By Ahmed Mousa Jiyad, Norway, 7th March 2011.
Recent data on Rumaila production for the period 26 December 2010 to 27 February 2011 indicates that after achieving the 10% threshold over the baseline production, daily production dropped sharply to the extent that in few days, production levels were lower even than the baseline production.
The purpose of this intervention is to provide a few comments on the issue taking into consideration the related provisions of the contract.
- The contract provides that the contactors (BP/CNPC +SOMO) are entitled to begin recovering cost and remuneration fee once they achieved 10% over the contracted baseline production for 30 consecutive days.
- For Rumaila the contracted baseline production is 1.066 million barrels per day (mbd), and hence the threshold for commencement of cost and remuneration fee is 1,172,600 barrels (the red line in the following chart).
- The actual payment to the contractor is limited to 50% of the “deemed revenues” for petroleum cost and remuneration fee, and 10% of the “deemed revenues” for the supplementary cost.
- Daily production data from Rumaila seems to satisfy the condition of 10% over the contacted baseline production for 30 consecutive days until 31st January 2011, as shown by NO (daily production rate) curve in the chart. Hence the contactor is entitled to apply the cost recovery modality. Average price for Basra crude during January was $93.37 (assumed to be the FOB price), which gives a total of $151.7 million as cap for payment to the contractor from the deemed revenues of the incremental production for the period 11 to 31 January (which the daily production data are officially available). If one assumes average daily production for the first 10 days in January is equal to the daily average of the remaining days of January, then the contractor share for the whole of January would be ca. $224 million for remuneration fees and cost recovery.Total incremental production (over the baseline production) during January is estimated to be 3,997,524 barrels, giving BP/CNPC a maximum remuneration fee of $3,897,586 (after deducting SOMO’s share and the income taxes). The remaining amount of ca. $223 million represents 14.9% or 13.1% of the budget for 2010 work programme, which was reported to be $1.5 or $1.7 billion.
- During February, daily production fluctuated with 12 days below 1,172,600 barrels threshold including 4 days with daily production even lower than the baseline production itself, while the remaining 15 days are above this threshold. However, since the downward production was deep the average daily production in February was 1,155,593 barrels, which is only 8.4% over the baseline production. Even if we apply the contracted annual decline of 5% per annum, this would not make for the difference of 1.6% for February underperformance. This implies that the IOCs have failed to sustain the 10% over the contracted baseline production, and this disqualifies IOCs from recovering their cost and remuneration.
- It appears, as anticipated by many including myself, that IOCs would attain the 10% threshold over baseline production to invoke cost and fees recovery without insuring sustainability of the increase by applying short terms mechanical or technical modalities instead of the advanced enhance recovery methods. BP/CNPC uses contract for the supply and servicing of Electrical Submersible Pumps (ESP), which was split between two companies, Baker Hughes gets 60% of the work while Saudi Al-Khorayef Petroleum Co., has the remaining 40%. ENI, last year done some debottlenecking (at Zubair oilfield), reducing pressure here, re-perforating there; it is not really sustainable – they have some work to do (as Thamir Ghadhban said to IOR on 9 December 2010)
- The Ministry of oil, SOC and Iraqi oil technical/professionals are expected to address this issue openly, accurately and professionally as the problems of the concluded contracts began to surface loud and clear, and remedial prompt and effective actions are required. It is vital that an annual report on Rumaila, and for that matter on all other contracted fields, is published and posted on the websites of MoO and SOC (and other ROCs) to outline what has happened to the Work Program and its Budget. Oil and Energy Committee in the Parliament should also have its say on such matters.
Ahmed Mousa Jiyad, [email protected]
Mr Jiyad is an independent development consultant, scholar and Associate with 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. Jiyad is regular contributor to MEES publications. He is now based in Norway. (Email: [email protected]).