times more than that for IOCs? Another error or wrong perception!!

Gas fields (Akkas, Mansuriya and Siba)

Though no data was provided, the table format (for FCP and Plateau Production) should be corrected and consistent.

Part three: Corporate Income Tax-CIT

The report provides a table comprises the annual and total “deducted” CIT based on “fields level” over the period 2011 and 2018 (both years inclusive). There are many serious problems and observations that need clarifications and correction:

  • The table covers years 2011 to and 2018, but the provided data on “Profitability Fee”, in earlier part of the report, was limited to 2016! So what are the “actual bases” for calculating and deducting these annual CIT payments?
  • There are no paid CIT for 2012 for three oilfields that paid taxes on 2011 and produced oil in 2012?
  • Why companies operating Missan 3 oilfields paid CIT for only one year-2015!
  • Why companies operating Badra oilfield did not pay any CIT at all!
  • Companies operating Al-Fayha oilfield (the exploration block Nr. 9) for 2017 and 2018, but the report mentions nothing on the status of that field and work progress on it;
  • CIT paid by companies operating Al-Ahdab oilfield comes second, in volume, after those for Rumaila. This needs explanation for the following reasons:
  • Al-Ahdab began paying CIT in 2013 while those for Zubair and WQ1 began in 2011;
  • Al-Ahdab annual production levels are much lower than those for Rumaila, Zubair and WQ1;
  • Contractually, CIT for Al-Ahdab is 15% and has a “stabilization clause” that protects it from the 35% CIT imposed latter;
  • The grand total for paid CIT is not correct, due largely to number format, which is a persistent problem of inconsistency and inaccuracy for the entire report.

In addition to the above there are too many errors and typing mistakes that should be addressed and edited correctly.

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.

Restraining the Game-Changer:

A Decade of Uneven Development in Iraq Petroleum Sector

The development of the Iraqi petroleum sector during the period 2008-2018 represents, from all related aspects, a distinct phase in the sector and in its role in the national economy.

Sector-wide petroleum comprises three different but organically liked sub-sectors through critical forward-backward linkages:

  • Upstream (including exploration, field development and production);
  • Midstream (pipeline, storage, export terminals and related infrastructures);
  • Downstream (mainly, crude oil refining, gas processing, petroleum product distribution and petrochemical industries).

Though the “State” has been the dominant actor in petroleum sector development, the post 2003 period witnessed an erosion of that role through a grand opening of the sector for International Oil Companies- IOCs; different contractual modalities, mostly reflecting the peculiarities and realities of each sub-sector, were proposed or adopted to govern the legal relations with the IOCs.

Thorough and continuing follow-up and research suggest that most of the evidenced development has taken place in the upstream sub-sector, with heavy IOCs involvement in a significant part of the country’ proven oil reserves through four bid rounds that contracted the most prized oilfields; while other two sub-sectors continue-trapped in their chronic misalignment, obsolete technologies and wasteful practices of invaluable natural resource.

Moreover, the “triple shocks”; collapsing oil prices since June 2014 (economic risks) accompanied by Da’esh (security risks) effects and Kurdistan Regional Government-KRG taking-over some of North Oil Company-NOC oilfields (June 2014-October 2017) (political risks) made matters even more devastating. And with the then prevailed notions of “the new normal” and the prospect of “lower-for-longer oil price” that contributed into further deepening the fiscal crisis of the state had elevated the “fear-factor” among Iraqi decision makers.

That, combining with apparent human, systemic and institutional capacity-gaps limitations (business risks), had resulted in:

  1. Iraq giving important concessions to IOCs without having tangible benefits in return;
  2. Weakened severely Iraq’s strength in any future negotiation with the IOCs;
  3. Establishing a powerful precedent for costly domino effects.

Accordingly, the article would argue that, analytically and empirically, a sub-sector focused policy could generate triple-negativities: on the development in that sub-sector; on the entire sector itself and on the sector’s contribution to the development of the national economy.

That, obviously, is a testimony of and an indication to the absence of well thought, coherent and integrated petroleum and energy policy; and to the futility of the “indicative non- mandatory” National Development Plan-NDP.

Hence, the logical consequences and outcomes would exacerbate structural imbalances, deepen vulnerabilities to external factors and increase dependency on oil revenues, which prohibits desirable structural change, diversification and transformation; a vicious circle of dependency and uneven development.

The nature of the topic decides the research methodology. Hence, the article is a multi-disciplinary in its approach focusing on the relevant and important economic, legal, institutional, political economy and geopolitical analytical frameworks and aspects. Also, the article offers evidence-based analysis by relying on official, verifiable and crossed-checked data, information and documentation. Time-series and charts for the ten-years covered period are necessary, and available, for elaboration but avoided for space restriction.

The article adopts a holistic view by addressing the three interrelated levels of analysis: micro, sectoral and macro (national), excluding KRG. Throughout the article, many questions were posed indicating the need for further scholarly work and research investigation. Finally, because of my constant follow-up and frequent contributions on Iraqi energy and petroleum sector, this article refers heavily to some of my previous works and publications.

The article comprises two parts and concluding remarks: part one identifies and analyzes the most important milestones in petroleum upstream development while part two provides assessment of successes and failures in the petroleum sector-wide and their implications for Iraq.

The above is an edited “Abstract and Introductionof my article published by the academic periodical-IJCIS:

Jiyad, A. M. (2018), ‘Restraining the game-changer: A decade of uneven development in the petroleum sector’, International Journal of Contemporary Iraqi Studies, 12:3, pp. 239–67, doi: 10.1386/jcis.12.3.239_1)

Kindly note that IJCIS, publishes by Intellect Books-UK, is a subscription periodical with a possibility to purchase, online, the entire issue or any of its articles; web-access link will be provided once the printed copy issue is released in the coming days.

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, Iraq/ Development Consultancy & Research, Guest Editor IJCIS-SI, Email: mou-jiya(at)online.no.

2018 is, in more than one aspect, rather an important year; It commemorates the 60 anniversary of 14 July revolution 1958; it registers thirty years of ending the eight years long Iran-Iraq war; it counts fifteen years of the country’ invasion by the Anglo-American lead troops; it also marks a ten year period of grand opening of the petroleum sector to foreign companies; it witnessed the almost end of the “triple shocks” that paralyzed the country and finally, it testifies a minor change of the dysfunctional democracy and plaguing Kleptocracy.

This is the “Introduction” I wrote, as the Guest Editor, for the special issue of the academic International Journal of Contemporary Iraqi Studies-IJCIS, due for release before year ends (by Intellect Books, UK)*

14 July 1958 revolution is still vivid in the memories of many of us who actually witnessed and lived that day and what followed to date. Much has been written about July Revolution during the six decades since that day, but for 2018 two important observations worth making.

First, despite a relatively short tenure of General Abd al-Karim Qasim government (14 July 1958 to 8 February 1963) its record of social economic and development achievements were not matched by achievements of all regimes since Qasim’ assassination, particularly those of post 2003. An article published on the local akhabaar news-site[1] lists most of Qasim achievements, which should make every post 2003 politician, decision maker, parliamentarian, minister among others feel ashamed.

Second, Iraq witnessed during July this year a popular mobilizations in all southern oil producing provinces protesting against lack of employment, deteriorated standard of living, insufficient basic social services especially electricity and safe drinking water and condemning the corruption in the country. In a way, July-September 2018 popular protest vindicates July 1958 revolution achievements comparative to the apparent failures of all post 2003 governments.

Thirty years ago Iran-Iraq war ended; a war that caused too much death, devastation, sufferings and pushed Iraq on the brinks of degeneration; further wars and sever comprehensive sanction led eventually to invading the country.

American and British troops invaded the country in 2003, toppled Sadam régime and, again, brought too much death and destruction but with dismantling most state institutions, inflict serious blows to social fabric and institutionalized sectarianism and ethnicity. Over these 15 years, much of oil export revenues were the target of an unprecedented cronyism and corruption, mostly Kleptocracy (defined here as formalized corruption by formal entities and influential political groups and oligarchy) with meager, if any, of actual economic and social development as manifested by spreading July 2018 demonstrations that left many dead, injured and good number of arrests.[2]

The security situation in Basra deteriorated dramatically on 4 September when the number of killed demonstrators rose to 9 with many more injured on both sides i.e. the demonstrators and security forces, and a number of local government building set on fire.[3] By 7 September number of fatalities in Basra increased to 15 dead and 190 injured with more building including private, foreign consulate and offices of some political parties put ablaze.[4]

Post 2003 democracy was basically confined to national and provincial elections, which were run on regular intervals, but none was without accusations, irregularities and corruption practices. National election of May 2018 has been the most challenged and precarious among them all.  Election results were not approved until three months after the election day even with recounts and involvement of High Judicial Council and the Federal Supreme Court-FSC; the term of the parliament ended on 30 June and the new parliament remains in limbo and was not convened and thus nominating the heads of the presidencies was delayed and the same applies to forming the new government.

FSC approved the recounted results on 19 August 2018 indicating the start of the constitutional process for forming the new government. The new parliament was finally convened, amid rather a different and also divisive political landscape post 2003, on 3 September. Not until 16 September the election of the president of the parliament was elected and on 2 October Dr. Barham Salih was elected the president of the republic- representing serious setback for Barzani’s party-  and on the same day Salih  asked Adil Abdul Mahdi, a pro privatization, the Kurds and IOCs,  to form the government within 30 days!

Provincial elections are scheduled for year ends unless they are impacted by the negative environment that tarnished the latest recent national election; the current political confused order would suggest strongly the likelihood of postponing the provincial election to further date.   But these too were and could be subject to even more irregularities with influential forms within sectarianism, tribalism and religious personality cult. Moreover, the aftermath of July demonstrations could effectively impacts holding, the process and the outcome of the elections.

The local parliamentary election in Kurdistan Region in Iraq was held over 28-30 September and again with different contested claims on its transparency, credibility and results.

2018 marks ten years of the big-push strategy or grand opening of the upstream petroleum for foreign investment and direct involvement that validates, initially, the school of thoughts that invasion was all about oil but the actual development questions that validation. The big-push strategy began by converting a production sharing agreement, was concluded during Sadam’ era when Iraq was under the severest sanction in history, into a long term service contract.

That conversion sets the main premises of a hybrid model contract that was adopted through four major bidding rounds. However, upstream petroleum since the cabinet shift of August 2016 witnessed a departure from previous practices by the return of deals concluded behind closed doors, lack of transparency and adoption of a net revenues sharing model contract that gives IOCs much more a share than offered under the previous four bid rounds.

2018 witnessed the beginning of the end of the triple-shocks i.e., low oil prices, Da’esh presence and retaking Kirkuk back from KRG seizure.

Da’esh (or ISIS/ISL) began by controlling Mosul in mid-2014 then moved to many parts of other governorates particularly Kirkuk, Salahuldeen, Dayala, Al-Anbar and came close to Baghdad. That caused untold destruction, killing, internal displacement and threatened the security and integrity of the country. The military operations to defeat Da’esh drained serious part of the annual state budgets in addition to officially estimated $100 billion reconstruction requirements.[5]

What made the situation even more alarming and drastic are the dramatic decline in oil prices and the prevailed motion of “lower for longer” that coincided with Da’esh attacks. Iraq oil export prices per barrel declined from $102.61 in June 2014 to $22.21 in January 2016 then improved gradually to exceed $74 during September 2018.

Further deterioration in Iraq financial situation was caused by the cessation of Kirkuk oil export when KRG took control of the province’s oil facilities. Though that seizure ended during the fourth quarter of 2017, export from Kirkuk still on hold at the time of writing.

The work on this special issue took eighteen months of concerted efforts, follow-up and back and forth communication involving all editorial colleagues, publisher’s team, anonymous reviewers and contributors. Well-deserved sincere and wholehearted words of thanks and appreciation are due to all of them.

Ahmed Mousa Jiyad provides review of the development of the Iraqi petroleum sector during the period 2008-2018 as post 2003 period witnessed grand opening of the sector for International Oil Companies- IOCs, particularly for upstream sub-sector. The article argues that, analytically and empirically, a sub-sector focused policy impacts, negatively, the development in that sub-sector, in the sector itself and on the sector’s contribution to the development of the national economy. The outcomes would exacerbate structural imbalances, vulnerabilities to external factors and increase dependency on oil revenues, which prohibits desirable structural change, diversification and transformation.

He also highlights the presence and impacts of the “triple shocks” combined with the prospect of “lower-for- longer” oil price that prevailed almost a year ago, contributing to continue deepening the fiscal crisis of the state and elevated the “fear-factor” among Iraqi decision makers. That, with apparent human, systemic and institutional capacity-gaps limitations resulted in Iraq giving important concessions to IOCs without having tangible benefits in return.

Juman Kubba asserts that Iraq, over the past fifteen years, took huge leaps backwards. Thus, she argued it is very important for politicians, historians, experts and judicial bodies to analyse what happened, why it happened, who is responsible and how to hold them accountable. But what is more important now is to ensure that Iraqi society recovers from the calamities of the past fifteen years as well as the preceding thirty years; and that the country’s resources are used to serve Iraqis and provide them with good living conditions and never again be wasted and dissipated. Accordingly, here article focuses on the pathway of healing Iraqi society from the aftermath of decades of war, poverty and immense suffering.

Restoring good education and healthcare is the first step on the pathway of healing and recovery. Also, neutralizing and reversing several dangerous post conflict societal problems that have arisen over the years such as traumatized war children, war injured young men, drug abuse among youth and alarming increase in neoplastic disease just to name a few.  Given the weakness of the government, corruption, and contradictions between legislation and jurisdiction, one must consider new non-traditional approaches to solving these problems; a few are presented in the article. The success of any future government should be measured by how much it can ameliorate the essential life sustaining services for ordinary citizens.

Monetary policy and particularly the role of the Central Bank have important function in the development of the country. Debating this issue, our late colleague Muwafaq Hassan Mahmood  addresses four topics; the first offers an empirical examination of the performance of the banking sector during the period 2010-2015; the second discusses banking sector reform requirements; The third topic will shed light on: i) the environments under which the Iraqi banking industry operates highlighting the limitations and obstacles that impedes the sector’s growth and ii) the investment environment and whether it’s an attractive for the business community to invest and doing businesses in Iraq. Finally, he examined the CBI’s dollar window impacts on the banking industry.

Human skills, systemic and institutional capacity gaps impact the performance of the petroleum sector and these have been the subject of international cooperation between Iraq and other entities e.g., countries, organizations and even companies. Usama Karim article focuses on one of such initiatives i.e., the establishment of the European Iraqi Energy Centre-EUIEC. He argues that knowledge acquisition and development leading to such endeavour is a process that takes long time and much resources needing meticulous planning. This process can be facilitated by the use of expertise and technology transferred by international companies and their networks engaged in ramping up energy production in Iraq.

EUIEC has four components, however, the article elaborates on the research component but Karim suggests that the final EUIEC organization, structure and facilities integrating all its components will require further efforts from the consultants, lead stakeholders and experts in setting up such complex endeavour building up on preliminary results from this study.[6]

Greg Muttitt article reviews what is now known about discussions of oil that took place during the invasion planning and execution, based on documents that have been released in the fifteen years since.

He examines the nature of the strategic objectives, how the US and UK governments planned to achieve them, and how they decided to talk about them in public. Reflecting on this evidence will allow us to revisit the question: was oil a major reason for the war and invasion of Iraq?

Federalism, an outcome of the regime change brought by the 2003 invasion and was enshrined in 2005 Constitution, needs fixing. Since 2003, Luay al-Khatteeb argues, Iraq’s experiment with federalism has in many ways benefitted Iraq, though, he asserts, functioning federalism was never given a chance to be tested in Iraq as there are various factors that have contributed to hinder the formation of a Federal Iraq. Thus, because implementation has been imperfect, it has not solved Iraq’s fundamental economic flaws, which promote the waste of oil revenues, promote oil revenue dependence and allow for local level corruption to flourish. This situation can still be remedied, he argued, but that requires time and may take generations to materialise.

Omar Eljoumayle article summarises his PhD dissertation in economic development of contemporary Iraq. The article traces the role of institutions, institutional policies and how the rapid and frequent institutional changes have driven the Iraqi economy for decades. Though applying the New Institutional Economic-NIE to Iraq expands the range of choices of institutions that could be examined, the choices have been narrowed down by revolving around three central issues: agriculture, oil and wars. The picture painfully presented is one of abrupt and instantaneous institutional changes, through which institutions were repeatedly subject to reshuffle and facing changing circumstances. Consequently these changes have severely affected the path of economic development in Iraq.

The book review part of this volume covers to recently published, in Arabic, important books: one on Iraq’s nuclear program and the other on the Iraqi economy.

While it gives me a great professional scholarly satisfaction to be the guest editor for this issue I regret to report that our colleague and contributor, Muwafaq Hassan Mahmood, passed away on 28 June 2018. Despite his illness and he and I knew he would be not with us for long,  Muwafaq (Abu Rand) was very determined and enthusiastic to deliver his article and honors his commitment before leaving us. I have known Abu Rand since mid-sixties and his early departure was indeed a devastating painful loss. My colleagues, Professor Tareq Ismael (Calgary, Canada) and Professor Bill Haddad (California, USA), and I convey our wholehearted condolences to his family, friends and colleagues and we sincerely thank Muwafaq for his contribution to this special issue.

Ahmed Mousa Jiyad,

Guest Editor, IJCIS-SI,

Norway

4 October 2018

*Jiyad, Ahmed Mousa, Introduction, IJCIS, Volume 12, number 3, 2018 (forthcoming)

[1] 1958 revolution the 60th anniversary (Performance of Qasim in akhabaar  http://www.akhbaar.org/home/2018/7/246337.html (in Arabic) accessed 14 July 2018

[2] As on 22 July the Iraqi Human Rights Commission announced 13 dead, 729 injured, including 460 from security forces, 757 arrested temporarily and release later and  91 government and private buildings and vehicles were damaged. http://www.akhbaar.org/home/2018/7/246645.html  accessed 23 July 2018.

[3] As reported by IOR, 5 September 2018

[4] http://www.akhbaar.org/home/2018/9/248576.html Accessed 8 September 2018

[5] On Da’esh effect, Kuwait conference and cost of reconstruction see , $100 billion for reconstruction http://www.iraq-businessnews.com/2018/02/12/video-iraq-seeks-100bn-for-post-is-reconstruction/

[6] Actually, I was the leader of a team that prepared the “Formulation study for the EU-Iraq Centre for Economic Partnership and Business Cooperation (DCI-ASIA part)”, which was commissioned and funded by the European Commission-EC during the period January-June 2012. The study resulted in formulating and recommends the establishment of EUIEC with four major components: Research, Training, Energy Debate and Business Cooperation. The EC adopted our proposal and started the implementation in 2014 through the Service contract notice “Iraq-Baghdad: ICI+ — EU–Iraq energy centre (EUIEC) 2014/S 074-126988”

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.

Petroleum Policy Proposal for the New Government: Contents, Justifications and Indicators

Petroleum (oil & gas) sector remains, in the next four years as it has been in previous eight decades, the basic pillar for the Iraqi economy.

Thus, it is preferable, if not imperative and mandatory, that the next government presents coherent, well-defined policy, with clear objectives and effective means that demonstrates it serves the national interest. Based on such a policy, the government will be monitored, evaluated and hold accountable periodically according to indicators that are measurable, comparable and verifiable.

This essay aims to present a proposal for why and how the new Iraqi government should have a well-defined petroleum policy document-PPD and what such document comprises; a proposal that helps in monitoring, analysing and evaluating actions and activities of the new government in the sector-wide petroleum.

The essay covers the most important and vital issues that PPD should cover: Structure and governance of the petroleum policy; its main components and indicators (the longest and detailed part in the proposal); Federal Oil and Gas Law; National Oil Company Law; Relation with KRG; Transparency retreat in the oil sector; Corruption problems in the sector; Oil smuggling; Organic linkage between petroleum policy and the general economic and development policy of the government; and finally Futile duplication of the past.

Also the essay emphasises the important role that Iraqi petroleum experts and specialists in undertaking independent, professional and timely monitoring, analysing and evaluating of the PPD at all its phases.

The preparation of this proposal is based on continuous follow-up and use of official information, indicators and standards in the international oil industry. Emphasis was given to practical operational aspects; evidence-based approach not unrealistic assumptions or theoretical abstractions; and starting from the notion that petroleum policy constitutes an obligation to be implemented by the new government, not a guiding document or formality requirements to approve the new cabinet.

First: Petroleum Policy: structure and governing framework

None of the previous governments had or submitted specific Petroleum Policy Document-PPD; this time it must be different. So far, there seems to be a “new” political equation: the prime minister designate requested, and granted, a free-hand in forming his cabinet; in return, he will be responsible for presenting and executing his “government programme”. Both, the cabinet and the programme are subject to parliamentary approval. Hence, the government will, and should, be under scrutiny and accountable for executing the approved programme and, accordingly, its commitments regarding petroleum (oil and gas) would constitute its petroleum policy.

  • It is preferable that petroleum policy be presented as a separate document- PPD in its own right (or what is usually called a White Paper) or within the government program. It may be referred to in the government program but then outlined in details later in a specific document;
  • Since the government program (prepared by the executive branch) is subject to the approval of the legislature (i.e. the parliament), then PPD must be subject to the same approval process and requirements;
  • The PPD should cover the activities of the three basic sub-sectors of the petroleum sector: The first includes exploration, development and production activities for oil and gas (Upstream); the second includes activities related to storage and tank farms, pipelines, pumping stations and export facilities (Midstream); the third covers crude oil refineries, gas industries and petrochemical (Downstream). It should be noted, though, that petrochemical industry falls within downstream sub-sector, but in Iraq it falls within the functions and mandate of the Ministry of Industry and Minerals-MIM not the Ministry of Oil-MoO.
  • PPD should have sets of important measures and quantitative indicators or thresholds that are measurable and verifiable covering all the activities of the oil sub-sectors mentioned above in addition to descriptive indicators. This effectively means:

First, identify and quantify the baseline-indicators at the beginning of PPD implementation (e.g. first December 2018 or January 2019);

Second, targets indicators (estimated at three levels: minimum, possible and ambitious) that the government is committed to achieve on an annual basis;

Third, financial, human, institutional and legal requirements needed for realization of these goals;

Fourth, potential challenges and risk mitigation categorized on the basis of their likelihood of occurrence (high, likely and unlikely) and their impacts (very effective, moderate, not effective).

  • Since the government will be hold accountable before the parliament for implementing its oil policy, this requires that both authorities should have active role and a specific task for “following-up and monitoring” the implementation of PPD at least once a year. In performing this role, the Energy Committee in the General Secretariat of the Council of Ministers is responsible for “follow-up” the implementation of the oil policy by the MoO, while Oil and Energy Committee in Parliament has the task of “monitoring/ oversight” the implementation of the Government/MoO’ PPD.

Monitoring and follow-up reports be presented, discussed and published periodically as a binding and agreed-upon coordination action between the two authorities; different from the parliamentary controversial practices known as “summons”.

  • The policy is to be reviewed and evaluated on the base of the indicators and thresholds already detailed in the PPD and the above-mentioned “follow-up and monitoring” reports. In case of significant failure or deviation (compared with the minimum values of the adopted indicators), this might justify or recommend a call for vote of no-confidence measures against the entire government or dismissal of the Minister of Oil.

Second: Components, Contents and Indicators of PPD

It is possible, but actually necessary and practical, to determine the most important parts of the PPD in each of the three sub-sectors of the petroleum sector; these are discussed now.

  • Exploration, Development and Production (Upstream sub-sector)

In this sub-sector, PPD includes the following:

  • Enact voluntary moratorium on developing any new oilfield except for the border fields (as discussed below) at least during the term of the new government. Similarly, no producing, discovered but not commercially developed or newly discovered oilfield be award to IOCs during the next four years.

The premises for such moratorium are:

  1. According to MoO’ official data and information, Iraq’s oil production reached 4.460 million barrels per day (mbd) during August 2018 and the production capacity could exceed 5 mbd at the end of this year and could reach 8 mbd by 2025;
  2. As the new government is limited by four years, it can add 1.5 mbd more and thus should focus efforts to arriving at about 6.5 mbd by or before the end of its constitutional term;
  3. Oilfields contracted during first and second bid rounds can achieve the required increase, especially the final stages of development to reach plateau production in the contracts of those fields begins or completed during the term of the government;
  4. There is no indication that international oil market, OPEC market share and Iraq quota within OPEC compel Iraq to have production capacity beyond 6.5 mbd during the next four years;
  5. In the event that a rate above 6.5 mbd is needed, the development activities of these oilfields could be “accelerated” within the limits of 8 mbd first and then reinstate the contracted plateau production targets fully or partially as recent information indicates to such eventuality;
  • Earmark any development of oilfields, not contracted before August 2016 and those discovered to date or in the future, exclusively by the National Effort-NE, but with the support of known service companies when necessary and through conventional services contracts, i.e., not through contracting IOCs or licensing rounds.

The justifications for this restriction and focus on the national efforts are:

  1. Most important oilfields classified as big, giant and supper giant have been already awarded to IOCs to the extent that almost 50% of Iraq (excluding KRG) proven oil reserves are now contracted to IOCs;
  2. National effort activities are crucial pillars for the development of human, institutional, knowledge and organizational capacities in this vital sub-sector of the Iraqi oil industry.
  3. Iraqi workers and staff are the backbone for executing national effort activities. Thus, expanding national effort activities could first, contribute, modestly at the start though, in address unemployment problem among young people technically qualified as evidenced by the demonstrations in southern provinces since last July; second, expedite the development of “Iraqi human capital” by extensive training to address skills and human capacity gaps;
  4. As claimed by the Ministry of Oil (though without providing credible and verifiable evidence) the cost of development through national effort is much less compared to those carried out by the IOCs;
  5. Certainly, “decision-making” is exclusively Iraqi under the national effort, while it requires “unanimity by Joint Management Committee-GMC”, which include IOCs, in each field under licensing rounds;
  6. Location, work procedures and activities of the national effort are local, while IOCs offices are located outside Iraq. Thus, this undermines their transparency and, thus, requires extra efforts, by the Iraqi authorities, to verify the credibility and accuracy of costs claimed by IOCs. Available evidences suggest that has been a source of contentions and disagreements between MoO and IOCs, which had its bearings on the projects themselves.
  • Focus on and give priority to end Associated Gas Flaring

Latest statistical information, for August 2018, from MoO indicates 60.4% of total produced associated gas was flared in the southern provinces (Basra, Maysan and Dhi Qar). As for all Iraq (excluding Kurdistan), it exceeds 56%.

Since associated gas flaring represents a blatant waste of an important economic resource in addition to the enormous environmental damage at the time Iraq imports gas from Iran, oil policy of the new government must include and ensure the follows:

  1. Compel IOCs contracted under second bid round to fully comply with their contractual obligations, particularly paragraphs relating exclusively to the maximum benefit from associated gas;
  2. No exemption of any of these companies from their contractual obligations through contracting gas matters, by MoO, to other companies outside the consortium that was originally contracted to develop these oilfields (case in point is what happened recently regarding gas in Gharraf oilfield);

Such action by MoO is highly questionable on legal and cost premises. Relieving related IOCs from their contractual obligation to treat associated gas means giving further concessions and represents a costly overstepping on Iraqi interest.

And by offering that task to another company under totally different contract with, most probably, terms favourable to the new companies would only exacerbates further losses for Iraq. Such eventuality becomes highly probable since these new contracts were negotiated and concluded behind closed doors and their texts have not been disclosed publically and transparently.

But if gas treatment were taken without the consent of the originally contracted IOCs, that could constitute a breach of contract by the MoO, which could compel the concerned contracted party i.e., IOCs to invoke the international arbitration clause that may result in substantive claim for compensation that Iraq has to pay, if warded by ICC in Paris.

  1. Full implementation of the instructions by the General Secretariat of the Council of Ministers on this subject as codified in Recommendation No. 51 of 2018 relating to the work-plan on the requirements of the World Bank loan in this area;
  2. Determine reduction threshold of associated gas flaring commensurate with the need to expedite the implementation of Iraq obligations under the World Bank initiative known as “Zero routine gas flaring by 2030”;
  3. Commitment of the government, especially the ministries of oil and electricity, to provide gas required to generate electricity in specific quantities and timelines (preferably on monthly base)

 

  • Sovereign Border Fields-SBF’ development has special importance and sensitive because of the possibility for joint development through “Unitization” approach with the neighbouring countries, particularly Kuwait and Iran.

International experience tells, unitization modality has many advantages in developing these fields attributing to many rationales, economic and operational considerations and prudent management of oil reservoirs.

In anticipation of high probability of adopting unitization with neighbouring countries, oil policy document should include the following:

  1. Any activity relating to the development of these fields should be limited to the national effort exclusively until a unitization development agreement is reached with the concerned State i.e., Iran and Kuwait;
  2. In the case the concerned State accelerates the development of the border field unilaterally then Iraqi side should give priority to the development of the Iraqi side of that field;
  3. The Iraqi government takes the initiative in urging the neighbouring countries (especially Iran and Kuwait for the time-being) to finalize all necessary agreements for the commencement of important border fields’ actual development through the widely practiced internationally of unitization agreements.
  • The last (fifth) bid round.

After a comprehensive evaluation of the contracts and results of this round by a group of well-known Iraqi oil experts, they concluded that these contracts serve the interests of foreign oil companies at the expense of the Iraqi national interest. That also contravenes the principle of achieving “the highest benefit to the Iraqi people” enshrined in the Constitution.

For the above reasons, the current government has not ratified any of these contracts and the next government should;

  1. Do not approve these contracts and returns them back to the MoO unratified;
  2. Since most of the contracts of this round relate to border fields and exploration blocks, then their development has to be considered through unitization approach.
  • The government refrains from and prohibits negotiating with foreign companies and concluding agreements and contracts with them behind closed doors without transparency and without disclosing the text of these contracts. Also the next government should not ratify any of these contracts which were not ratified before October 2, 2018.

The reasons for this prohibition are:

  1. As the next government will be responsible for implementing its “government program”, the verification of the program implementation requires full transparency and disclosure and this is not possible when negotiations and contracts are confidential;
  2. It cannot be ascertained that contracts signed in secrecy achieve “the highest benefit for the Iraqi people” affirmed by the Constitution;
  3. International experience shows that when business contracts are concluded in secrecy or are not fully transparent, there is something important that the contracting parties want to conceal. Consequently, international evidences indicate to strong correlation between contracts’ lack of transparency and corruption;
  4. Since everyone recognizes the widespread corruption in Iraq, especially among leaders and decision makers at all levels, the lack of transparency in the negotiation and signing of contracts in the oil sector inevitably lead to corruption, and there are too many accusations in this area;
  5. Iraq has an international obligation with EITI to disclose, publish and make these contracts accessible to the concerned public to ensure that these contracts serve the interest of the citizen.
  • The next government undertakes to accelerate the implementation of the long-delayed Common Seawater Supply Project (CSSP) as soon as possible, especially the first phase of the project with National Effort participation of no less than 51% in the construction work.

The justifications are based on the following:

  1. Since 2010 the MoO has been discussing with some international oil companies about this vital project and it is about time to commence earnest action i.e., the implementation;
  2. Water must be injected to sustain oil production and compensate for the decrease in the natural pressure of the reservoir. This requires the injection of large quantities of water in proportion to oil production from the concerned fields;
  3. Since the development of oilfields contracted under first bid round (Rumaila, West Qurna 1, Zubair and the three Maysan fields– Buzergan, Fakkah and Abu Garab) enter or complete the final development phase during the term of the next government, Iraq could in fact face very awkward situation for the following reasons: These fields constitute the backbone of oil production in Iraq. Because they have been producing for many decades, their reservoir pressure is decreasing rapidly and at high rates, which means there is urgent need for water inject. Moreover, implementation and completion of water injection project takes several years.
  4. The need for water injection is not confined to the above brown fields; green fields of second bid round too need such facility, especially Halfaya and West Qurna 2, Majnoon and Gharraf; the same applies to Al-Ahdab oilfield;
  5. For cost considerations, acquiring operational and technical experience and the possibility of implementing the project in two or more phases in the future, it is preferably involve the national efforts by no less than 51% in the execution of this project.
  • Refrain from calling for renegotiation contracts of the four licensing rounds.

PPD of the new government ought to states clearly the futility of renegotiating the contracts of the first four licensing rounds. This position is based on the following arguments:

  1. Most specialized studies proved the service contracts of those four bid rounds give Iraq the best financial return compared to any other contracts, especially production sharing contracts-PSCs concluded by KRG;
  2. Any renegotiation will surely give IOCs unique opportunity to obtain further concessions that could inflict huge financial damage to Iraq’s interest during the duration of the contracts;
  3. The former Minister of Oil, Abdul Karim Luaibi, gave significant concessions to the oil companies without Iraq getting anything in return; hence Iraq lost many powerful arguments and thus erodes its negotiating strengths;
  4. The final phase of developing the fields, under contracts of the first and second licensing rounds, will be commenced or completed during the period of the new government; this means reaching the beginning of the plateau production stage, which means high percentage of the capital costs for the bulk of developing these oilfields was recovered and consequently any renegotiation of these contracts or change their terms would only serve the interest of the IOCS at the expense of Iraq, a further flagrant violation of the Constitution.
  • In the light of the above, the oil policy document should clearly state the preference of service contracts before PSCs, as well as asserting that any form of PSCs and revenue/profit sharing contracts contravenes the principles of the Constitution.

Such assertion implies and could leads to:

  1. Allow MoO to focus and devote efforts to monitor the implementation of the development of the concerned oilfields within the contractual terms and effective control of the development costs to ensure reaching the plateau production targets;
  2. Provide stability and certainty necessary for productive contractual relations between the IOCs and the Iraqi producing companies contracted with them;
  3. Block attempts to convert existing service contracts into PSCs;
  4. Prevents adopting or call for adopting any form of PSCs or contracts based on returns/profits sharing for the development of fields not currently contracted.
  • Restrict exploration activities to National Efforts only and when necessary in cooperation with foreign companies under limited technical services contracts. This recommendation is based on the following:
  1. According to official statistics of the Ministry of Oil, proven oil reserves are currently stands at 153 billion barrels. If we assume that production by the end of this year is 5 million barrels per day-mbd, then reserves/production ratio is more than 84 years;
  2. There is very high probability that this proven reserve would increase significantly after the completion of the development phase of the oilfields under licensing rounds and the completion of exploration contracts, implying there is enough time to enhance petroleum reserves;
  3. The confinement of exploration activities to the national effort only constitutes very important incentive to develop technical, knowledge and technological capabilities of the Iraqi cadres rather than relying entirely on foreign companies.

 

  • Intensify the development of Iraqi manpower, address skills gaps and expand the use of advanced information technology. Why?
  1. Rapid and intensive development of Iraqi human resources in various related petroleum activities is one of the most important requirements for the development of the oil industry, which suffers from many skills and knowledge gaps;
  2. Under the contracts of the first four licensing rounds IOCs allocate a total of $62.2 million annually (this amount has dropped to slightly now because of the withdrawal of some IOCs) for human resources capacity development. These annual funding are non-recoverable and thus must be used in full, effectively and efficiently;
  3. It is assumed that the use of these annual amounts to increase Iraqi staff contribution in the advanced positions and leadership in the management of these fields and also to increase the share of Iraqis working in those fields no less than 85% as established in the signed contracts;
  4. Finally, it is necessary to provide a detailed annual disclosure of how these funds were used, their results and actual impacts in raising and developing performance, efficiency and bridging various skills and knowledge gaps, both human and systemic in the upstream sub-sector.

II-Pipelines, Storage and Export Outlets and Installations (Midstream sub-sector)

As mentioned earlier, the development of some of the oilfields contracted under first and second licensing rounds begins or reaches the final stages, which means increase oil production towards their plateau levels; this requires further necessary capacities of  pipelines, storage and locations of tanks-farms, warehouses and oil export facilities, among others.

Accordingly, PPD should state accurately and quantitatively the following indicators:

  1. Currently total available capacities (i.e., before the new government assumes its functions officially) for pipelines, storage and export facilities of crude oil (baseline survey indicators);
  2. Projects currently under construction and their timelines of completion of pipelines, storage and crude oil export facilities (baseline survey indicators);
  3. The target capacities committed by the new government to achieve and the timeliness of pipelines, tanks and crude oil export facilities (target indicators);
  4. The above target indicators should not include those located within the areal limits for the oilfields established under the contracts when such facilities are within the contractual obligations of the concerned IOCs;

 

For Iraq’ domestic economic development considerations, the next government should commit that no state owned company, wholly or partly, establishes, buys or owns, in whole or in part, any storage capacities outside Iraq;

For reasons of national security, the next government pledges not to privatize any of the crude oil export facilities in the Arabian Gulf and not to offer any new facilities associated with crude oil export to private investment, whether Iraqi or non-Iraqi;

The government should work to achieve “export flexibility” through multiplicity of export outlets, especially the rehabilitation and activation of Kirkuk pipeline through Turkey; through Syria- when security conditions improved and Jordan. And that the government should seriously consider feasible alternatives – both economically and strategically – to intensifying access to Asian markets by sea or by pipelines through Iran.

SOMO, Iraq’s only oil marketing company, occupies an important and critical position that goes beyond, in real terms and economic role, the oil sector to the entire Iraqi economy. Thus, petroleum policy document should include the following:

  1. Providing and ensuring the necessary operational flexibility for SOMO; this helps SOMO carry out its “marketing” function efficiently and effectively according to market requirements and conditions, on one hand, and the crude-mix (depending on API, sulphur content, etc.), market destination, oil lifting as per payment in kind to IOCs in relation to upstream development projects, strategic positioning, among others;
  2. SOMO should not involve in activities outside its primary marketing mission and function without the approval of the government and parliament. The most important of these activities are characterized by high risk or speculation or may result in losses or financial burdens or international obligations; examples of these activities are “spot trading”, “hedging”, ” profits sharing” and “possession of physical assets e.g., storage capacities outside Iraq”;
  3. Compel SOMO to comply with all standards and requirements of transparency and disclosure of all its activities, and to publish comprehensive monthly reports.
  • Oil refining and gas processing (Downstream Sub-sector)

Refining sector and gas processing suffer from many well-known chronic problems. The new government must carefully diagnose and determine what it will do to address them in its petroleum policy document- PPD, especially since the studies and statistical information indicate large and chronic gaps between refinery configuration, i.e., the quantity and quality of domestically produced petroleum products, and local demand patterns.

Iraq has to import large quantities of petroleum products to fill supply-demand deficit caused by the outdated refineries and used technology. The most important evidence of this is the proportion of fuel oil production, which during the first half of this year accounted for 45% of the total production of Iraqi refineries. What is urgently needed should be highlighted in the PPD is a set of quantitative indicators on what the Ministry of Oil should undertake as follows:

  1. Specify the designed and actual operational capacities of each of the currently operating refineries and indicating the quality and quantity of all petroleum products produced therein (baseline indicators);
  2. Disclosing the quantity, quality and value of all exported and imported petroleum products at end of third quarter 2018 (baseline indicators);
  3. Determine the design capacities and expected operational capacities of the new refineries that will be constructed during the term of the government and the quality and quantity of all petroleum products to be produced by these new refineries (target indicators);
  4. The new government firmly commits itself to complete the construction of Kerbala refinery during the period of its mandate and give this grassroots refinery a priority to complete it as soon as possible;
  5. The government is committed not to offer or accept, under Refinery Investment laws, the construction of any new refinery that does not comply with the minimum standard- European standards No. 5;
  6. The Government shall emphatically refrain from purchasing or participating in the purchase, construction or participation in the construction of any refinery outside Iraq;
  7. The government undertakes not to allow any form of competition between the Ministries of Oil and Industry and Minerals in the field of petrochemical industries because this causes serious damage to the Iraqi economy and waste of efforts and financial resources (such as the case of the FAO refinery, which was offered without FEED studies and its impact on Nebras petrochemicals project). The Ministry of Oil is responsible for the refining sector while the Ministry of Industry and Minerals is concerned with the petrochemical industries;
  8. Terminating Maysan Investment Refinery contract, offered, suspiciously, several years ago to Satarim- a financially bankrupt non-qualified technically and non-specialized in terms of experience company. So far, no material evidence that suggest and any progress in construction of this refinery!
  9. Stop boring repetition of re-announcing many new refineries for investment, for which FEED studies have not been prepared (refineries such as Wasit, Diwaniyah and Muthanna); none of these had attracted any serious investors, indicating apparent lack of interest in these refineries. Therefore, the new government should not wait any further and commit itself to start the construction of at least one modern refinery of those which Iraq paid millions of dollars to many international consulting companies to prepare feasibility and FEED studies for them. Alternatively, the government should technologically upgrade some of currently operating refineries. Otherwise, Iraq will continue importing oil products, estimated at an annual cost up to three billion dollars (though the Ministry of Oil does not publish detailed and regular information on the quantities, values and sources of all imported oi products);
  10. Urge Basra Gas Company-BGC to accelerate the development of its production capacity to reach the level of production specified in the contract and commensurate with the increase of associated gas from oilfields, Rumaila, West Qurna 1 and Zubair. This in turn will contribute to reducing gas flaring on the one hand and increase export revenues of liquefied gas and condensates produced by BGC.
  11. As BGC is a joint company owned by the Iraqi government through the South Gas Company-SGC by 51% of its shares; therefore, PPD should determine BGC production capacity during the term of the new government.
  12. Finally, BGC should also publish information about the locally marketed products that have been exported and the revenues generated.

 

Third: Federal Oil and Gas Law-FOGL

There are at least four drafts for this law, all of which have become obsolete and un-implementable. Therefore, the next government has two alternatives: either abandon all existing drafts of the law or introduce a new draft law that is completely and radically different from any of the old versions of the law. If the second alternative is chosen, the 10-year experience with the above four versions suggests that this requires intensive, complex and long efforts and may do not work in the end.

 

Fourth: Iraqi National Oil Company-INOC Law

The appeal against this law submitted to the Federal Supreme Court-FSC by Iraqi citizens proved that the formal submissions (presented on 3 October, 2018) to FSC by the legal representatives of the Prime Minister and the Ministry of Finance confirm the unconstitutionality of many articles of INOCs law.

These formal submissions together with the appeal request may convince FSC to accept the challenge of the law, wholly or partially. Hence, the new government has two options: Either completely disregard this law or introduce a new draft law that is fundamentally and completely different from the law being contested.

 

But, it is rather strange, unfortunate and a move to impose a fait accompli on the next government, the cabinet decided, 9 October 2018 to nominate the current oil minister as the chairman of INOC, while the appeal is still before the FSC!! Moreover, that decision prompted the “Chairman” of INOC to issue directives on 18 October that were revoked, by him, on 20 October due to sever criticisms, by many including this writer (http://www.akhbaar.org/home/2018/10/250241.html), exposing the shallow premises of these directives and their highly possible detrimental consequences.

Fifth: The relationship with KRG

The relationship between the federal government and KRG has a long, complex and difficult history since 2003. In view of the evidence and known positions, it is expected that the new government will attempt to solve the problems related to the oil issue with the Kurdistan Regional Government, but it must also insist on preserving the supreme national interest, which was raised during the past years and still can be summarized as follows:

  1. The unconstitutionality and illegality of all contracts signed by KRG with many IOCs (note that this is the subject of a lawsuit filed with the FSC by the Ministry of Oil against KRG many years ago; currently waiting for experts witnesses for professional opinion)
  2. Restrict all oil exports to SOMO and consider any export of crude oil outside SOMO smuggling and illicit trade (this is what all previous federal governments, including the current one, have officially stated);
  3. SOMO should continue boycotting any company or oil tankers that transport or buy smuggled Iraqi oil through KRG (this is what SOMO has done);
  4. Never allow the control of KRG on any oil and gas fields that are belonging to the northern federal oil and gas companies (NOC and NGC) (and this is what was achieved after the defeat of Daesh and the restoration of control by the federal authority on Kirkuk at the end of last year);
  5. Not to allow KRG authorities to undertake (or conclude agreements with foreign companies for) any exploration or development activity in the shared or disputed areas (and this is a declared position of the federal government);
  6. The Ministry of Oil should not deal with and blacklist any foreign oil company currently or in the future involve in any exploratory or developmental activity in the Kurdish region (this prohibition is still in force despite the current oil minister violating it in favour of a UAE company for reasons that must be investigated officially);
  7. The Ministry of Oil should continue on its arbitration case that it submitted to the International Chamber of Commerce in Paris against the Turkish companies and government for violating international agreements signed between the two countries, especially those relating to Kirkuk-Ceyhan oil pipeline (Iraqi Oil Ministry estimates winning the lawsuit and with significant compensation award);
  8. Oblige KRG to fully comply with the provisions mentioned in the federal budget laws since 2004 concerning the settlement of receivables of oil export revenues and others by KRG to the Federal Ministry of Finance (as mentioned in the annual budget laws and detailed in reports by  the Supreme Auditing Board);
  9. The demonstrations in Basra and other southern oil-producing provinces will not allow the new government giving KRG more than what it entitles on population basis and providing that KRG delivers all oil produced in the region to the federal government to be exported by SOMO (the new government should not ignore demonstrators sentiment particularly when raised a banner reading ” Basra Oil for Basra”);
  10. Finally, Iraq cannot and should not bear all the burden of OPEC decisions when reducing production. It is assumed that Iraq’s relationship with OPEC occupies important space in the oil policy of the new government.

But on the other hand, there are many factors and considerations that may lead us to believe that the new government does not implement or succeed in implementing the above tasks for the following reasons:

  1. The role of what is known as “weighted and influential personalities”, that has good relations with Kurdish leaders, in the internal political landscape and the relationship between the two governments. For example, if Adel Abdul Mahdi becomes a Prime Minister his positions (as a friend of the Kurdish people as Massoud Barzani calls him) and his well-known views could compel him to oppose all or some of the above components of the oil policy of his government;
  2. Election results, held a few days ago, in the Kurdish region are still subject to disagreement and opposition, and there is considerable scepticism about their transparency and credibility, which means that their results will not be recognized and could inevitably affect both the parliament and the composition of the provincial government.
  3. The election of the President of the Republic of Iraq has deepened the divide and tensions within the “Kurdish House” and may push KRG (dominated and controlled by Barzani family) to harden their positions with the federal government;
  4. Absent transparency and the fate of oil export revenues continue to be pursued by KRG despite the “formal” reports that were issued before the elections in the region;
  5. KRG debt accumulation and the practices of “mortgaging” future oil sales had gradually pushed KRG into “debt trap” and KRG might use it debt as negotiation issue with the federal government;
  6. The improvement in international oil prices may make KRG feel it is not anymore under “financial pressure”, thus reducing the need for quick resolution of outstanding issues mentioned above with the federal government.

Sixth, Transparency Shrinking in the Oil Sector

As the PPD covers many topics and includes a wide range of indicators for goals that the new government commits itself to accomplish, the document requires to adopt and determine all quantitative and descriptive standards of transparency in the extractive sub-sector and the rest of petroleum sector, which MoO must implement and comply with them fully.

The core standards of transparency are availability, accessibility, regularity, accuracy and comprehensiveness of data, information, contracts, financial flows, activities, achievements, negotiations and concluded agreements, MoUs and alike, among others.

The above should cover all entities, departments and companies of the Ministry of Oil and foreign companies contracted with, as far as it relates to projects in Iraq. Moreover, MoO is committed to follow-up the consequences of the dissemination of such information from opinions, studies and reports.

Seventh: Problems of Corruption in the Oil Sector and Oil Smuggling

It is not new to say that corruption has become a widespread and institutionalized phenomenon in Iraq and in the MoO where there is a large number of explicit or implicit accusations and sometimes even with names and sums indicating the involvement of senior officials in the Ministry. But it is rather strange to observe that no official in the ministry or its companies, who have been charged or suspected of corruption, has taken legal action against those who accused them!!

There have also been increasing cases of “stealing” oil and oil products from pipelines leading to known a phenomenon of “oil smuggling”, especially in the province of Basra with the involvement of officials in such illegal activities.

Because of the negative and catastrophic effects of various forms of corruption and oil smuggling on this sector and on the national economy, PPD of the new government must take a decisive, clear and strong position to combat and eliminate these negative phenomena and identify means and indicators to assess its performance.

Eighth: The Organic Relationship Between Petroleum Policy and the Broader Economic and Development Policy of the New Government

Because the Iraqi economy is structurally dependent largely, if not entirely, on the oil sector, oil policy has an effective impact on the economic development policy of the country as a whole. Reconstruction, debt repayment and provide basic needs and services, that previous governments have failed to provide, make it imperative on the new government to coordinates and integrates fully and effectively its petroleum policy with the national development plan.

However, National Development Plan (NDP) 2018-2022 is, as its predecessors, indicative and non-binding, while the government program is binding according to which the new government will be assessed and held accountable. This practically means what matters is the details of the government program, its consistency and harmony of various policies, tools and entities responsible for implementing the program.

Ironically, the parliament has voted, recently, to create a new parliamentary “Committee for Strategic Planning”, while the government’ NDP is only indicative and without any strategic vision, let alone planning!!

 

Ninth: Avoid Duplication and Populism

The current government program (2014-18) on petroleum focused only on “increasing oil and gas production to improve financial sustainability” in brief very general terms without quantitative indicators that can be used to measure performance.

But the tasks of the new government should be detailed and their implementation is measured by many indicators with credible verification. Hence, the new government should avoid copy & paste the “format” of previous government programme relating to the petroleum sector.

 

At the same time, Iraq should not be seen as a testing ground for utopian ideas that are not well thought out and are not economically and socially feasible and move away from populist ideas and practices. The demonstrations in the southern provinces clearly indicate the gravity of the situation; deeds more are needed than word and results matter most than promises.

Tenth: The Role of Iraqi Petroleum Experts and Economists

In the light of the importance of oil policy, as outlined above, and its effective impacts on the Iraqi economy it becomes extremely important that all faithful Iraqis who are keen on preserving the interest of the country and the good use of its petroleum wealth, especially oil experts and specialists and economists, to stand together firmly and forcefully to follow-up, remain vigilant and expose all attempts to harm or compromise the interests of the Iraqi people; hard and challenging times are ahead of us, unfortunately!

 

* Arabic earlier version of this essay has been circulated widely and posted on many websites and e-media, http://www.akhbaar.org/home/2018/10/249826.html

Norway

21 October 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.

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.

:

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.