Iraqi Oil: Resource Curse or Glorious Blessing?

AMJ- I personally do not think it was or is feasible for Iraq to “rebuild the energy sector by itself,” as you put it.  I will deal first with the involvement of the IOCs and then discuss the issue of “control over the oil sector.”  The Ministry of Oil concluded between 2004 and 2008 some 40 memorandums of cooperation- MoCs with many IOCs to provide support in three major activities: joint technical studies, training and development, and technical consultancy. IOCs covered all costs related to these MoCs.

MoCs had helped in the formulation of the Technical Support Contracts-TSCs, which were envisaged for implementation by the IOCs during two years 2008 and 2009. The focus of the TSCs was firstly to address the production decline of the major oilfields (Rumaila north and south, Zubair, West Qurna 1, Missan fields and Kirkuk), and then increase it by 400-500 thousand barrels per day-kdb. The Iraqi side pays for both the investment requirements and the IOC fees incurred to achieve that target.

The negotiation of the TSCs lasted from the last quarter of 2007 to mid-2008 without conclusion due to key differences on major issues. MoO then reduced the duration of the TSCs from two to one year since (at the time) they would overlap with the timing of the first bid round. IOCs refused the one year’ period as being too short for such contracts. Accordingly, MoO abandoned the whole idea to focus on the preparations for the bidding round.

Many within Iraqi petroleum industry proposed a gradual increase in production capacity through these TSCs but with a longer period (say 5 years). So, even that modest increase of 400-500 kdb was envisaged to be realized through the involvement of the IOCs. Therefore, any substantive increase in the country’s production and export capacities requires IOC contribution in one form or the other: technical support contracts or the concluded long-term service contracts.  The problem is, therefore, not related to involvement of the IOCs but to the scale, pace and terms and conditions of such contracts, as was discussed in answering Q2.

Regarding the issue of “control over the oil sector,” I have to emphasise that IOCs under the service contracts have no legal claim to“sharing” or “entitlement”  on the produced petroleum or the reserves.
Also there is a need to differentiate between “operational” and “sovereign” controls on the upstream petroleum as stipulated in the concluded service contracts by the ministry of oil. Most on-field operational activities of the contracted field/ exploration block are managed by the Joint Management Committee- the JMC, where both the Iraqi side and the IOCs are represented and the decisions are taken by consensus. This implies equal control for both contracting parties.

Approval of awards for sub-contractors and supplies depend on their value. Some have to be approved by JMC and the ones with higher value have to be approved by the Iraqi ROC alone.
All development plans (initial and final) with their annual budgets and programmes have to be approved by the ROC and the ministry.

Finally, decisions on actual production levels remain a sovereign matter. However, since the service contracts are based on Take or Pay-ToP principle, IOCs would be compensated for any production curtailment, provided that such curtailment is applied pari passu to all producing fields and involved IOCs.

The above would indicate, theoretically, that Iraq has in fact effective control under these service contracts. However, the degree of effectiveness depends on the professional competence of the Iraqis on different levels of decision making from the related field to the ministry. Also, the existence of good governance modalities is critical in this regard.

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