2- The “Economic Model”, HoA proposes an economic model to be used in deciding the compensation for Raw Gas, which the BGC Joint Venture has the monopoly to off-take and purchase from the producers. There are many important issues regarding the economic model remain very ambiguous such as: “fixed percentage” , “a time lag between realised revenues (to the Joint Venture) and actual payment of compensation” , “adjustment in certain economic parameters”, “appropriate audit rights,.., on the realized revenues.”, “who has the responsibility of formulating the economic model” , “The inclusion of “taxes” and “the fiscal regime” among the factors affecting the compensation for raw gas is an indication of an approach that eventually reduce government revenues.” The economic model has vital impacts on the comparative advantages of the associated gas as source of energy, as feedstock for industrial purposes and for households uses. Thus it is important to know exactly what economic model would be used in these contracts.

3- Abusive Transfer Pricing. Indications on possible occurrence of abusive transfer pricing are detected from provisions related, among others, to Shell’s strategic alliances (Clause 3), Shell’s Obligations (Clause 5), Cost and Expenses (Clause 8), Quick Win Assets (Clause 9). The possibility is further enhanced by the way the JMC decision making is formulated and the apparent weak auditing role given to MoO under the agreement.

4- Assets Evaluation for SGC’s Equity Shareholding. According to HoA the South Gas Company-SGC “will contribute its equity shareholding [a 51 %] as a combination of existing assets (based on a jointly agreed evaluation) and the balance (if any) by cash”. But what was mentioned in HoA, the reference points for such evaluation are namely Shell’s “verification surveys”, “initial assessment”, “refurbishment requirements” etc of the existing related assets such as “compression stations and field gas treatment units”, “pipelines and LPG storage and loading terminals”, “North Rumaila and Khor-Al-Zubair gas processing plans”, etc. There is an obvious conflict of interest here on the part of Shell: It has an interest to reduce the value of SGC’s assets in order to increase the “cash” component of SGC in the equity share. That cash component will be used to finance the Joint Venture requirements from various equipments, installations, services, etc in accordance with the “project development/framework agreement(s)” prepared by Shell!. And when the Joint Venture “will procure technology, technical support and related matters from Shell and/or its affiliate(s) who will be the lead provider of technical and operational support to the Joint Venture”, then conflict of interest becomes crystal clear. Iraqi Private Company Law No 21 of 1997 under which the Joint Venture Company will be formed and operate, stipulates, regarding assets evaluation to be made by a Committee, agreed upon by the Company Registrar, composed of experts in Law, Accountancy and the related working field. The assets evaluation has to be comprehensive, professional and objective.

5- The Joint Management Committee- JMC. The JMC is the fundamental organ in the implementation of HoA and prepare all the necessary requirements for the Joint Venture. To do so HoA vests JMC with enormous and powerful authority, which could supersedes those of MoO and Shell as well. HoA contains and provides many provisions related to JMC, which are controversial and confound and thus need further scrutiny, from structural, organisational, functional and procedural aspects.

6- Investment requirements. Different estimates for initial investment requirements were reported ranging from $8 billion to $17.5 billion. Since the evaluation of the Iraqi assets was fixed (at $1.5 billion when investment requirements was estimated at $8 billion!), the Iraqi side would pay in cash its proportionate share of any escalation in investment requirements. Needless to say that even before BGC has started the initial cost more doubled by one estimate, or 50% if one considers a $12 billion. Are we heading towards a black hole?

Considering the above I would suggest the following:

1- The ministry of oil may, in the name of transparency, either make the fundamental components of the BGC contracts known by posting them on its website, or call for “expert hearing” to discuss this vital joint venture to assess its viability and merits for the Iraqi economy;

2- The ministry of oil is obliged to honour its commitment to the Parliament by sending copy of the said contracts for review, debate and make decision regarding enacting them by law(s);

3- Failure to do the above by the ministry, the Parliament have the obligation to enforce the special motion banning the ministry from signing these specific contracts, and consider them null and void;

4- Finally, each one of us has the moral obligation to express opinion individually and collectively, and disseminate views among the public, the national media, government officials and the parliamentarians regarding these contracts, as they surely would have direct implications for the best interest of the Iraqi people that are enshrined in the constitution.

Ahmed Mousa Jiyad,

Iraq/ Development Consultancy and Research (I/DC&R)

Norway.

12 July 2011

* Iraqi-Shell Gas Deal: who occupies the driver’s seat? Posted on Energy Intelligence http://www.energyintel.com/PubHome.asp?publication_ID=112, also reposted on IOF http://www.iraqoilforum.com/wp-content/uploads/2009/05/ahmad-musa-jiyad-iraqi-shell-gas-deal-who-occupies-the-drivers-seat.pdf