$14.4bn Compensation to IOCs: How Accurate or Possible?

Second, the “Net” Remuneration fee

According to the concluded contracts the remuneration fees (at R-factor value=1) ranges between $6/barrel and $1.15/b giving a simple average of $2.513/b for the ten covered oilfields. This simple average is highly impacted by the two high remuneration fees for Alahdab and Badra oilfields.

But the weighted average of the remuneration fees (weighted by the plateau production of the related oilfields) declines to $1.88/b, reflecting the significance of economies of scale of the giant brown oilfields of the first bid round.

The above averages (simple and weighted) are for the gross remuneration fees; but gross remuneration fee is deductible by three factors: the income tax; the share of the State partner and third, the R-factor. Leaving the impact of the R-factor aside (because it is complex accounting and auditing process that relates to actual expenses and revenues, which the Ministry of Oil did not disclosed so far) the “Net” remuneration fee is calculated as the gross remuneration fee deducted by the income tax and the share of the State partner.

Based on the contract provisions I have calculated that every dollar Iraq pays as remuneration fee it is divided between Iraq and the IOCs at 51.25% vs. 48.75% respectively. This implies that the maximum “simple average of the Net remuneration fee” which the IOCs receive is $1.23/b and the maximum “weighted average of the Net remuneration fee” which the IOCs receive is $0.92/b. They are the maximum because they were calculated at R-factor=1, meaning that higher values for R-factor (occurring as production incresaes) would reduce the remuneration fee depending on the adopted contract of the bid round.

Therefore, our calculation produces two thresholds for net remuneration fee: $1.23 and $0.92 per every incremental barrel of oil production.

Third, the compensational curtailed production

As mentioned above the Minister of Oil said the amount of paid compensation exceeds $14.4 billion. Such payment was done to compensation the IOCs for lost income (Net remuneration fee) due to production curtailment in accordance with article 12.5 of the contract.   But how accurate, or possible or justifiable this amount is?

The simple test is to estimate the volume, number of barrels, of the “curtailed production” that justify such astronomical compensation during the period 2011-2014.

Based on the two thresholds for net remuneration fee $1.23 and $0.92 mentioned above the curtailed production must have been either 11.746 billion barrels or 15.705 billion barrels!!!!.

To tolerates these volumes of curtailments the South of the country needs to have at least production capacities of 3 mbd (in 2011); 6.5mbd (in 2012); 8.9 mbd (in 2013) and 13.8 mbd (in 2014) under 11.746 billion barrels only; and much higher than these under 15.705 billion barrels of curtailed production!

Let us remember that total incremental production (to justify remuneration fee payment) during the same period was only 1.1 billion barrels. So how is it possible that the volume of curtailed production is between 11 folds to 15 folds higher than actual incremental production?

Something is seriously wrong, suspicious and scandalous.