Al-Ahdab Oil Contract has Many Flaws

Ahmed Mousa Jiyad is an independent development consultant, scholar and Associate with Centre for Global Energy Studies (CGES). 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. He is now based in Norway.  The opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

A recent ceremony for Al-Ahdab oilfield commencement of commercial production was attended by former minister of oil Dr. Shahristani, now the deputy prime minister for energy affairs, and his successor, Mr. Abdul Karim al-Luaibi. This is significant development from more than one aspect:
  1. The contract for this oilfield was converted from a production sharing contract-PSC concluded under former régime in 1997 into a service contract concluded in November 2008.  Practically, the contract serves as a base, with modifications, for the “model” service contracts that followed for the three bid rounds concluded so far. Thus an end to the PSCs in Iraq’s upstream petroleum was consolidated;
  2. It also signifies a needed achievement for the ministry and the Shahristani strategy of opening of the sector before the IOCs, as the ministry been heavily criticized for not delivering substantial results;
  3. The early local resentments seems to be fading away and this field alone would secure three important privileges for the governorte/province of Wasit: more revenues through the known “petrodollars” allowances for every barrel of produced oil; the oil and gas produced from the oilfield will be used for generating power in the Zubeidiyah power station which is being set up by China, also in Wasit; and a place at the Federal Oil and Gas Council when this council is established under the proposed Federal Oil and Gas Law currently under consideration.
That said and though it is surely welcoming and encouraging news to see the development of this oilfield is coming on stream, however, AlAhdab contract with CNPC requires serious attention with highly justified revision.


I have since January 2010 reputedly exposed the weaknesses and problems with Al-Ahdab contract and how, in comparative sense, it works against the Iraqi interests. Credible information indicates that the negotiating team at that time was “instructed” from the office of the prime minister to accept these unfavourable terms.


To be specific, this contract has many flaws regarding the following variables, which has significant financial implications for the Iraqi interests:


The “signature bonus” was extremely insignificant amount (of only 3 million dollars) that is not commensurate with the corresponding signature bonus paid for the oilfields under the second bid round taking into consideration the envisaged Production Plateau Target-PPT, as measure of proportionality.



With original 115 thousands barrels per day-tbd PPT for AlAhdab, which is between 110 tbd for Najmah and 120 tbd for Qaiyarah oilfields, CNPC should pay 100 million dollars NOT 3 million dollars. Upgrading the PPT to 200 tbd as recent data indicates, the signature bonus should be even higher. This is the least to ask, considering that another Chinese oil company had paid $2.2 billion signature bonus for two exploration blocks only in Angola.

The payment “cap” for petroleum cost and remuneration fee was fixed at 100% of the “deemed revenues”. This implies that CNPC gets its investment and remuneration fees first, and unless there is surplus in the deemed revenues, Iraq would not get any revenues from the field. Therefore, the payment “cap” ought to be reduced to 50% of the “deemed revenues”.


Level of “commercial production”, which decides the commencement of payment could be specified at 25000bd (again somewhere between that for Najmah and for Qaiyarah oilfields as reference points) or proportionately higher if the 200 tbd PPT is adopted.


Unpaid dues carry “LIBOR+3” interest. Due to this Iraq paid in July 2010 some $250 million as its 25% share in the investment requirements to “avoid paying the interest”. So far the development cost mounts to $1.5 billion, meaning Iraq has already paid $375 million in cash.


These unmet payments should be interest free, similar to the provisions of the model contracts for rounds 1 and 2. Therefore, the “LIBOR+3” interest on these unpaid dues should be deleted from AlAhdab contract.


The overhead charges for AlAhdab is 2% compared with 1% for all other contracts. Hence this charges should be cut to that paid by other IOCs.


The corporate income tax of (15%) should be amended to become (35%) and the provisions relating to  “stabilization” should also be amended to that effect to be in line with other service contracts.


The R-factor should also be adjusted to be in line with those applied for green- fields offered under the 2nd bid round. The remuneration fee will thus be reduced from the maximum of $6/b to a minimum of $1.2/b, instead of the current minimum of $3/b. The scale of R-factor would also be adjusted from 4 to 5 levels accordingly.


Unfortunately, the parliament had missed good opportunity few months ago to remedy these shortcomings, safeguard Iraqi interests and assert its authority and constitutional role, and thus
continues in pacifying itself and accepting circumvention by the executive branch.


On 27 March 2011 the Parliament voted to abrogate a former law, of 1997, that ratified the Development and Production Contract and the Memorandum of Understanding related to AlAhdab oil field signed in Baghdad on 4 June 1997 between MoO and CNOC and CNI, represented by Alwaha Co. (China).

 

The parliament, in my view, should have insisted that AlAhdab Contract of 2008 must also be revised and if approved then ratified by law, and thus the parliament should have seen that contract before abrogating the old law. Thus, not only the parliament had missed excellent opportunity to set powerful legal precedence for having all other contracts enact by law, the parliament had in fact gave its consent to remain passive and be on the sidelines of effective authority regarding such oil contracts.
Ahmed Mousa Jiyad,
Iraq Development Consultancy and Research (I/DC&R)
Norway.
26th July 2011

One Response to Al-Ahdab Oil Contract has Many Flaws

  1. Abdulzahra J. Kadhim July 27, 2011 at 2:24 am #

    Thanks Ahmed for the interesting and valuable information.
    I may add another significant factor should have been mentioned to your readers is that prior to the signature of The AlAhdab deal and I recall during Dr. Shahristani visits to China at the time he secured a verbal promise by the Chinese to write off most if not all of Iraq’s debt during Sadam era which stood at $US8.5 Billions; and eventually they fulfilled their promised.