Iraqi Oil: Resource Curse or Glorious Blessing?

AMJ- As a policy I usually do not address persons and personalities but focus my attention on issues, policies and actions. So, let me elaborate on two main issues pertaining to your question.
First, the “big push” strategy. Iraq, through four bid rounds and one direct deal (for AlAhdab oilfield), signed 19 service contracts comprising 21 gas and oil fields and exploration blocks. The bid rounds took place between June 2009 and May 2012. These contracts cover almost 60% of Iraq’s proven reserves, and would, (if fully implemented) bring total oil production to 12.5 mbd by 2017, and naturally more associated gas in addition to free gas. The time scale and pace outlined above was unprecedented in the history of the world’s oil industry, and has no precedent in developing countries.

Many, (including myself) had questioned the feasibility, sustainability and desirability of such a big push strategy, and there was much analysis, debate and publication on this issue.  In fact, even the Ministry of Oil in 2008 (MoO) was aiming at a total production capacity of 4.5 mbd by 2013 increasing to 6 mbd within 10 years. That level of total production capacity was endorsed by the Baghdad Symposium for Reviewing Iraq Oil Policy in February 2009 as the MoO 10 year plan to achieve 6mbd by 2019. Instead of adopting a gradual approach based on the careful prioritisation and sequencing of developing the oilfields according to economically justified premises linked to sustainable development requirements, MoO opted for a fast tempo big push grandiose strategy by offering and contracting all of Iraq’s prized oilfields to IOCs. It was only when the IOCs inflated the plateau targets for the oilfields during the June 2009 bid round the euphoria of 12.5 mbd threshold began to surface and became a sacrosanct target for some inside and outside the ministry.But MoO and the government are now more receptive to revising the plateau targets, especially after a thorough study partially financed by the Word Bank drew similar conclusions to those of many Iraqi oil professionals. These experts, along with the suggestions of the forthcoming National Energy Strategy, suggested a lower production level was more realistic.

Accordingly, three main parameters would be revised compared with production envisaged under the signed contracts: i- Lower plateau target (probably to a maximum of 9 mbd); ii- a longer development period (to be completed in 2020 instead of 2017 for the major oilfields of bid round one); and iii- longer plateau production period (longer than 7 years).

Before launching the first bid rounds there were other options and, later on, many opposed this big push strategy. However, since the concluded contracts are already implemented, most of the attention is now rightly directed toward “damage limitation” to ensure compliance with the Constitutional principle of the “Best interests of the Iraqi People.”

This has two implications: the first is to focus attention on concluded contracts to safeguard Iraqi interests, and thus it is highly advisable to have moratorium on new contracting and bidding rounds until at least the oilfields offered under round one begin plateau production period. The second is to make necessary preparations for revising, amending and thus re-negotiating signed contracts. Both implications are formidable tasks, and this brings us to the second issue: terms and conditions

All concluded deals are service contracts based on dollar denominated Remuneration Fees per barrel of oil/equivalent. Factoring in corporate income tax, the share of the Iraqi State partner and the R-factor, Iraq gets back 51.25% of every dollar paid in remuneration fees. So, all windfall (or economic rent resulting from oil prices) belongs to Iraq only and is not shared with the IOCs. This is not the case with KRG contracts, and this represents significant financial advantages for Iraq.

But service contracts could prompt IOCs to be less cost-conscious. Actually, this was manifested in increasing complaints that began to surface on IOCs tendency for “gold-plating” and inflating costs unreasonably. The signed contracts have elaborated decision making, accounting and auditing protocols and procedures to theoretically provide control on cost matters. However, the ministry and the contracted state Regional Oil Companies (ROCs) suffer from serious human resource and skill capacity gaps, which must be addressed by a variety of measures. It is worth mentioning in this regard that the contracts provide a provision to establish a Training, Technology and Scholarship Fund-TTSF, which generates annual income of $62.2 million during the duration of the contracts that must be used to bridge these gaps.   

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