By John Lee.

Iraq's Commission of Integrity has revealed that it has concluded cases resulting in fines of more than 245 billion dinars ($206 million) on private banks, due to violations relating to customs licences and foreign currency auction instructions for 2012.

The CoI mentioned that one of these corruption cases related to a private bank smuggling foreign currency abroad by process of purchasing foreign currency to companies’ interests under the pretext of importing goods. The Office noted that upon investigation, it was found that the companies did not import goods to Iraq since 2004.

The Office clarified that the issues included some governmental and private banks when they committed fraud and entered the auction of selling currency in the names of companies and private account holders without their knowledge, and submitted invoices and forged import manifests. They also violated the instructions of the Central Bank when entering the auction pursuant to provisions of article (3) of money laundering law no. (93/2004).

(Source: Commission of Integrity)

By Dr Amer K. Hirmis.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

An Economic Manifesto for Iraq

 [Bayan Iqtisadi lil-‘Iraq]

Prologue

The October 2019 Uprising of the youth of Iraq is a fresh reminder of the Iraqis love for life. Optimism and hope is on the horizon for a better future, to rebuild Iraq after sixty years of continued economic, political, social and environmental destruction, by successive regimes, in particular since 2003.

Light is in Iraq’s horizon shifting the oppressive darkness engendered by plutocratic theocracy. The Uprising is evidently paving the road to freedom with martyrs, blood, suffering and inextinguishable desire for better life for all Iraqis.

Religion has effectively usurped the power of the Iraqi state. No president or prime minister of Iraq could make a strategic decision without first being sanctioned by the religious authority and/or prominent religious figures. In his speech on October 7, 2019, regarding the Uprising, the president of Iraq repeatedly offered his respect and appreciation to religious figures, for “guidance to the state…” The state craft is now not in the hands of the president or the prime minister.

Every progressive thought or idea, for example, gender equality, positive law, mixed education, modernity (al-hadatha), secularism (al-‘almāniya), and functional democracy has been decried as un-religious, Western, and not suited to Iraq. This state of affairs in governing Iraq is reminiscent of early Mesopotamia, except for the likes of Sargon of Akkad who successfully separated state from religion, during his reign.

In their Uprising, the youth of Iraq, are clearly and loudly demanding an end to this state of affairs. Both the religious leaders and the political class are accused of systemic, rampant, corruption and unlawful enrichment at the cost of annihilating the workers, the poor, women, and the masses that live in abject poverty.

Three things must happen now in Iraq:

1. Functional (not just electoral) democracy is accepted by the overwhelming majority of Iraqis, and is the way forward to set up a truly democratic system of government, run by the people of Iraq (al-Nass, al-A’lma al-‘Iraqi);
2. It is high time that the rising youth of Iraq ought to have a strong political leadership and government with a strong will and determination to make and effect fundamental change: to cast the dark cloud currently looming over Iraq, and bring light by facing up to tribalism and theocracy, create a strong, diversified, economy, preserve the social fabric that is being torn apart by many of the state institutions, bring back civility in social relations, respect and equality for women, re-energise civil society, restore good physical environment and, inter alia, make Iraq a truly sovereign country establishing peace and stability within and without the country; and
3. This leadership, based on a new truly democratic political grouping must work to establish peace and development in Iraq. It should establish stability, security and have a clear positive manifesto based on a vision for the sort of a modern and progressive Iraq they wish to see in 2050, starting immediately.

To this end, what must stop is the social refraction that is being deliberately effected for self-interest under the rubric of warped ideologies, false pretences in “exercising democracy” and religious codes. The emerging leadership must support its 2050 vision by reasonable, realistic, rational and evidence-based short, medium- and long-term objectives, and policies, to unify Iraq in economic, social, political and environmental sense. 

The Economy

Whilst Iraq has witnessed brief intermittent periods of economic growth in GDP (gross domestic product) over the past 60 years, this growth was never inclusive. Iraq has never experienced economic development, which goes beyond economic growth - it is not difficult to observe that a very high proportion of new wealth is concentrated in the hands of the few political elites, prominent families, and their immediate social base, leaving the vast majority of Iraqis in despair for a more equitable distribution of income (including from oil rent), desperate to survive, suffering from poor consumption pattern, spending most of their small disposable income on bare essentials, and consequently deprived from engaging in the political process. All along this has been a deliberate policy of the successive regimes in Iraq, selfishly carving up the oil rent for themselves not the masses. The productive sectors of the economy, like manufacturing and agriculture, have been left to shrink both in absolute and relative terms.

The non-oil economy of Iraq is now so small it can’t and does not absorb graduates from universities or vocational training institutions. Except in the trade sector, the private sector finds it virtually impossible to invest in the face of bureaucratic procedures and pervasive corruption, imposing unbearable economic cost. It is almost impossible to find an institution in today’s Iraq that observes good governance, abides by the rule of law, and is subject to proper regulation. It is not uncommon in Iraq that the operator is simultaneously the regulator, or the accused to be their own judges. And, last but not least, over the past ten years, the Central Bank of Iraq has been an active proponent of “quietly” bringing religion into all aspects of the economy. This is a political, not an economic, project!

Today, the Iraqi economy is in dire straits. Here is why:

1. The crude oil sector comprised 65 percent of GDP in the first quarter of 2019, up from 52 percent in 2014 (at constant 2007 prices, see: cosit.gov.iq various national income reports);
2. Agriculture sector contributed 1.3 percent to GDP in Q1, 2019 (down from 4.12 percent in 2014);
3. Manufacturing contributed 0.8 percent to GDP in Q1, 2019 (down from 1.2 percent in 2014);
4. Oil exports comprised 99 percent of total exports in 2018;
5. Excluding oil exports, Iraq suffers from chronic trade deficit. Importing goods and services has become an easy way to laundering money, only to be invested abroad. The wholesale and retail sector is nearly seven times larger than the manufacturing sector;
6. The parallel (black) economy in Iraq is rife, avoiding taxation and not included in GDP;
7. Women’s participation in the labour market is a mere 13 percent, at a time when women comprise 50 percent of population in working age;
8. The rate of unemployment is around 16 percent (and 25 percent amongst the youth);
9. The obese ‘General Government’ “sector” is five times larger than the agriculture sector and seven times larger than manufacturing; and
10. 30 percent of Iraqis live in poverty.

All the above are characteristics of a backward, rentier, Iraqi economy.

A four-pronged economic development strategy 

A 3-year economic development programme, drawn within the context of an overarching strategy, integrated with a 3-year national federal budget should be considered by the new leadership of the Uprising in Iraq – and the new prime minister. The programme and the budget should be approved by a new cabinet and a new parliament. An annual review of both should be presented to, and discussed by, parliament.

A four-pronged economic development strategy should replace the 2018-22 ‘National Development Plan.’ The strategy should be implemented by the new cabinet. In the short- to medium-term, the following should be key elements for implementation:

1. The development of the manufacturing sector. This is an absolute necessity for diversifying the economy away from its dependence on oil, with increased emphasis on satisfying the domestic demand, as well as developing export-oriented industries, where Iraq could develop comparative advantage in contested markets over a short period of time. For example, the petrochemical industries, plastics, pharmaceuticals, cement, agri-processing, and so on;
2. The development of the agricultural sector, which requires a rigorous management of the water resources, labour force skills development and stronger links with manufacturing. Securing affordable, high quality food, to the Iraqi masses, produced efficiently is of paramount importance. Instead of having the majority of agricultural land divided into small holdings, as at present, the strategy would benefit from introducing ‘agricultural corporations’ on a wide scale, reaping the benefits of economies of scale, and long term investment;
3. Physical and social infrastructure development. Building roads, bridges, airports, housing, schools, hospitals, etc. is a key area for creating well-paid jobs, reducing unemployment, alleviating poverty, and, as in other sectors, instilling professional work ethics, eradicating corruption and nepotism; and
4. Development corridors should be initiated beyond urban centres, to link up various provinces (muhafathas) with their rural hinterland. A parallel housing strategy should be in place, thus creating flexibility in the movement of labour and capital across the country, so alleviating the pressure on major urban centres, like Baghdad, Basra, Mosul and Erbil.

A detailed programme for the above four key elements should be produced in consultation with the private sector representative organisations, to involve the private sector from the outset in the development process. Government must play an enabling role to induce investment within a tightly regulated system, based on the rule of law, good governance and robust socio-economic feasibility study for every single major investment project.

A proportion of oil revenue should be allocated for the development process. This proportion should increase gradually, as the expansion of the productive sectors begins to absorb increasing numbers of employees, including those currently employed in government.

Strong links between education and economic development strategies must be established, in order to establish a balance between supply from the education sector and demand from economic sector for employment needs.

In the short- to medium-term, over the first seven years, the new government must work to achieve:

1. High employment levels;
2. Alleviating poverty through job creation;
3. Upgrading skills, and instil professional work ethics;
4. Decreasing public debt;
5. Tackling tax avoidance, and imposing heavy progressive / gradual income tax;
6. Confiscation of the property gained unlawfully (min ayna lak hatha policy);
7. Record number of women at work;
8. Investing in manufacturing and agriculture, incentivising the private sector to do so;
9. Investing in physical and social infrastructure;
10. Start a robust programme of investing in productivity, R&D and business entrepreneurship;
11. Reducing youth unemployment; and
12. Drawing together a modern ‘Industrial Strategy’ for the long-term.

It is crucial that Iraq has, first and foremost, a modern Industrial Strategy underpinning growth and development in the rest of the economy. It is also crucial that a fundamental change is made to the institutions of state/government so that they work in a coordinated and integrated way, especially in areas of fiscal, monetary and supply-side policies, to support the growth of the private sector in a tightly regulated way, based on the rule of law.

The above objectives for the economy of Iraq can’t be realised without stintless efforts of tackling the inextricably linked aspects of life of the Iraqi people, to support the economic strategy - these include social fabric/culture, political system and the environment.

Social fabric

The leadership of the Uprising (as it stands now) must be supported to establish peace and development in Iraq through social reforms, appointment of civil servants, ministers etc. on merit, adopting professionalism in politics and in economics, and abandoning ethno-sectarian practices once and for all. They must reverse the cultural decline Iraq has been witnessing in various aspects of life, opening the doors for modern culture to thrive.

For over sixty years now, Iraq has been witnessing the murder of academics, journalists, artists, writers, and civil activists who stand up for the ‘Truth’ exposing the wrongs and odious thoughts and acts of successive totalitarian, despotic and theocratic regimes, of which the latest has been in power effectively since 2004. In spite of the fact that the 2005 Iraqi constitution guarantees, on paper, freedom of thought, assembly, writing  and publishing, acts of brutal elimination of the ‘other’ form too long a list to cite. Violence has become a technique to stamp “authority” and demonstrate “legitimacy.”

Culture in Iraq has suffered a great deal, especially since 2003; examples of cultural sufferance include constant attacks on civility which have become much worse and pronounced than in the 40 years or so previous to 2003. Prior to 2003, Iraq witnessed the shrinkage of the educated middle class, the main generator of effective demand in the economy. Post 2003, Iraq has seen a gradual decline in the size of working class, the cowing the of peasants (fellaheen) at the hands of the tribal leaders, and the rise of a “social strata” comprising people with strong ethno-sectarian allegiances, living on plutocrats’ handouts through money laundering, currency auctions or simply by serving religious parties, and their affiliates.

For this “social strata” corruption has become a substitute for education, professional work and for patriotism. A culture, and way of life, they would sadly defend at any cost, even brutally murdering the ‘other.’ For many (not all) within this uncultured and uneducated “social strata” human life has no value.

The educational establishments – e.g. the universities –are being trampled with by establishing religious centres of ‘thought imposition’ at all levels of education, exercising peer pressure, especially on women to wear hijab, an ever expanding phenomenon in Iraq; school girls as young as seven are being hijabed – a clear symbol of indoctrinating and subjugating girls (and boys) from an early age. Thousands of Iraqi intellectuals have left the country for fear of their life; this brain drain comprises a massive loss of human capital.  The oppression of ethnic/religious minorities in Iraq is tantamount to ‘cleansing’? Masses of Kurds, Christians and Yezidis, for example, have left Iraq, over the past 60 years. And, despite their enormous contribution to the economy and culture, Iraqi Jews have, regrettably, become part of Iraq’s history, not the present. And, what was left of the professional work ethics in certain institutions is rapidly diminishing; jobs are offered on sectarian, ethnic or political affiliation, leaving the institutions to wither.

Education by rote is replacing scientific education methods. Al-hafith yuhazim al-fahim (the recitist defeats the learned) is regrettably an accepted currency in religious circles. For the sake of future generations to be able to live in an increasingly competitive, digital, world, this must stop.

The distortion of culture in Iraq has taken many forms. For example, music, singing, and, inter alia, alcohol drinking have been banned. Public spaces, restaurants and what remains of social clubs have to take note of the so-called religious prohibitions imposed by the clergy in the name of religion. Disguised or not, thought police is out in the streets and in universities. Human decency and the love of life in Iraq have been forced to take a back seat, only to give way to some imaginary seventh century social code of practice. Truth and reason are being replaced by blind faith and metaphysics.

Disturbing reports have recently emerged from international news agencies pointing to nefarious practices of commoditising women and minors as young as 12 years old, in the name of pleasure, usufruct, marriage (zawaj/nikah al-mut’a/mizyar). Iraqis look askance at such bent “culture” that has become accepted in some quarters. Alien to Iraqi culture, and to humanity, such practices must stop. 

Political system

A strong, diversified, economy that supports all Iraqis needs a strong, stable and favourable polity that would engender economic development and lead to functional democracy. The Uprising’s leadership must reform the broken ethno-sectarian political system, so as to form a solid basis for achieving the outline economic strategy set out above.

The Uprising must put an end to the ‘political vandalism’ of the last 60 years, which has replaced professional politics and politicians. The Iraqi state was dismantled post-2003, and effectively handed to religious parties, in the main. Thus, state building remains a major challenge in Iraq. Corruption, bad governance, circumventing the rule of law, and disrespect of the constitution, is almost complete. The separation of powers too - the judiciary, executive and the legislature - is nearly absent. There is every indication at present that the power of religion has surpassed that of the state, creating a deep, subversive, state, serving self-interest, indeed regional powers, not the Iraqi people. Religion at present has a strong grip on power and the state in Iraq. There over 250 registered political parties, the largest have religious orientation, fracturing the state and government. This is an extreme version of the state of affairs since the establishment of modern Iraq in 1921.

This state of affairs provides good reasons for the youth Uprising.

The Uprising demands that ‘political vandalism’ must end. A secular state must be established in Iraq (by al-‘alma -the Iraqis) for future generations to have a chance to build a modern, stable, secure, and peaceful Iraq for themselves and their offspring(s).

As at the beginning of November 2019, the Uprising is rejecting the existing political system engendered by religion (and Gudea-type turban wearers). This system appears to have run its course. One brave protestor lamented loudly “We don’t want (political) parties, we want a country to live in” as if Iraq has been destroyed. This lamentation is reminiscent of the lamentation over the city of Ur (ca. 2000 BC), which describes the weeping for the city and pleading that it should not be destroyed by the gods.

Iraq’s “electoral-democracy” is not a functional democracy, based on intelligent tightly scrutinised electoral system, of political parties competing on the basis of credible programme of political, socio-economic and environmental reforms. It is not beyond the realm of possibilities that the isolated political elites are rigging the electoral system to stay in power. Voter turnout has decreased from 80 percent in 2005 to 44 percent in 2018. Protests have become frequent. Men of the cloth, and their affiliates in government have established their own militias within the network of the so-called Popular Mobilization Forces (al-hashd al-sha’bi), which is reported to have fired live rounds at the protestors, and is openly threatening the state.

The Uprising is rightly demanding a new/amended constitution, a new electoral law/system and the amendment of key laws ensuring, for example, the impartiality of the judiciary, the army, the police force, etc. These demands should be strongly supported by all the democratic forces/parties in Iraq.

Support for the Uprising must be made within legitimate and peaceful means, in compliance with international treaties and laws. The current toxic objective conditions created by the occupation of Iraq in 2003 and the establishment of a religious state (but in name) must be changed so that conducive conditions for peace and development are created. Economic development and social change that follows must pave the way for the establishment of functional democracy in Iraq, in the long-run.

The task at hand is enormous; the Uprising could, however, usher the beginning of the end of the failed plutocratic ethno-sectarian state/government system in Iraq.

Physical environment

There is every indication at present that the physical environment of Iraq up and down the country is severely degraded. The causes of the degradation include climate change, wars, and economic sanctions, mismanagement of infrastructure and industry, corruption and, inter alia, flaunting the rule of law. The influence of tribal relations and religious codes on decision-making has been detrimental to physical and social infrastructure (education and health services in particular).

Poor water quality, dumping of industrial waste and sewage into rivers, soil salinity, air pollution, and conflict pollution (caused by wars and ISIS) has led to the deterioration of key ecosystems, climate change impacts and threat of water shortages. Prolonged drought has taken a toll on rain-fed crops in the north of Iraq. This situation is compounded by adverse policies of basin countries (Iran, Iraq, Syria and Turkey). This needs to change. The marshes in the south could be turned into major tourists' attractions, benefiting local population, and the country at large.

In the South, the felling of hundreds of thousands of palm trees, and destruction of orchards for personal gains, is lessening the absorption of CO2. The fires from oil wells burn, releasing huge amounts of toxic residue into the air that people inhale. Gas flares in millions of cubic meters, a massive waste to the Iraqi people.

Hundreds of shanty towns have spread across Iraq, where at least two million people live. The inter-generational health consequences of this and other forms of environmental degradation are plaguing Iraq; their effects will last for a long time.

Environmental disasters like (the few of) those listed above are normally at the top of political and economic priorities of governments, but not apparently in Iraq. The plutocratic/theocratic political class in Iraq is, allegedly, too busy distributing oil wealth amongst themselves.

The emerging leadership of the Uprising in Iraq ought to change this dire situation.

Epilogue

The October Uprising deserves every support from all those who want to see functional democracy prevail in Iraq. All the democratic and progressive forces in Iraq should come together to make this happen.

As expected, the plutocratic theocracy in Iraq has failed to meet the demands of the Iraqis – they have failed to reconstruct the economy, the physical and social infrastructure. They failed to provide basic services in a country that is so rich in natural and human resources.

The deliberate mismanagement of politics and the economy and attempts to destroy the social fabric of the country under an ethno-sectarian system of government has brought despair in Iraq. People have not, however, lost hope in their inextinguishable desire for better life.

The plutocratic ethno-sectarian system in Iraq has reached the end of the road.

The future is for the Uprising.

Iraq needs a strong government to steer the country away from rampant corruption that has drained the country of needed resources. Economic development requires political stability and there would be no stability in Iraq as long as tribalism and religion is dictating what could and could not be done, and as long as the rule of law continues to be flouted.

Iraq needs to begin to build a prosperous future, based on initiating economic development and establishing a polity based on functional democracy.

Dr Amer K. Hirmis

November 7, 2019

Please click here to download Dr Hirmis' full report in pdf format.

Dr Amer K. Hirmis is Principal at UK-based consultancy CBS Ltd. (2008-present). In October 2009, Amer began a 20-months assignment as Senior Development Planning Advisor to the Ministry of Planning in Iraq (funded under the DANIDA programme for ‘peace and reconstruction’ in Iraq). The posts Amer has assumed include Chief Economist and Head of Policy at the London Chamber of Commerce and Industry (1992-5), Economic Advisor to UK South West Regional Development Agency (1996-8) and Associate Director and then Head of Consulting and Research (Middle East) at the global firm DTZ (1998 to 2007).

Dr Amer K Hirmis is the author of ‘The Economics of Iraq – ancient past to distant future’

[https://www.amazon.com/Economics-Iraq-Ancient-distant-future/dp/1999824105]

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

SOMO Discloses Data on its Spot Sales[1]

In an unprecedented move, SOMO and the Ministry of Oil-MoO disclosed recently detailed data on quantities and revenues of crude oil sold directly through "electronic auction" or "spot trading" to named international oil buyers-IOBs; this occurs after more than 20 months of my constant personal follow-up and communications on the issue.

The disclosure shows that during the period between the start of June 2017 and end of May 2019 total spot sales reached more than 76.4 million barrels-mbs, generating total revenues of more than $4.5 billion, including additional/extra revenues (due to premium over official selling price-OSP) of more than $59.6 million.

Undoubtedly, the background and details of this disclosure testify the importance of this development and render it as valuable precedent that must be commended and maintained, but with improved formalized modality.

Data analysis indicates, on the one hand, the increasing importance of this type of spot trading in generating "additional revenues"; but on the other hand, such temptations of additional short-term gains could lead to negative impact on SOMO’s strategic and marketing positioning in the medium and long terms, which could cause significant erosion in future oil exports and revenues.

Therefore, in the light of the analysis, it was suggested to the concerned authorities to seriously explore the feasibility of establishing an electronic platform for spot sales, within SOMO (SOMO-Spot), which works exclusively in spot sales of the Iraqi crude oil under terms, conditions and mechanisms that adhere strictly to three principles: competitiveness, transparency (of structural-operational governance) and efficiency.

Due to the importance of the topic, this article includes a brief background of the issue; reviews details of the data provided by SOMO; provides some analytical notes and finally proposes a special platform for the sale of Iraqi oil under competitive transparent spot trading modality.

Highlighting and Follow-up Spot Sales Issue- a brief history

I have dealt with this subject in detail using statistics and official data and I had direct contacts with SOMO on the matter. Also I shared my writings (in Arabic and English) within my extended professional network, which comprises a very large number (over 2000) of senior government officials, current and former ministers and parliamentarians, specialists, academics, research centers, civil society organizations, media, oil companies among others. Moreover, my contributions have been, and are usually, posted on many websites, others’ networks and social media channels inside and outside of Iraq.

I raised the issue for the first time at the beginning of September 2017[2]. Then I received a request from the Ministry of Oil to make a presentation on the subject (in addition to my other two papers that were already accepted by the Conference Committee) before the "Iraqi Investment Conference" scheduled, then, to be held in Baghdad on  22-23 October of that year.[3] The conference was not held as it was abruptly canceled under the directives of former Oil Minister, Jabbar Luaibi, without giving reasons (according to official correspondence I received from the Conference’ Preparatory Committee dated 26 October 2017).

The cancellation of the above-mentioned conference seemed to have prompted SOMO to act; they immediately sent official letter inviting me to Baghdad to discuss, with its leadership and senior specialists, what I wrote on the subject. But, for several reasons, I was unable to go and, alternatively, I proposed holding the meeting through Skype facilities. That was done on 12 December 2017, and the session lasted for three hours with spot trading was at the center of the discussed topics, and my emphases on the necessity of providing more details on this new activity by SOMO.[4]

Instead of providing more data and details on spot sales, the Ministry suddenly terminated the publication of the only data, i.e. total revenues from spot sales, in its monthly production and consumption report, from January 2018 onwards (again during Jabbar Luaibi period!!).

That termination and non-action by SOMO prompted me to raise the matter again. That was done through my article of 21 March 2019, which it called on the Ministry and SOMO to provide explanation about these spot sales and their related revenues.[5]

Immediately afterwards, on 23 March, I received a detailed formal letter signed by SOMO’ DG. But that letter did not provide material evidence and did not provide enough or convincing answers to the questions rose in my article. I, on the same day, prepared and posted detailed letter to SOMO’s DG stating exactly what information SOMO was supposed to do for clarifying the status of those sales.

It is worth mentioning in this juncture that the Ministry posted on its website on 25 March a selected "part" of the letter that was sent to me (referred to above) by SOMO.[6]

It took SOMO three months to prepare detailed data on the subject and both SOMO and the Ministry finally yielded by posting the data on their websites on June 23.

SOMO data and what it comprises

The data was prepared by SOMO's Commercial Financial Commission– CFC and were presented through four tables without any explanatory notes or clarifications.

Table 1 provides details of each crude oil shipments sold through auctions at Dubai Mercantile Exchange-DME during 2017; these details include: the month, buyer/company name, shipment number, date of sale and date of loading, type/brand of crude oil, quantity, price premium (dollars a barrel), the additional realized revenues, actual selling price per barrel and total revenue.

The quantity of crude oil sold amounted to 1.959 million barrels-mbs with total revenues of about $999 million, including additional revenue of about $13.4 million.

Table 2 provides details of crude oil shipments sold through the DME in 2018: the sold crude was more than 7.5 mbs with total revenues of about $465 million including additional revenue of more than $2 million.

Table 3 titled "quantities and deliveries of crude oil shipments that were sold at a price premium and additional revenue during 2017/2018" shows that sold crude reached about 16 mbs with total revenues of about $920 million including additional revenue of more than $7.9 million.

Finally, Table 4 shows "quantities and deliveries of crude oil shipments sold at a price premium and additional revenue during 2019"; by the end of April.

Crude oil reached more than 20 mbs with total revenues of about $1.251 billion comprising additional revenue of over $20.5 million.

In its May report, SOMO presented a table on "quantities and deliveries of crude oil shipments sold at a price premium and additional revenue during May 2019." The amount of crude oil sold in May was about 13.3 mbs with total revenues of more than $913 million including additional revenue of about $16 million.

Analysis and Assessment of SOMO’s Disclosure

This section highlights the positive aspects of this disclosure, identifies what could reduce or question its credibility that should be addressed and warns against possible danger of shortsightedness that favors short-term financial gains at the expense of the strategic marketing positioning of SOMO and its share in the competitive international oil market in the medium and long terms.

First: an important precedent that establishes necessary requirements and commitments.

Through my continuous monitoring and documenting the activities of and developments in the oil sector and SOMO for more than three decades, I assert this disclosure is very important precedent that deserves appreciation and support. Moreover, this disclosure is instrumental that could help in the following:

• It constitutes the material basis and minimum threshold for quality, detail and comprehensiveness of data relating to activities of SOMO (and the Ministry of Oil) that must be provided in the future on a monthly basis;
• The necessity of expanding this disclosure to include not only the spot sales of crude oil, but also the regular monthly sales of crude oil pursuant to the annually concluded “Term Contracts” between SOMO with it clients of international oil buyers-IOBs;
• This level of disclosure enhances transparency in monitoring of oil export revenues and greatly facilitates verification and data reconciliation to ensure the reliability and accuracy of such data;
• SOMO data can be considered as example and model to be followed by other national companies affiliated with the Ministry to achieve advanced levels of transparency and oil sector governance. It is worth mentioning here that EITI Standard 2019 adopted at the World Conference of EITI held in Paris last month requires a lot of such detailed information and data disclosure.

Second: The Follow-up and Communication Bear Fruit

When I raised the matter publically (as mentioned above) we did not know the exact volumes and details of spot sale operations. Now and after about two years of follow-up and direct contacts with SOMO,  everyone knows (or can know) that the total of these sales have, between the start of June 2017 and the end of May 2019, exceeded 76.4 mbs, generating total revenues of more than $4.5 billion, including $ 59.6 million of additional revenues- due to price premium.

This means that had the issue was not raised and followed-up, SOMO and the Ministry probably do not disclose these large quantities and huge returns resulting from these spot sales;

This case also shows that individual, professional and objective follow-up, based on official/formal statistics and reliable sources, can encourage (or force) official authorities (in this case SOMO and the Ministry of Oil) to respond and communicate with oil experts and specialists from outside the oil sector.

At the same time, it is vital to ensure the sustainability and continuity of this disclosure and expand it to include all the activities of the oil sector, taking into account the specificity of the sub-sectors of petroleum and various departments of the Ministry.

Third: Transparency Concerns Regarding Direct Spot Trading

Despite the importance of this disclosure and the need for its continuity, it is vital to take note of its apparent weaknesses and shortcomings that should be addressed.

1. SOMO data refers to two types of tables: the first relates to the details of crude oil sold electronically through the DME during 2017 and 2018; the second did not include any information of how the sales were done and the name of the platform/stock exchange auction from December 2017 until the end of May 2019. This lack of information shed doubt on and questions the credibility of the ministry's announcement (referred to above), which stated that all sales were done "by electronic auction on the DME, Platts..”, while SOMO tables make no reference at all to Platts or to any other platform for online auction. Unless SOMO identifies the name of the auction platform, it could lead to the belief that SOMO has actually carried out these operations directly with the concerned IOBs in a non-competitive way. This suspicion of irregularity is enhanced by the fact that “the date of sale” for each and every deal was not mentioned. All the above are symptoms of irregularity, inside-trading and thus constitute a lack of transparency in the process, which raises doubts about its credibility and thus opens the door for suspecting the possibility of corruption;
2. When comparing the components of these two types of tables, the only difference between them is that the first type includes a column entitled "Date of sale/date of loading" for each shipment of crude oil sold on the DME, while the second type includes "loading date" only. This is an additional and important flaw in the transparency of the immediate direct deal mechanism;
3. The DME provides information regarding each auction in terms of the date and time of auction; the duration of bidding during the auction; the number of companies that paid the participation fees; the number of companies that actually took part in the auction; the number of offers made during the auction and finally the highest price premium among others. As for the spot deals done by SOMO outside DME, SOMO did not provide any of the above information!!!

Fourth: Cautionary Remarks against the Ambiguity and Temptations of the "Additional Revenues"

SOMO's earning, of extra revenues (due to premium over OSP) through spot deals, of over $59.6 million during the period between the beginning of June 2017 and the end of May 2019 is good addition to state treasury.

However, caution should be exercised as adopting this financial indicator (i.e. additional revenue) and promoting it as indication of efficiency and achievement may provide cover-up for irregular (or even illegal) practices that may lead to suspicion of corruption, especially when such spot trading was conducted with weak, or even without, supportive material evidence. Hence, the integrity, competitiveness and transparency of the process could be seriously tarnished. Simply stated, additional revenues could occur, hypothetically as well as in reality, parallel with giving bribe through splitting the premium.

Additional revenues also indicate giving preference to short-term financial gains over and against strategic positioning at medium and long term interests that may cause or pose costly strategic losses.

The fear from preference for short term gains can be exhibited by the following comparisons.

The following analysis is premised on the comparison between the quantities of crude oil sold through spot deals and total crude oil exports in the same months in which spot deals were done.

• Total crude oil sold under spot trading since the beginning of June 2017 to the end of May 2019 was more than 76.4 mbs, which constitutes about 3.9% of the total oil exports in the same months in which spot deals were done (or loaded on tankers). However, if we look at the annual pattern, the above ratio increased constantly and significantly from 2.6% in 2017 to 3.4% in 2018 to 6.4% in 2019;
• Looking at the monthly comparisons we find that this percentage has risen (but at fluctuating fashion) from 3.6% in January 2018 to 12% in May 2019. But what draws attention (in addition to this increase of more than three folds) is that the increase or decrease in spot deals was in some months does not corresponds (in direction and volume) with the increase or decrease in total oil exports in many months. For example, spot sales in November 2018 increased by 3.342 mbs over previous deals in April 2018, while the increase in total oil exports for those months was only 1.117 mbs. In another example, while total volume of oil sales decreased, the volume of spot deals increased. Total sales in April 2018 decreased by 6.853mbs from previous month, while spot sales increased by more than 1 mbs during the same months. The third example is on the decline in both the total and spot sales, but the decline in the latter was much lower than in the former; total sales decreased by 11.723 mbs in February 2019 compared to the previous month, while the corresponding decrease in spot sales was only 522 thousand barrels.
• Spot deals of the Kirkuk oil blend presents a very worrying example. During the period between the beginning of December 2018 and end May 2019, 12 shipments were sold by spot trading covering a total of 5.25 mbs, or about 33% of the total exports of Kirkuk oil during the same period. But on a monthly basis we find that this percentage has increased continuously from about 24.8% to more than double that, or 54.5% between January and May of this year. This is a trend whose consequences may be underestimated or overlooked as a result of increasing sales of spot deals in a direct and non-competitive manner as explained above. It may be useful to recall what former SOMO DG and one of the proponents of spot trading (i.e., Dr. Falah Al Ameri) reportedly said, "We lost our market in Europe, it weakened, especially Kirkuk grade”[7]. But, does selling this high percentage of Kirkuk oil in this way deepen the loss of the European market for Iraqi oil or recover it?

These and other examples demonstrate that the "additional revenue temptations" of spot deals make such deal preferable at the expense of meeting the needs of the IOBs, which are the traditional customers to buy Iraqi oil. The advantage given by SOMO's spot sales could negatively impact the reputation and credibility of SOMO and the confidence in its commitment in honouring the obligations of the "Annual Term Contracts" that are concluded between those IOBs and SOMO.

Proposals for Discussion and Considerations

In order to capture the fiscal advantages of spot sale in a more regulated and coordinated manner and to avoid the possible negative impacts of this trading on the annual term-contract modality that has been adopted by SOMO for decades, I suggest the followings:

• Detailed thorough professional study or a background/discussion paper should be done to evaluate SOMO’ experience in crude oil spot trading since the commencement of this new activity in April 2017 to date. The purpose is to determine the positive and negative aspects, the operational and procedural requirements that were adopted and diagnose lessons learned and explore possible scenarios to achieve good results for Iraq;
• SOMO, the Ministry and other representatives at SOMO Ministerial Committee should determine specific percentage of oil exports that could be earmarked for spot trading. This percentage, based on the type of crude oil, could be determined annually (in parallel to the practice of the annual term-contracts established by SOMO for several years) and monthly (in parallel with the practice of the monthly Ministerial Committee decisions implemented by SOMO for several years by now). These allocations for spot trading should be fully, timely and publically announced, particularly on SOMO website, at specific time intervals;
• Assessing the feasibility of setting up SOMO’s own spot trading electronic platform, e.g., SOMO Spot Trading-SST, that offers Iraqi crudes exclusively- currently including Basra light, Basra heavy, Kirkuk blend and Qayara oil. The proposed platform, i.e., SST could also deal with petroleum products such as condensate, naphtha, NGL, LPG and other products in addition to oil produced in Kurdistan (in case of agreement between the federal government and the provincial government in implementation of the annual budget laws). New oil grades can be added in the future (such as Basra medium, Al-Yamama oil- known for high quality/API etc.,) in the light of oilfield development projects currently on implementation;
• The proposed platform (SST) may be managed either within the existing SOMO’ administrative structure or by the establishment of a subsidiary company (e.g., SOMO-SPOT). The conditions, controls and practical and organizational procedures of the proposed platform for spot trading must be well elaborated and premised on three fundamental principles: competitiveness, transparency and efficiency. Direct spot sale to oil buyers without bidding should be strictly prohibited and constitute punishable offence;
• The governance of SST and its management should be subject to the same control and oversight by the Ministerial Committee with additional openness and answerability.

 

[1] This article was originally written in Arabic, shared with my professional network of contacts and posted on many websites such as: https://www.akhbaar.org/home/2019/7/259802.html and

http://www.tellskuf.com/index.php/mq/83238-uj065.html

[2] Debating SOMO’ Transformation.  The English text posted on IBN and AlKhbaar on 5 Sept 2017 https://www.iraq-businessnews.com/2017/09/05/expert-blog-debating-somo-transformation/  ; http://www.akhbaar.org/home/2017/9/233074.html and the Arabic text on http://www.akhbaar.org/home/2017/9/233297.html

[3] https://oil.gov.iq/index.php?name=News&file=article&sid=1653

[4] Reforming and Transforming SOMO- A Follow Up, posted on IBN on 13 Dec 2017 https://www.iraq-businessnews.com/2017/12/13/reforming-and-transforming-somo/ and on Al-Akhbaar 13 Dec 2017 http://www.akhbaar.org/home/2017/12/238018.html

[5] My article can be found and accessed through the link   http://www.akhbaar.org/home/2019/3/255755.html

[6] https://oil.gov.iq/index.php?name=News&file=article&sid=2276

[7] As reported by Iraq Oil Report-IOR, 24 May 2017

Click here to download the full article in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. 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 organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By John Lee.

The National Investment Commission (NIC) has published details of a new round of solar energy projects:

The Ministry of Electricity is please to invite local, regional and international Independent Power Producers (IPP) to submit Expressions of interest (EOI) to embark into a proposed reverse auctioning round for SEVEN (7) Green field solar PV IPP projects (each a "project") with a potential combined capacity of 755MWp.

A project involves the design, finance, construction operation and maintenance of a utility scale solar power project to the Ministry on a Build, Own and Operate (BOO) basis. A dedicated Special Purpose Vehicle (SPV) shall be established to undertake the construction and operation of each project.

The Ministry, in its commercial capacity as a grid operator, will connect the SPV to the Iraqi transmission grid under a Transmission Connection Contract (TCC) and, in its capacity as owner of the land, will lease the land to the SPV under a Land Lease Contract (LLC). Also, the Ministry will purchase produced electricity from the SPV under the terms of the power purchase Contract (PPC).

The Ministry expects these project(s) to employ around 1300 people in the Republic of Iraq and supply more than 250,000 households with critically needed electricity supply.

The following projects are available :

• Sawa-1 Solar PV IPP with a capacity of 30 MWp to be located in Muthana Province,
• Sawa-2 Solar PV IPP with a capacity of 50 MWp to be located in Muthana Province,
• Khidhir Solar PV IPP with a capacity of 50 MWp to be located in Muthana Province,
• Iskandariya [Alexandria] Solar PV IPP with a capacity of 225 MWp to be located in Babil Province,
• Jissan Solar PV IPP with a capacity of 50 MWp to be located in Wassit Province,
• Karbala Solar PV IPP with a capacity of 300 MWp to be located in Karbala Province,
• Al-Diwania Solar PV IPP with a capacity of 50 MWp to be located in Diwania  Province,

The above project(s) may, at the Ministry's discretion, be tendered on a standalone basis or grouped. For the proposed tender, the Ministry will conduct a transparent, fair and competitive reverse auctioning process to select a developer or a consortium for a single or a group of project(s).

Parties interested in participating (the "respondent") in the process must fulfill the following pre- requisites for short listing:

• Successful, proven and verifiable technical and financial capability and experience of no less than 10 years in developing renewable energy IPP Project(s) of no capacity less than 50 MW on an individual and not collective project basis, particularly utility scale solar PV projects.
• An average annual turnover of more than US$ 10 Million for the last three years solely from revenues obtained via renewable energy projects development and operatorship, preferable majorly from solar PV projects.
• Previously awarded projects should have been tendered according to the Public Private Partnership (PPP) model on similar auctions regionally or globally.
• The respondent must have registered and licensed official regional and international offices.
• The respondent must demonstrate previous initiative towards social responsibility and willingness to contribute to capacity building, to integrate local content, and to support the nascent renewable energy manufacturing and service sectors in the republic of Iraq.
• The respondent must have never been barred by the Government of the Republic of Iraq, or any entity controlled or regulated by them, from participating in any project or conducting work of any form in the Republic of Iraq, including the Kurdistan region of Iraq. Also this applies to any other government, or any entity controlled or regulated by any other government.

Respondents that fulfill the requirements above shall express their interest to participate in the tender process by 29 April.2019 and the finnnal time to receive the (IPP) documentation 60 days from the announced date.

The number call of is MOE- HQ5/ 2019 An package (the "package") must be sent in electronic copy format (a single PDF file) from an official business email address to [email protected]

The requirements set herein;

• Name of the respondent
• Name and contact details (Postal address, telephone number, and email address) for the appropriate point of contact (Point of Contact) to whom future correspondence may be sent; and
• Where the respondent is considering potential consortium partners, an indication of such intention and details of potential consortium partners (to the extent it is known).

The Ministry will not consider any proposals or packages submitted by mail, in person, or via liaison.

The following submission of the EOI, and after passing this stage this stage the respondent will bay the documentation (RFQ). The RFQ will include further information, including a description of the project(s), an outline of the tender process and eligibility criteria for pre- qualification.

The announcement shall not constitute in any way a commitment by the Ministry to proceed with the next stage, hold the proposed reverse auction, announce the tender, award any project or comply with the information provided herein. The Ministry retains the right to amend the scopes of the project(s), modify, extend, cancel or suspend the project(s), at any time for any reason without clarification or any liabilities for the Ministry or any other entity of the Government of the republic of Iraq.

This announcement shall be considered a complementary and integral part of the Project(s) Documentation.

(Source: NIC)

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

This article may also be downloaded here in pdf format.

Restraining the Game-Changer: A Decade of Uneven Development in Iraq Petroleum Sector*

Abstract and Introduction

The development of the Iraqi petroleum sector during the period 2008-2018 represents, from all related aspects, a distinct phase in the sector and in its role in the national economy.

The petroleum sector comprising three different but interrelated sub-sectors through critical forward-backward linkages: Upstream (including exploration, field development and production); Midstream (pipeline, storage, export terminals) and; Downstream (crude refining, gas processing, petroleum product distribution and petrochemicals).

Though the state has been the dominant actor in petroleum sector development, the post 2003 period witnessed grand opening of the sector for International Oil Companies- IOCs. Different contractual modalities, mostly reflecting the peculiarities and realities of each sub-sector, were proposed or adopted to govern the relations with the IOCs.

Thorough and continuing follow-up and research suggest that most of the evidenced development has taken place in the upstream sub-sector, with heavy IOCs involvement in a significant part of proven oil reserves through most prized oilfields.

 

But the “triple shocks”, of collapsing oil prices since June 2014 (economic risks) accompanied by Da’esh (security risks) effects and Kurdistan Regional Government-KRG taking-over some of North Oil Company-NOC oilfields (June 2014-October 2017) (political risks) with the prospect of “lower-for- longer” oil price that prevailed almost a year ago, contributing to continue deepening the fiscal crisis of the state and elevated the “fear-factor” among Iraqi decision makers. That, combining with apparent human, systemic and institutional capacity-gaps limitations (business risks), have resulted in Iraq giving important concessions to IOCs without having tangible benefits in return.

 

Accordingly, the article would argue that, analytically and empirically, a sub-sector focused policy impacts, negatively, the development in that sub-sector, in the sector itself and on the sector’s contribution to the development of the national economy. That indicates to the absence of well thought, coherent and integrated petroleum and energy policy; and to the “indicative non- mandatory” National Development Plan-NDP. The outcomes would exacerbate structural imbalances, vulnerabilities to external factors and increase dependency on oil revenues, which prohibits desirable structural change, diversification and transformation.

 

The nature of the topic decides the research methodology. Hence, the article is a multi-disciplinary in its approach focusing on the relevant and important economic, legal, institutional, political economy and geopolitical analytical frameworks and aspects. Also, the article offers evidence-based analysis by relying on official, verifiable and crossed-checked data, information and documentation. Time-series and charts for the ten-years covered period are necessary for elaboration but avoided for space restriction.

The article adopts a holistic view by addressing the three interrelated levels of analysis: micro, sectoral and national, excluding KRG. Throughout the article, many questions were posed indicating the need for further scholarly work and research investigation. Finally, because of my constant follow-up and frequent contributions on Iraqi energy and petroleum sector, this article refers heavily to some of my previous works and publications.

This article comprises two parts and concluding remarks: part one identifies and analyzes the most important milestones in petroleum upstream development while part two provides assessment of successes and failures in the petroleum sector.

 

Part one

Milestones in Upstream Petroleum Development 2003-2018

Since 2003, upstream petroleum subsector is having many milestones with significant direct impacts on the development of the sector-wide and also on the national economy at different degrees. Some of these landmarks constitute, by their own right, a distinct phase and sometimes overlapping. This part addresses the most important landmarks some of them could shape the development of upstream petroleum for, probably, many decades to come.

First: Ministry of Oil MoUs with IOCs[1]

Between 2004 and end 2008 the Ministry of Oil-MoO had concluded some 40 memoranda of understanding-MOUs with IOCs: including majors, independents as well as minors.

The first step was to formulate a standard text for the MoU, which spells out the structure, the terms of reference governing the signed MoU and its duration and renewal if needed. For each MoU there was one  “Joint Steering Committee-JSC” comprises three or four representatives from each side; the names and number of the Iraqi side are known while the corresponding information on the IOC side are not. The role and mission of the JSC is to oversee and insure the full and proper implementation of the related MoU.

Each MoU was signed by the MoO while the other party was either a single company or a consortium of companies or an official entity.

One consortium comprising three companies; three consortia each comprising two companies while the rest represent MoUs with single companies. All MoUs were signed with companies except one, which was signed by the Norwegian Ministry of Energy.

The parties to the signed MoUs belong to 23 countries; the USA has the largest participation with 9 companies, followed by Japan and Norway with 4 each, then China, UAE, UK and Canada has 2 each and one company from each of France, Russia, Holland, Ireland, Turkey, Kuwait, Malaysia,  Brazil, Indonesia, Austria, Angola, Australia, Spain, Italy, India and  South Korea.

One of each MoU objectives is to conduct “Joint Studies” and for each study there was a “Technical Committee”; again the names, positions, specializations and number of the Iraqi side are known while those for IOCs are not provided. The number and coverage of the joint studies are not unified for all MoUs; some has only one joint study, while many have more.

Another important objective is human capacity development; each MoU offers different opportunities for training, workshops on variety of subjects and programs and for academic degrees.

These MoUs provided various opportunities, both serious and visits, for MoO staff and affiliated companies to interact with their international counterparts after decades of relative isolation. For IOCs, MoUs represent unprecedented and invaluable opining of all archives relating to upstream petroleum in the country that helped IOCs to explore where they would be involved and what they could provide to chart their way towards business objectives in Iraq’s upstream petroleum.

Execution and performance of these MoUs are not similar in delivering stated objective and some were terminated when the related IOC signed contracts with KRG without the approval of the federal Ministry of Oil.

Apparently, eventually outcomes did not correspond to IOCs efforts as their actual involvement in upstream project could tell. Two examples could highlight this: the USA had the largest participation with 9 companies in these MoUs, yet only one, ExxonMobil, has only 32% participation interest in one oilfield. On the other side, Russia had only one company that participated in these MoUs, but Russia has now three IOCs with significant participation interests in four oilfields and exploration blocks.

The same valid also on a company level as the cases of Chevron and Kuwait Energy-KE exhibit. For the MoU signed with Chevron, the three Iraqis in the JSC, headed by the current Minister of Oil-Jabbar Allibi (Luaibi), had a record high of convening meetings outside Iraq (between February 2004 and April 2008 they traveled to London 8 times, to Bahrain 5 times and to the USA twice); Chevron organized 44 training activities (in USA, Jordan, Bahrain, Kuwait and Turkey) attended by 741 Iraqis and held 17 workshops (mostly in Amman) with 139 participants. Finally, Chevron was involved in 15 joint studies. Yet, Chevron did not have a stake in MoO concluded contracts as per the bid rounds.

KE MoU, by contrast, was signed in September 2007 and has one year duration only; the JSC held one meeting only in Kuwait in 2007; the company participated in one joint study only and it provided no training or organized a workshop. Yet, the company has stakes in three MoO signed contracts, including the field it participated in its study!

 

An important outcome of these memoranda of cooperation is their contribution in the formulation and development of the model contracts for the four bid rounds; they helped the formulation of two year technical support contracts-TSCs, which were devised for implementation by the international oil companies during 2008 and 2009. These contracts focus first on halting the production decline of the major oilfields (Rumaila, Zubair, West Qurna1, Missan and Kirkuk), and then increase production by 400 to 500 thousand barrels per day-kbd. MoO pays for both investment requirements and the IOCs fees to achieve that target. Negotiations on these technical support contracts lasted from the fourth quarter of 2007 to mid-2008 without conclusion because of differences on serious issues (Al-Ammedi 2009).

MoO then reduced the duration of the technical support contracts to one year. After that time they would overlap with the timing of bid rounds. The IOCs refused the one year duration as too short for such contracts. Accordingly, the ministry abandoned the contracts to focus on the bidding rounds.

Based on the previous experience with the technical support contracts and the expected bid rounds the ministry began formulating and drafting the model contracts that would constitute the contractual framework governing the relationship with the IOCs (Al-Ammedi 2009a).

 

Second, the Accelerated Program and the Symposium for Reviewing Iraq Oil Policy

Intense debate inside Iraq during the period September 2008 to April 2009 focused on the desperate state of the upstream sector, especially in the southern part of the country.

A team of nine senior oil professionals including two former oil ministers conducted in depth survey on the status of the upstream sector. The team visited various locations and sites and held intensive discussions with top management and senior staff there during the period 21-31 December 2008. A final and detailed report was presented to the PM on 12 January 2009. Copy of the report was distributed during the Symposium for Reviewing Iraq Oil Policy held in Baghdad February 27-March 1, 2009.[2]

The first recommendation of the said “report” calls to adopt a program aiming at increasing oil production by some 350-500kbd, and the Symposium endorsed such program, to be executed within two years (2009 and 2010). Two days after the Symposium, the Council of Ministers-CoM[3] authorized a committee comprising the PM, his Deputy, the Ministers of Oil, Finance and Planning, and the Legal Advisor of the PM to review the state of the oil industry and decide on the requested mandates and authorities for the MoO and oil producing companies.

Apparently, the accelerated program was primarily drawn by a former Director General-DG of South Oil Co-SOC and oil ministry and CoM advisor Jabbar Allibi. However, Allibi was removed from been in charge of the program.[4]

Allibi removal had in effect derailed the program and considering the fact that the occupancy of DG position of SOC had changed three times, this had contributed to causing further management instability and worsening deterioration of the upstream operations especially in the south.

Not surprisingly, therefore, to observe the continuous fluctuation of oil production and exports causing serious loss in oil revenues and deepening the financial crisis of the country. Based on official data by the MoO compiled by the author, Iraq did not benefit, as it should have been, from high oil prices because its oil export was sharply declined from a total of 58.8 million barrels-mb to 54.4mb to 49.4mb in July, August and September 2008 respectively, at a time when the average price of the exported Iraqi crude was 118.81$/b, 102$/b and 85.30$/b during the same three months period.

The gradual improvement in oil export revenues during 2009 was a reflection of oil prices upward trend more than oil exports, which kept in regular and sharp fluctuation due to technical capacity constraints and security conditions.

 

But what is more important was the state of the petroleum upstream sector went from bad to worse and the accelerated programme to at least capture the decline and prevent it from worsening have not succeeded in a sustainable way to insure steady levels of oil production and exports, as the above data indicates clearly. One thought suggests it might be a “deliberate neglect” to justify the opening up of the oil sector before foreign investors- the IOCs.[5]

 

This might and might not be the case. But judging by outcomes, the above figures clearly suggest mismanagement and lack of vision. Instead of proposing “Grandiose” move by offering more than 80% of Iraq’s petroleum reserves through bid rounds, the MoO could have adopted gradual, feasible and achievable approach starting from rehabilitating the upstream sector moving upwards. Evaluation, selection, prioritisation, sequencing and implementations are fundamental ingredients and preconditions for successful development and testimonies for sound and effective federal petroleum policy.

 

Third: Conversion of the Contract for Al-Ahdab Oilfield

The production sharing “Development and Production Contract”-DPC was signed 4 June 1997, received endorsements at the time from the Iraqi National Council (parliament) when it was first initialled in 1996 and ratification from the cabinet and revolutionary command council in 1997 before it became effective, but remained idle due to UN sanctions.

The MoO decided to renegotiate the terms in 2006 to convert that PSC into a 20 year service contract; formalised it in late August 2008 in Beijing during a visit by Iraqi Oil Minister, Hussein al-Shahristani, approved by the Cabinet on 2 September 2008 leading to the contract signing on 10 November 2008 in Baghdad.[6]

The significance of this conversion takes many aspects: it marks the first IOC to break ground in Iraq's oil sector since the 2003 US-led invasion; it indicates the type of contract (long term service contract-LTSC not PSC) Iraqi government would accept; it provides the terms, conditions and provisions of such contracts; it highlights the importance of bilateral government-to-government relations or “oil diplomacy” and finally, it establishes the basic first version of the model contract that was adopted latter (but with many modifications reflecting a learning curve) for four bid rounds.

Also this contract offered the Parliament a powerful opportunity to have and consolidate its role in approving the contract and thus establishes a precedence; but regretfully that opportunity was missed due to negligence, incompetence or intentional.

Al-Ahdab original PSC of June 1997 was ratified by law[7]  and thus the new converted contract becomes legally invalid unless it is either ratified by a new law or the old law be revoked by a law. The Cabinet decided on the latter option, proposed a draft law and referred it to the Parliament.[8] Instead of insisting on ratify the new contract by a new law, and thus consolidate its role in approving all LTSCs, the Parliament[9] agreed, on 27 March 2011, to the government request and approved an abrogation law!

 

 

Fourth: The big-push strategy through four bid rounds

By benefiting from the insights of the MoUs, the status of the accelerated program and the successful conversion of Al-Ahdab contract with lessons learned from it, MoO launched what I considered a fast-tempo big-push strategy (Jiyad 2011).

All existing development and production service contracts and exploration, development and production service contracts were awarded through bid rounds except, as mentioned above, the one relating to Al-Ahdab oilfield.

The four bid rounds followed a similar procedure comprising the following steps:

• Announcement of the fields and exploration blocks offered in the round;
• A request for international oil companies to apply for pre-qualification;
• Specification of the parameters for pre-qualification and announcement of the qualifying companies;
• Preparation of a profile and data package for each offered field or block, and sale of that information to the interested qualifying companies;
• Workshops for the companies to discuss the data package and the draft model contract, and to review the bidding process and parameters. These workshops are usually open for the media and attended by senior officials from the ministry. The fourth bid round was attended also by representatives from local authorities in the areas of the offered blocks;
• The holding of bidding events in Baghdad with full publicity and TV coverage, with the bids being opened and announced in public with full competitiveness and disclosure; and
• Approval of each contract by the Council of Ministers.

 

The Final Tender Protocol-FTP for each bid round specifies the bidding parameters and the formula for calculating the bidding scores. For the first three bid rounds the bidding parameters were the plateau production target and the remuneration fee, while for the fourth bid round there was only one parameter, the remuneration fee.

 

For all bid rounds MoO accepted the highest scoring bidder provided the remuneration fee proposed by the highest scorer does not exceed the maximum remuneration fee acceptable. This maximum is disclosed only if the highest scorer’s proposed remuneration fee exceeds the maximum, in order to give the bidder(s) concerned the opportunity to revise their proposed fee downward to that of the maximum remuneration fee. MoO did not disclose the maximum remuneration fee it had set on many occasions when the highest scorer’s proposed remuneration fee was lower than that maximum.

In the case of tied bids, whether the remuneration fees proposed are equal to or less than the maximum set, and where the tie is between a consortium and a single company, the consortium bidder is preferred and declared the winner.

Main features of and developments in the model service contracts are briefly analysed below.[10]  This analysis of all versions of the model service contracts identifies the nature and main characteristics of the contracts concluded under the four bid rounds, which were considered as “unknown in the oil industry” when they were introduced (Chalabi FJ 2010:258).

First, each bid round has its own “model contract” reflecting the nature of the offered opportunities and the lessons learned from the previous rounds.  From negotiation theory and practice- who sets the agenda impacts the outcome. Thus, the Ministry did well by setting the agenda, i.e., the model contract, and asks the IOCs for feedbacks instead of following Terry Adams proposal.[11]

Second, all the contracts have similar structures in terms of equal number of articles, annexes and addenda, except those for the fourth bid round which have more addenda. Almost all the articles are identical or could be considered as common clauses, except those reflecting the specifics of the field or block.

Third, the contracts could be considered as being in a hybrid category of their own since they include components from production sharing contracts and components from conventional service contracts. Among the main features taken from production sharing contracts are: the long duration; the privileges of first/exclusive rights; the payment of a signature bonus; the R-factor as a sliding scale remuneration fee; and restrictions on sovereignty through consensus-based decision-making within the joint management committees. ‘Business risk’ for IOCs relating to the commerciality of petroleum discovery is covered only by contracts relating to bid round four, which is for exploration blocks.

Fourth, all the contracts are premised upon the principle of take-or-pay/now-or-later even when the government decides to exercise its sovereign rights to curtail production.

Fifth, all payments to the international oil companies (costs and the remuneration fee) are denominated in US dollars, not in barrels or barrels of oil equivalent. This implies that any economic rent (windfall) belongs to the Iraqi side, and the international oil companies do not have any claim on rent in the event of oil price increases. The international oil companies benefit from higher oil prices by expediting the recovery of their capital and operating expenditure and by receiving greater volume in remuneration fees through the operation of the payment caps when there are higher revenues. This, however, also calls for the application of the R-factor, which reduces the remuneration fees.

Fifthly, for each of the concluded contracts there is a carried state partner participation interest of 25% (now reduced for some of oilfield offered under bid rounds one and two) with no up-front payment from the Iraqi side. The international oil companies in the consortium cover, proportionately, this participation until they recover it. The model contract for the fourth bid round does not have a state partner participation interest since the risk of exploration is taken on fully by the international oil companies should there be no commercially worthwhile discovery.

 

New provisions in the model contract for the fourth bid round

The current version of the fourth bid round model contract exhibits many new components, reflecting the still evolving development of the model contracts and the Ministry of Oil’s learning curve in contract formulation.

A pre-development holding period is introduced, subject to certain rather complex provisions, in the event of an oil discovery. The rationale for this is that Iraq has too much oil to manage if all the contracted fields are developed as planned in addition to the existing production from other fields.

Also for the first time there is a transitional state partner. Initially the state partner is Oil Exploration Co, but once the value of the R-factor exceeds 1 then a new state company takes over the role of state partner. This reflects the different phases of the contracts arising from the distinction between the exploration and development phases, and this distinction lead to the removal of the state partner’s 25% interest, as mentioned above.

The third development is the absence of a performance factor, because with only one bidding parameter (the remuneration fee), and therefore no production plateau target, there is no reason to include the performance factor.

An important fourth new element was introduced to reduce the cost-inflating tendencies of international oil companies. A new term, ‘cost production’, is included to reduce the remuneration fee entitlement in such a way as to induce the international oil companies to pursue cost effectiveness and refrain from exaggerating costs.

The fifth new development is related to the application of take-or-pay/now-or-later principle. The contracting Iraqi oil company’s obligation is confined to 80% of the produced gas if circumstances call for application of the take-or-pay/now-or-later principle. It is worth noting the application of this principle remains as it was in the previous bid rounds in the event of an oil discovery.

The sixth new component is provision for dry gas export, subject to a separate contract and marketing arrangement. This is an option for the international oil companies to pursue, but does not constitute an obligation on them. No such option was or is offered for oil.

Another new provision gives the Iraqi oil company the right to terminate the contract if the international oil companies conclude another contract with any regional or provincial authority without Ministry of Oil approval.

The final new development is the establishment of an infrastructure fund to finance infrastructure projects in the province where the contract area is located. During the term of the contract the contractor will pay 10% of the annual budget for the fund.

It is worth mentioning that each signed contract comprises other detailed provisions, annexes and addendums reflecting the particularities of the related field or exploration block.

The Ministry held four bid rounds between June 2009 and May 2012: the first was for the already producing, known as brown, oilfield; the second was for discovered but not developed, known as green oilfield; the third was for free gas fields and the fourth was for exploration blocks. The outcomes of these four bid rounds can be summarized as follows:

• Four contracts covering six oilfields were concluded under first bid round comprising oilfields Rumaila, Zubair, West Qurna 1-WQ1 and Missan (comprising three fields of Abu-Garab, Faqa and Buzorgarn). Their combined proven reserves, at the time of contacting, was 33 billion barrels and their combined contracted production plateau target –PPT was 7.335 million barrel per day-mbd;
• Seven contracts for seven green oilfields were concluded under second bid round comprising West Qurna 2-WQ2, Majnoon, Halfaya, Gharraf, Badra, Najma and Qaiyara. Their combined proven reserves, at the time of contacting, was 33 billion barrels and their combined contracted PPT was 4.765 day-mbd;
• Adding Al-Ahdab oilfield to the above would give a total PPT of 12.3mbd to be reached at end 2017 and sustained for seven year. They have 67billion barrel of proven reserve; constituting 58% of the country proven reserves at that time.
• The number of involved IOCs in the above 14 oilfields was 15 companies from 12 countries including the five permanent members of the UN Security Council.
• Three free gas fields, Akkas, Siba and Mansuriya, were contracted under third bid round with a combined PPT of 825 million cubic feet daily-Mcfd and 11.2 trillion cubic feet. Three IOCs from three countries were involved.
• The fourth bid round was about exploration blocks; four blocks, 8, 9, 10 and 12 were contracted with 7 IOCs from 6 countries.

The decision to go for the bid rounds and their outcomes, especially the first two, had created vibrant, interesting, mobilized and courageous debate on many aspects pertaining to timing, the type and number of the offered oilfields, the type and conditions of the contracts, the feasibility and sustainability of proposed and concluded production targets, the legality premises among others.

Why there were such wide powerful and impacting concerns on these bid rounds?

First, historically, there seems to be a strong association, in the Iraqi conscious, on three nexus of “oil, politics and patriotism” or what is termed, wrongly, in the western business terminology as “resource nationalism”.

Second, there was a prevailing conviction that invasion is “all about oil” and that conviction was consolidated not only by the many and repeated statements in international media; but also by the apparent attention given to oil matters by the occupying forces, by the many MoUs (as discussed above) and by the massive intrusive efforts by US and UK embassies and their preferences regarding related oil issues such as type of contracts, oil law, privatization of INOC.

Third, there was strong resistance “from within” the petroleum sector itself that argued their opposition on national efforts and capacity premises. The most apparent protest came from Basrah Council[12], Basrah professionals[13] and SOC senior staffers.[14]

 

Fourth, former oil technocrats, experts and professionals, especially those residing outside the country were very active and had crucial role in mobilizing and energizing the debate through their analysis, commentaries and articles (Al-Husseini 2010; Al-Chalabi I 2009;  Jiyad 2011; Al-Khayat 2012 among many others),

Moreover, the first bid round came at the height of a heated debate on the ill-fated Draft of Federal Oil and Gas Law[15] and the first announcement of Shell’s Head of Agreement-HOA, that was negotiated and concluded behind closed doors.

Fifth, Oil workers and trade unions were also among the early protestors, but were focused first around Rumaila oilfield, then on Zubair, WQ1 and Majnoon. The Federation of Oil Unions of Iraq and the Federation of Workers Councils and Unions in Iraq have condemned the Ministry's decision to award a foreign consortium the contract to develop Rumaila (Mohammed A 2009); partly on legality grounds and partly for fear of unemployment and, later, for not been properly compensated.

Sixth, ironically, KRG and its related interest groups, individuals or contracted companies had their share in praising KRG PSCs as superior to MoO contracts in serving Iraqi interests!!

Finally, from petroleum industry perspectives they were between two contrasting positions- “crazy” and “game changer”.

Total, then CEO Christophe de Margerie was reported by Reuters (28 October 2009) have said “The 12 million barrels is crazy”.

US Department of Energy, according to Cordesman (2010), “projects Iraq will expand its oil production from 2.4 million barrels per day in 2008 to 2.6 in 2015, 3.1 in 2020, 3.9 in 2025, 5.1 in 2030, and 6.1 in 2035.”

But the executive director (2012) of the International Energy Agency-IEA, Maria van der Hoeven was adamant that “Iraq has a potential as a game-changer” and becoming a “strategic source of world oil supply” in the years ahead (Hill 2013). That takes us to the next milestone.

 

Fifth: INES and IEA-IEO Support PPT Revision

For the first two bid rounds, the production plateau target was one of two bidding parameters, as mentioned earlier. This prompted IOCs to inflate their production targets to out-bid their competitors. Consequently, plateau levels in all the resultant contracts came out much higher than even the Ministry had envisaged. Hence, euphoria began to surface at the prospect of crossing the threshold of 12.3mbd, and this then became a sacrosanct target for some within the ministry and outside it. But, as mentioned above, many oil professionals doubted the feasibility of attaining these plateaus within the specified timeframe, and questioned the justification of constructing expensive production and export capacities based on these figures.

Initially, MoO and the government were reluctant to the idea of revising down the PPTs[16], however, they became more receptive to the revision of the plateau targets, especially after the finalisation of two thorough studies.

The government and the World Bank agreed to the necessity of having an integrated strategy for the country. Thorough, well researched, intensively debated through more than forty meetings and 18-month study resulted in a final report of the Integrated National Energy Strategy (2013-2030)-INES.[17]

Concurrently with INES, Iraq and IEA cooperated in conducting another study, Iraq Energy Outlook-IEO.[18]

 

Both studies came to similar conclusions to those expressed by many Iraqi oil professionals on the unattainability and feasibility of the contracted production targets: INES discusses the implications under three (high-13mbd, medium-9mbd and low-6mbd) production plateaus with different commencement timelines and plateau period durations. IEO assesses the consequences under “high”, “delayed” cases and “central scenario” of 6.1mbd by 2020 and reaches 8.3mbd in 2035.

Thus, these studies prompted the Iraqi authorities to consider seriously lowering down their previously contracted production targets and take what that entails by amending the contracts.

 

Sixth: Lower PPT, More Concessions 

Even before the government approves INES[19], MoO under the, then, new Minister Abdul Kareem Luaibi, was already reworking on reducing the production targets; Russian Lukoil was the first to renegotiate its contract, bringing production targets for WQ2 oilfield down from 1.8mbd to 1.2mbd (Osgood 2013).

By September 2014 and based on available brief information, this author compiled, that total production plateau from the amended PPT in the signed contracts would be reduced from over 11 mbd (Old Plateau Target-OPT) to 7.15 mbd (New Plateau Target-NPT) (Jiyad 2014). NPT could be even lower after Shell and Petronas relinquished Majnoon in 2018, WQ2 PPT was reduced for the second time to 800kbd (IOD 2017), and possible Badra reduction.

 

Reducing production targets is important course of action and has many significant long lasting implications and effects since that requires amending the contracts, which opens the door for renegotiating the terms, conditions and provisions of these contracts; and here lays the catch 22! First, this reduction is, hypothetically and theoretically, advantageous for Iraq. Had Iraq succeeded to attain the contracted plateau production targets (of 12.3mbd) by 2017 it would have by now:

• Have a minimum of 8mbd of idle capacity, considering OPEC production cut enforced since January 2017;
• It would have paid $184.5billion of capital cost, since each 1mbd capacity requires $15 billion initial investment;
• It would have to encore substantial “maintenance cost” for the 8mbd of idle capacity;
• It would have to pay the IOCs the “remuneration fee” for 8mbd of idle capacity according to contractual provision/ condition “Take or pay”;
• There could have been thousands of unemployable oil professionals.

 

Second, IOCs found this the opportunity they had hoped for to improve the contracts for their benefits. They argued, reducing the PPT impacts negatively the economics of their projects, and thus they should be compensated to maintain their original Internal Rate of Return-IRR.

Our follow-up on this issue indicates a range of IRR between an “absolute minimum” of 8% and “not overly profitable” 17%.[20] But, on the other hand, reducing these “crazy” plateau targets would first give them more time to attain the new targets and, second, would reduce significantly the “up-front” investment requirements; and both have significant fiscal positive implications for IOCs.

Lukoil provides clear example; a reduction of WQ2 PPT from 1.8 mbd to 1.2mbd would reduce investment to $26 billion from $33 billion over the next 10 years.[21] Thus and based on that, the latest reduction in the PPT to only 800kbd would reduce investment requirement by, probably, another $4.7billion.

Moreover, the actual negotiations regarding PPT reduction had resulted into the following gains for the IOCs:

• Reduction of the “State Partner-SP” share in the remuneration fee from 25% to as low as 5% would results in billions of dollars concessions to IOCs from Iraq; we have identified four such reductions. Based on the related new production targets and the resulting increase in IOCs share due to these reductions in SP share our calculation arrives that those IOCs would get an additional $441million a year in their Net Remuneration Fee-NRF (post income tax and SP share). That, over the years of the contracts would result in billions of dollars move from the Iraqi coffers to IOCs.
• Another concession given by the Ministry was the elimination of the R-Factor (which relates remuneration fee to cost recovery). By eliminating the R-factor, IOC gets all its new NRF per barrel even after all capital cost was recovered. This would give IOCs, especially during the plateau production period (which has been prolonged due to plateau reduction), additional millions much more, in magnitude, than the previous concession[22];
• The third concession was the elimination of P-Factor (which is a performance measure linking the payment of remuneration fee proportional to the achieved production target). Elimination the P-Factor could result in two negative consequences for Iraq first, it disincentives IOCs to comply with the new production targets (a forward concern) and second, it relieves the IOC from the penalty for non-performance so far (a backward concern). The magnitude of non-performance so far could be, theoretically, gigantic since all IOCs had not attained the contracted plateau target. To illustrate, MoO had in 2013 informed Shell (the operator of Majnoon) that its consortium had cased Iraq financial losses estimated at $4.6billion for not performing their contractual obligations (Jiyad December 2017).
• Another concession was related to increasing the “natural decline factor-NDF” on the “base-line production-BLP” for the brown fields, i.e., those covered by bid round one. Increasing the NDF would give corresponding proportional increase in the additional oil production that should be attributed to IOCs and, thus, increases its remuneration fee. For example, NDF for Rumaila was increased by 2.5 percentage points starting from 2014 (IEITI 2016), which expedites the deductions for BLP. Our calculations indicate that Rumaila consortium, e.g., BP and CNPC, would gain additional of over $23million per year in their NRF. However, it is not known whether such NDF was applied to all or some of the brown fields.

Third, it should be stated that all these concessions were dealt with in complete secrecy restricted to the Ministry, Energy Committee of CoM and the related IOCs. What was puzzling, though, these revisions occurred while the architect of these contracts, i.e. Shahristani, was still walking in the corridors of power!  Why was he so passive?

Apart from what was reported by the business circles, IOCs and professional sources of information, nothing disclosed by Iraqi authorities until the IEITI annual reports provide formal admissions on these changes.

What even more serious and suspicious is while the Ministry offered these significant and long lasting concessions, it got absolutely nothing in return for the country. Moreover, the Ministry had actually and practically lost the leverage over the IOCs to, for example, cope with the impact of low oil prices, as discussed next. But it remains vital to know why that was allowed to happen and how the Minister, i.e., Abdul Kareem Luaibi, was able, in such ease, to   cause the country billions of lost revenues?

 

Seventh: Formal Revisions of the Concluded LTSCs

After 2014 election, a new cabinet installed with Haider Al-Ebad- PM and Adil Abdul Mahdi- Minster of Oil. On the Parliament side, late Ahmed Al-Chalabi became the chairman of the Finance Committee. Politically, Mahdi was a long time senior member of The Islamic Supreme Council of Iraq-TISCI (formerly known then Al-Hakeem party) and Al-Chalabi  (Iraqi National Congress-INC) was affiliated with TISCI during the election; the two are known for their opposition to Shahristani, strong support for privatization and inclination towards PSCs. Their position was strengthened by the support they got from the new Minister of Finance, Hoshiar Zebari (KRG).

Soon after the formation of the new government in September 2014 a new powerful and coordinated campaign directed against the LTSC; partly but mostly, political motivations and rivalries and partly unfamiliarity with oil industry in general and the concluded contracts in particular.

The new minister of oil began, in February 2015, a series of statements by first expressing openly his preference for PSC, “Iraqi public,.., needs to be educated about the benefits of PSCs”[23], then continues in discrediting the LTSCs, though, making erroneous claims that actually expose his modest understanding of oil economics and signed contracts.[24]

On the same wave-length advises Hoshyar Zebari, “It is better to move from service contracts with IOCs to production sharing contracts”, asserting  “Even the most strong opponents of this now have come to see that these [current technical service contracts] are not beneficial.”[25] His remarks are recycling of those aired by KRG and pro PSCs.

Al-Chalabi, used his parliamentarian position and the opinions expressed by minsters of oil and finance to make further and formal onslaught on LTSC through a formal communication to the Minister of Finance. But, thorough assessment of the data presented in the formal communication proved to be inaccurate with many flaws and wrong interpretation of the signed contracts (Jiyad October 2015).

The same call continued unabated even after the last cabinet reshuffle, which brought current minister, Jabbar Allibi who, a few days after taking the helm of the ministry, stated, “We are opening dialogue to come into acceptable terms that are of benefit to both Iraq and IOCs.”[26] For months latter he said “We are in the process of concluding a consultancy contract,…., to help us in reviewing some of the clauses in the contracts.”[27]

 

What prompts and enforces such persistent calls for contract revision or conversion?

Following the debates, expressed opinions, statements, information and statistical data and course of events could lead to the following main brief explanations:[28]

• Politicization and personalization of the issue, primarily directed towards Shahristani;
• Unfamiliarity and wrong understanding of types of contracts, especially the comparative assessment of LTSC vs. PSC as evidenced by what Mahdi, Chalabi, Zebari and Allibi among a few others have said;
• Da’esh (Islamic State of Iraq and Greater Syria- ISIL/ISIS) effects since June 2014 after the governorates of Naynaw (Mosul), Salahuldeen and Ramadi were taken by Da’esh; represents serious existential security threats, severely interrupting economic activities including petroleum sector and depleting the country’s meager financial resources;
• KRG seizure of oilfields operated by NOC, leading to depriving the federal treasury of significant stream of revenues; during the entire period between June 2014 and January 2018 export of Kirkuk oil constitutes only 2% of total oil export revenues and 1.9% of the corresponding volume of exports;
• Collapsed Iraqi oil export prices from $102.61/b in June 2014 to lowest floor of $22.21/b in January 2016 before improving gradually to $63.288/b.

 

The impact of these calls and views was culminated in imposing, by the Parliament, a provision in state budget law for 2016 and then for 2017, obliging the government and the MoO to, “Revising bid round contracts with the aim of amending them to protect Iraq’ economic interests and to increase oil production and reduce expenses and find a mechanism that links cost recovery in accordance with oil prices.”[29]

 

Obviously, that provision in budget laws indicates the advocates for contract revision are not aware that Iraq, as discussed above, had already gave significant concessions and thus lost vital negotiation power and any revision would entail giving further concessions.

The target to “reduce expenses” is a matter of “skill capacity” of the Ministry staff to insure prudent projects co-management not the contract itself. Moreover, calling for coupling cost recovery with oil price would, legally, economically and practically converting the LTSCs into a “revenue sharing contract”, which works for the IOCs favor as work progress towards the production plateau; Finally, if that occur it will not “protect Iraq’ economic interests”.

 

Eighth: New Contract Model with More Reliance on the IOCs

When he took office in August 2016, the Minister of Oil pledged to use more “national efforts” and base decisions on “solid sound studies” regrading upstream petroleum projects. By now, he renegades on both; MoO has been working under rather different environment characterized with inconsistency, secrecy, ambiguity, absence of coordination and coherence, inclination towards foreign companies and lack of project feasibility.

Since that reshuffle of August 2016, the MoO has been persistently trying to offer most possible remaining oilfields and exploration blocks to IOCs under new contracts that differ from those adopted by the Ministry in previous four bid rounds.

On 23 October 2016, only two months after the current Minister took the helm of the Ministry, the Ministry offered 12 new discovered but not developed oilfields announced.

The most alarming and absurd components of the announcement are the contractual modality and the process of awarding and contracting. The Ministry asks the IOCs to submit “their own proposals for contractual, commercial and financial terms and conditions..”, and “Bilateral and direct negotiations between the ministry of Oil and the IOCs will be used as a basis for awarding the fields’ development and production contracts to the IOCs after agreement on the terms and conditions of the contracts”.

The above contravenes the experience, the process and the basic premises of the Ministry used at least since the preparation for first bid rounds mid-2008. No model contract; no process timeliness; no final tender protocol; no bidding parameters; no open bidding. Simply, the IOCs state what they want not the other way around as what it should. Elementary negotiation principle implies that those who decides the terms and conditions comes the winner. Even people with no negotiation experience at all do surrender this way! So what was going on at the Ministry, why and who was behind this demise?

A bilateral and direct negotiation is recipe for corruption and bad governance; it is really shocking to see such a retreat from the open and very transparent bidding process to behind closed door bilateral negotiation.

What make the matter even worse and devastating are the human resource skills and capacity gaps, especially in international contract negotiations, implementation, follow-up and monitoring.

Less than three weeks later the offer was postponed for a year due to pressure that questions the rationale for such offering.[30]

MoO reinvigorated rather intensively the direct behind closed door negotiation, with ExxonMobil regarding the package for developing Ratawi and Nahr Bin Omar in oilfields under a new, proposed in November 2016 by the Minister,  Southern Iraq Integrated Project – SIIP, which incorporates the  stalled Common Seawater Supply Project-CSSP.

The Minister stated that, “[w]ithdrawing this project [CSSP] from ExxonMobil in 2012 was a grave mistake.” (IOR, 2 December 2016). I disagree for the following reasons:

• ExxonMobil was lead company in initial CSSP proposal 2010, but was excluded after the company signed contracts with KRG in conformity with the then and still blacklisting policy of the Ministry;
• The proposed cost of $20 billion was unreasonably high;
• The burden-sharing or IOCs proportional contribution in the cost of project was not endorsed by other IOCs;
• The capacity of the project was based on the contracted PPT, which, as explained above, was reduced dramatically, Thus, had CSSP executed as envisaged initially, it would be significantly idle capacity by now;
• By declaring such a mistake soon before launching discussion with Exxon manifest professional and negotiation naivety because it simply gives your opponent a leverage over yours!..

By first week February 2017 and while the Minister was in the US and after having “[A] dinner with their [ExxonMobil] CEO”, he said, “We have reached a good stage now” indicating the deal will be signed, “Before the end of the year” (IOR, 13 March 2017).

That did not materialize; the Minister declared that no agreement was reached with ExxonMobil and the project, i.e., SIIP, will be offered to other companies if the two sides do not agree by February 2017.[31]  The back and forth on this deal was finally ended by announcement in June 2018 that ExxonMobil is out of CSSP / SIIP[32]

Further remarks are due on this deal. First, this project was supposed to be executed jointly with CNPC, but there are no credible and verifiable evidence that suggests the Ministry had conducted any discussion with this company, why?; second, during the entire two years negotiation between the Ministry and ExxonMobil, no information was made available on any essential parameters of the negotiation, what was offered by each side and why was the negotiation reached a stalemate; third, it seems the Ministry has left it to ExxonMobil to propose the type and conditions of the contract then the Ministry would look at that; fourth, it was not known whether there was /is a committee that was charged with negotiating this important project on the Iraqi; fifth, no information is available to indicates that the Energy Committee of the Council of Minister and/ or Oil and Energy Committee of the Parliament had been duly kept informed on all phases and results of the negotiation.

The third example is the latest mass offering of border fields and exploration blocks. In a sudden move the Ministry announced in first week of January 2018 it will hold the fifth bid round on 7 May 2018 and proposing very tight schedule to accomplish the bidding; thus expedite the timing it has previously indicated in its announcement of 27 November 2017. The Ministry provides no clarification on why it decided to hold the round earlier than announced previously.

 

By offering some 18 onshore brown and green fields and exploration blocks and one offshore area, all grouped under “9 exploration blocks” on the borders with Iran and Kuwait, the Ministry seems to be embarking for yet another grand-opening to IOCs.

 

26 IOCs were qualified to participate in this round including six already blacklisted by the Ministry from participating in upstream petroleum projects. Thus, it is puzzling to see the Ministry contravenes its own policy; who is behind this obvious chaos?

 

What causes serious concerns is the complete blackout on the type and components of the contract(s) for this bid round. Moreover, what complicates the matter even more is that IOCs are who will suggest these contracts as stated by the Minister said, "The commercial models, by the companies wishing to invest, will be studied and analyzed then negotiated and select the contract which achieves our objectives”[33]

Leaving the contracts to IOCs discretion is, as discussed earlier, a recipe for disadvantageous imbalanced deal that works against the country’ interests and adoption of the abandoned Terry Adams approach.

 

Also, due to the tight timetable and known management capacity gaps at the Ministry, the biding process presents serious challenge as there are 9 groups of fields and blocks; 3 or 4 types of contracts and 26 companies eligible to participate in the bid round. Covering areas with two or three different types of already producing (brown) fields with discovered by not developed (green) fields and exploration blocks in a single contract would require the formulation of a complex difficult contract, largely due to the significant differences between the financial terms, contractual provisions and technical and geological requirements of these three covered areas.

Additionally, and this is very important, the contracts of this bid round should reflect the special status and the prioritization of developing fields straddled along borders with Kuwait and Iran, especially with regard to the possibility of joint development through the formula known as “Unitization” of the concerned field. This is in addition to the need for including in the contracts many of the conditions, provisions and practices recognized by international contracts for border fields.

Finally, the timing of the bid round was first set five days prior to the national election on 7 May this year then brought forward to 15 April and later moved it to 25 April! The Ministry announced on 13 April it has delivered the Final Tender Protocol and two Model Contracts to the 14 IOCs that bought the “Data Package”, without mentioning their names and not providing the text of the mentioned documents, as the MoO used to for the previous bid rounds.

 

The fifth bid round took place on 26 April 2018 in Baghdad and the model contracts were published soon afterwards. The process, the outcomes and the model contracts of this bid round have caused outrage among most known Iraqi oil and economic experts as they expressed their strongest opposition.[34]

 

Ninth: Shrinking Transparency, Deals Behind Closed Doors and Return of Secrecy

Transparency, in Iraq petroleum sector, is a new concept. Formally and officially it was introduced in the International Compact with Iraq -ICI under benchmark, “Establish and implement mechanisms to ensure transparency of petroleum sector flows” (GoI 2007). Pursuant to ICI obligations, MoO began publishing publicly available reports on production, export, and processing of crude oil and made them available on the Ministry’s website and also to take the necessary steps to joining the Extraction Industries Transparency Initiative-EITI.

 

Following its undertakings under ICI, the government publicly announced its commitment to work with all stakeholder groups at the 4th EITI Global Conference in Doha, Qatar, in February 2009, and then made formal commitment to EITI at the Iraq EITI (IEITI) launch conference on 10-11 January 2010, when the country was accepted, by EITI as a Candidate.

As a candidate country, Iraq took all necessary actions and fulfilled EITI requirements that led the EITI International Board on 12 December 2012 to announce Iraq as “Compliant” country under the EITI Rules.

Attaining the compliant status seemed to be misunderstood by those at the Ministry, IEITI and others. Having the compliant status was seen as “mission accomplished”; as “permanent membership” in EITI; as “testimony of transparency in the sector”; it is about “oil revenues only” among others.

Hence, a sense of complacency prevailed and each IEITI annual report becoming mostly a copy of the previous one; the National Secretariat of IEITI-NS became more passive, less responsive to external views and non-transparent in its records.

Transparency at the MoO begun shrinking gradually and one month after the current Minister took office he caused serious blow to transparency; most data that used to be posted on regular intervals on the Ministry website since 2008 were suspended from September 2016 and all previous data archives became inaccessible.

But Iraq’s status as a compliant country was subject to “validation” of continued full compliance with EITI rules and standards, which was scheduled in 2017. Accordingly, a team from EITI International Secretariat-EITI-IS visited the country on April 2017 for a fact finding mission and prepared “Initial Assessment”, which found Iraq non-compliant (EITI 2017).

The Validator, Adam Smith International-ASI, agrees with the EITI-IS preliminary assessment but, moreover, downgraded two benchmarks and, thus, makes Iraq’s compliance even weaker.[35]

 

Apparently, the “Initial Assessment” forced the Ministry to resume posting, on its website starting from July 2017, some data, that was suspended in September 2016. But that was too little too late and EITI suspended Iraq status on October 2017.

Ironically, the Ministry continued on its non-transparent attitude and practices even after the suspension and after the Ministry and Iraqi authorities declared their commitments to EITI and to comply with the needed requirements to regain Iraq status. Examples are many, the one year long negotiation with ExxonMobil regarding SIIP (March 2017-February 2018);  with Jinhua, a Chinese company, to develop East Baghdad Oilfield (December 2017); the agreement signed on January, 2018 with the US company Orion to utilize associated gas from Nahr Bin Omar oilfield in Basrah province; the contract/agreement signed with the GE-Baker Hughes US companies in July 2017 related to associated gas from Nassiriyah and Gharraf oilfields in Thi Qar province, among others.

As usual, the Ministry has continued on its direct behind closed doors deals with IOCs without disclosing any vital information on these deals or about the contracts or agreements that were signed. Moreover and worst still, all the above mentioned contracts and agreements were negotiated and concluded without following the usual official contracting procedure that requires public tendering, open bidding and transparent selection. Finally, the Ministry was unable to clarify why associated gas from Gharraf oilfield was contracted to Baker Hughes when the associated gas from this field is already governed by the contract signed with Petronas and its partners!?

 

The latest manifestation of the Ministry’s non-transparent and secrecy mentality is related to the current fifth bid round.  Actually, this anti-transparency mentality contravenes all what was prevailed during the previous four bid rounds.

 

Regrettably, in reality there has been a clear consistent pattern on shrinking transparency and a return to pre 2003 secrecy of information in the petroleum sector, especially since the last ministerial reshuffle of August 2016; deeds are more revealing than symbolic formal declarations and rhetorical statements!

 

Part two:

The Balance-Sheet of Successes and Failures

Our evidence-based assessment of the development in the sector-wide petroleum focuses on the fundamental components of the sector. The basic premise is the assertion that the success of a prudence and soundness of petroleum policy could only manifest itself through harmonious, coordinated and timely execution of the main components of the said policy. Further assertion, logically and analytically, follows: a failure of policy at a sector-wide petroleum leads to further dependency of the national economy on oil export and consequently less sustainable development on the macro-levels.

However, this essay focuses on the petroleum sector leaving the sector-macro nexus to other time or to other scholars. Thus, the remaining space of this contribution covers five basic issues: Profile of oil production capacity and performance; Oil export, destinations and new marketing modalities;   Refining Structure and the chronic production-demand misalignment; The wasteful continuation of gas flaring; and finally the recent disturbing development regarding regulating the upstream petroleum.

 

Profile of Oil Capacity and Production

Oil production capacity and actual production in Iraq can be looked at from locational/ provincial or organizational (i.e. National Oil Companies-NOCs) or management (i.e. by National Efforts- NEs or by Joint Management Committees-JMCs with IOCs pursuant to bid rounds) perspectives, though overlapping.    However, availability and details of consistent data (especially in continued time series) limit the analysis.

At the commencement of 2018 Iraq production capacity stands at 5mbd[36] and total production at end December 2017 at 4.189mbd[37] (excluding KRG), indicating 16.2% idle capacity. This significant idle capacity, with its negative consequences for cash-needed Iraq, can be attributed to multiplicity of causes, including OPEC cut deal. If this idle capacity comprises some of those covered by the bid rounds, this would entail paying IOCs their corresponding Remuneration Fee in compliance with “take or pay” contractual provisions. It should also have implications for pace and scale of developing capacity further.

Based on our computation of average daily production during the second half of 2017 some 80.4% of total Iraq oil was produced by Basra Oil Company-BOC (including production from Thi Qar province); 10.5% from Missan Oil Company-MOC; 5.2% from Midland Oil company-MidOC (mostly from Wasit province) and 3.9% from North Oil Company-NOC (Mostly from Kirkuk province since production from Kirkuk, Ninawa and Salahuldeen provinces was negatively impacted by Da’esh effects and KRG seizure of some oilfields that are operated by NOC ).

 

The above indicates that ca. 96% of the country’s oil production during the second half of 2017, i.e., from BOC, MOC and MidOC, involves IOCs, due to the first two bid rounds, and those fields developed by national efforts; but MoO data does not make such distinction and thus we have to make some estimations.

IOCs have been involved, through ten contracts, in ten (twelve) currently producing oilfields, while another two, i.e., Najma and Qayara in Ninawa (Mosul) province have been on hold due to Da’esh effect.   Based on the signed contracts and their amendments and published data from formal and industry sources the following methodology was used to estimate oil production resulting from bid rounds and IOCs involvement.

• Base Line Production –BLP, upon signing the contracts, was 1881kbd for oilfields under BR1 and 48kbd for two oilfields only in BR2;
• BLP under BR1 are subject to “Natural Decline Rate-NDR” at constant 5% annually; it was increased to 7.5% from 2014 onward for one oilfield; the cut-off year for computation is 2011. BLP under BR2, though mentioned but contractually was not a counted for since these are “green-fields”;
• The Remaining of BLP-RBLP at end 2017 was calculated for each oilfield under BR1 using its NDR;
• Current Production-CP, at end 2017, for each oilfield was compiled from “latest available” data;
• Net Additional Production-NAP, i.e. due to IOCs involvement, for BR1 oilfields was calculated as follows: NAP=CP-RBLP and for BR2 oilfields: NAP=CP.

 

Appling the above approach gives the following estimates:

• Total oil current production-CP from the ten oilfields at end 2017 was 3653kbd;
• The remaining base line production-RBLP for oilfields under BR1 at end 2017 was 921.05kbd;
• Net additional production-NAP from IOCs involvement in the ten oilfields at end 2017 was 2731.95kbd;
• Total oil production (excluding NOC and KRG) at end 2017 was 4041kbd, which means oil production from oilfields operated by National Efforts-NF was 388kbd (i.e. 4041-3653)

 

The above analysis and computation indicate that actual production from the ten oilfields was less than one-third of the originally contracted plateau production that was supposed to be reached at end 2017. But because of the limited development of oil production by national efforts, actual production from the ten oilfields constitutes over 90% of total oil production. Most likely, oil production by national efforts had actually carried the burden of OPEC cut.

Net additional production, which represents the real IOCs contribution, stands at 2.7mbd and this represents 68% of total oil production in the middle and southern Iraq. Also NAP decides the magnitude of two important financial parameters: capital investment that was spent to have such production levels and net remuneration fees; both parameters represent payment to IOCs.

 

Oil Export, Destinations and New Marketing Modalities

Monthly data on oil exports continued, by State Oil Marketing Company –SOMO, uninterrupted by deliberate anti transparency measures imposed by the current Minister of Oil. Export data are grouped under Kirkuk blend, which is exported through pipeline through Turkey to port of Ceyhan, and Basra blend, exported from export terminals on North Arabian Gulf. Until mid-June 2014 small quantities used to be trucked to Jordan from Kirkuk.

 

From end June 2008 to end January 2018 Iraq exported a total of 8.8 billion barrels, 90% of which is Basra blend.  Kirkuk export, since March 2014, was severely impacted by security conditions, Da’esh effect and KRG actions. In fact SOMO data indicates zero Kirkuk export since October 2015 except minor quantities between September 2016 and July 2017.

During the last ten years Iraq generated an accumulated $626.8billion in oil revenues, 88% of which is generated from Basra blend; indicating 2 percentage points in the price for Kirkuk blend favor reflecting quality and location advantages.

 

Iraq has three major market destinations: Asia, the Americas and Europe. There has been a dramatic change in markets configuration since 2008, leaning forcefully towards Asian markets at the expense of the Americas. Asian markets had 32% of Iraqi oil compared with 41% for the Americas and 27% for European markets. In 2015 Asian markets share almost doubled to 61%, the Americans down to 9% and the European increased slightly to 30%.

This significant shift towards Asian markets could be attributed to many factors: high growth demand for oil in East Asian economies; refinery configurations in that region could very well process Iraqi crudes-both Basra heavy and Basra light; most IOCs that are involved in the bid rounds and receive their entitlements (for cost recovery and remuneration fees) in crude which is shipped to Asian markets; the serious and continued interruption of Kirkuk crude and finally aggressive pricing and marketing by SOMO to enhance its share in the that market.

It is worth highlighting in this juncture three developments concerning SOMO:

First, from June 2016 onwards SOMO diversified crude grades by launching Basra Heavy, reflecting the increasing magnitude of heavy crudes production due to bid rounds and also protecting the quality of its flagship Basra Light blend. But the monthly export data makes no such distinctions between these two crudes.

Second, on April 2017 SOMO broke with its established policy and began limited spot trading through auction on Dubai Mercantile Exchange-DME. Our monitoring and calculation suggest that between April 2017 and January 2018 SOMO sold 12 shipments of 2 million barrels each equally divided between Basra Heavy and Basra Light. Basra Light shipment generated total premiums worth $2.484 million over the Official Selling Price-OSP and a corresponding $11.242 million from Basra Heavy.

In addition to DME, SOMO began, in February 2018, similar auction through Platts and considering to auction through Argus.[38]

Third, on December 2017 SOMO entered an “agreement of partnership work” with the Russian company Litasco, Lukoil‘s international marketing and trading arm, by establishing a new venture, Lima Energy. The later name now changed into Iraq Petroleum Trading- IPT and becoming one of SOMO’ clients!

However, neither SOMO nor the Ministry provides information on the basic terms of this venture; surprisingly enough the Parliament did not make a move despite the fact that this type of “international agreement” should be subject to its approval!

 

Refining Structure, Production and Demand Misalignment

The structure of the Iraqi refining sub-sector has evolved, over many decades, in such a way that is currently characterized with multiple core complexes each has some smaller “satellite external” refineries linked, administratively, to it. Each core complex was developed gradually over the years by adding new capacities in the same location (or province) or by modernizing existing capacities or by both: addition and modernization.

Until mid-June 2014 Iraq has a nameplate refining capacity 984-kbd comprising all state owned North Refineries Company-NRC (494kbd); Midland Refineries Company-MRC (220kbd) and South Refineries Company-SRC (270kbd). Baiji refinery (402kbd) is the core complex of NRC; Doura refinery (140kbd) is the core of MRC and Basra refinery (270kbd) is the core of SRC. There are 10 state-owned smaller refineries with total capacity of 232 kbd (23.6%) while the three core complexes have a combined 752kbd (76.4%).

But all that has drastically changed after June 2014 due to Da’esh (ISL/ISIS) effect; most of NRC designed capacity has been extensively damaged, especially in Baiji and Qayara. Consequently, more than one-third of the country’ refining capacity was lost, and might take years and billions of investment to reconstruct it again.

 

Even before Da’esh effect, the refining sector suffers from two chronic misalignments: the first, actual refinery production is much below the nameplate capacity; indicating low utilization rate and the second, the obsolete technologies produce more of the lower parts of the barrel of products that is not commensurate with demand; leading to production-demand misalignments that has to be increasingly met through imports of expensive petroleum products.

In late 2009 the MoO commissioned many international consulting firms to undertake Front End Engineering and Design-FEED studies for four modern grassroots refineries with a total refining capacity of 890kbd.[39]  All refineries were offered for investment through many promotional activities since 2011 but without good results, except a scandalous contract, with technically incompetent and financially bankrupt, for Missan refinery that was signed many years but remains ink on paper to this day!

Also the government decided to execute Karbala refinery and began the work on 2014; but the construction encountered lack of funding and change of prioritization under current Minister of Oil, who discourage state involvement in the refining sector, while the Ministry seems to encourage Iraq state investment in refineries outside the country![40] Was there any such confusion and absent of basic economic principles of prudent petroleum policy??

Under the current minister, the ministry announced repeatedly these and other refineries for private investment without noticeable success, except small, and accordingly technologically inferior, refineries that would deepen the above mentioned misalignment.  However, the Ministry announced an award of 300kbd Faw Refinery in Basra province to two Chines companies but without FEED study and no known information or details on the signed contracts.[41]

So far, refining sector remains one of the major failures of petroleum policy, or lack of it, in the country and thus the chronic supply-demand misalignment.[42]   It is worth mentioning in this regards that the Ministry has suspended, since September 2017, providing monthly data on the demand on “other oil products”, which constitutes major import item since January 2009![43]

Gas Flaring Continues

Another chronic disappointment that manifest serious policy malfunction is the continued gas flaring and at accelerated rate.

All gas production in the country has been associated with oil production; the more oil is produced the more associated gas is produced as well depending on the gas-oil ratios of the related oilfields.

Monthly statistical data indicates that, on average, gas flaring to total produced associated gas has increased from 51% in 2009 to reach a maximum of 69% in 2015.

The Ministry suspended the publication of these data on September 2016, a month after the current Minister took the helm of the Ministry, and the monthly average of the flared gas for the first eight months of 2016 was down to 64%.

In this regard I would argue that gas flaring is more of apparent policy failure than absence of legal framework.

The establishment of north and south gas industry entities within MoO in 1979 and 1980 intended to “utilize all associated gases available in the fields of Iraq to produce dry Sales gas, LPG, Natural gasoline and Sulphur for domestic needs and for exports. But wars from 1980 to 2003 had interrupted the giant Southern Gas Project [44]

Law 84 of 1985 for Reservation of Hydrocarbon Endowment, which is still valid, forbids, according to Article 8-Second, gas flaring “unless it is not possible to utilize it economically”.

 

On April 2005 the MoO signed a MoU with Shell and Mitsubishi to conduct a two-stage Comprehensive Gas Plan covering all fields, which was delivered by end 2008. Based on that MoU, MoO and Shell signed on 22 September 2008 a Head of Agreement-HoA to, “establish a joint venture to reduce gas flaring in the South of Iraq and gather and gas for utilization in the domestic and export market (the “South Gas Utilization Project” )”.

The leaking of “confidential” HoA prompted evaluation, criticisms and opposition from many Iraqi professionals, e.g. Jiyad (2009), Merza (2010), Al-Ameer (2011), among others.

 

The negotiation and finalisation of the HoA lasted longer than anticipated but eventually lead to signing a joint venture establishing Basra Gas company-BGC between South Gas Co (51%) Royal Dutch Shell (44%) and Mitsubishi (5%); BGC was approved by the Iraqi Cabinet on mid-November 2011 and officially announced the commencement of its operations on 1 May 2013.

One direct consequence of BGC was to exclude gas utilisation provisions in the contracts governing Rumaila, WQ1 and Zubair oilfields offered under first bid rounds; while such provisions were included in the contracts for oilfields covered by the second bid round and offering the same remuneration fee for gas on oil-equivalent barrel.

BGC’ first tanker of exports of condensates was on 22 March 2016; almost eight years from signing the HoA, which ironically includes a “Quick Wine Assets” that supposes to  “optimization and fast-track procurement of equipment in order to increase gas production before incorporation of the Joint Venture”!!!

The Ministry signed on the World Bank Zero Flaring Initiative by 2030, but the Ministry keeps giving inconsistent indications on when gas flaring would end.[45]

 

Another policy inconsistency is manifested by three contradictory developments: continued gas flaring, importing Iranian gas and commitment to exporting “surplus” gas to Kuwait (Ministry press office, 21 September 2017)!

But the strangest lack of proper policy understanding is what the Minister has reportedly said, on 2 February 2017, “Gas utilization in the country was impacted by, among other factors, the fluctuation of gas prices in the international markets”. ! Iraq fails to utilize its associated gas for domestic uses, it imports gas from Iran, yet it blames gas prices in the international markets!![46]

 

The publication of data on gas production, utilization and flaring  resumed on July 2017 and based on them the average monthly (July 2017- February 2018) flared gas down again to 56.6% of total of associated gas production.

Much of that reduction in gas flaring was attributed to BGC activities that led to increasing export of condensates and LPG in the first quarter of 2018. Also it was attributed to increased gas utilization form oilfields contracted under the second bid round. For example, gas treatment plant with capacity of 2 million cubic meters daily- mcmd was inaugurated at Buzergan oilfield (CNOOC as Operator) on 2 April 2018 that would supply power plant to produce ca 104MW.[47] Earlier, in December 2017, Russia’s Gazprom Neft, operator of Badra oilfield, launched the commercial operation of a 1.6 billion cubic meters a year capacity gas processing plant at the oilfield, which monetizes at least 95% of the produced associated gas.[48].

But the challenge that would face the Ministry’s efforts to end gas flaring in 2021-22 is of two folds; gas flaring rate is now stands at 56.6% at oil production (excluding KRG) of 4.360mbd and thus much is needed from the Ministry to reduce that rate to zero even at today’s oil production level. Moreover, oil production in 2021-22 will, according to the Minister[49], reach 7mbd, which implies increasing associated gas production by 61% on today’s level.

 

It should be mentioned at this juncture that the Council of Ministers has approved Resolution 51 of 30 January 2018 mandating the MoO to launch “Supplemental Natural Gas Processing Contracts (SNGPCs) for the processing of associated gas to qualified investors through a competitive and transparent bidding process that adheres to best international standards” no later than 30 June, 2018.[50]

So far, the Ministry has been non-compliant to that Resolution since none of the announced deals and contracts were awarded “through a competitive and transparent bidding process” e.g., Baker Hughes for associated gas in Nassiriya and Garraf oilfield (2 April 2018); Orion Gas Processors to capture and treat gas from Nahr Bin Omar oilfield (9 January 2018).

But the question remains on whether the Ministry could keep its promise for ending gas flaring by 2021-22?

 

 

Regulating the Upstream Petroleum

Two legal instruments of particular and direct relevance to upstream petroleum have been under the focus of attention since 2003; these are Federal Oil and Gas Law-FOGL and Iraqi National Oil Company-INOC Law. Many drafts for both laws were proposed and discussed and much has been written about them, particularly since February 2007.

While FOGL, even in its latest version, has practically been overtaken by events, INOC Law was passed recently by the Parliament. But because this law was full of flaws, ambiguities, contradictions, inconsistencies and, above all, contraventions to the Constitution, it prompted strong and wide opposition to the extent that this author has launched formal detailed appeal before the Federal Supreme Courte by highlighting where and why this law is unconstitutional and, thus, should be revoked.

Due to the importance of the law and its highly likely damaging impacts on the petroleum sector and on the Iraqi economy at large, it is imperative and of vital necessity to adopt inclusive and participatory methodology for combating the law. For this purpose I adopted four phases AMTA approach: Awareness, Mobilization, Teaming-up and Action.

Awareness phase aims at highlighting what is seriously wrong with the law by providing preliminary evaluation of the law and then further specific with economic evaluation on how this law could violate the constitution, weaken INOC itself and contribute to the disintegration of the country. Articles in Arabic and English were shared widely and posted on many websites.

Mobilization phase began by calling upon Iraqis, collectively or individually, to protest the law and file “open” appeal to the Federal Supreme Court; two articles in Arabic were shared and posted on 26 and 27 March respectively.

The call aims at prompting the citizens to know their constitutional rights and empower them with the knowledge base to act as was enshrined in the constitutional article 93.

Team working phase began when many oil professionals, lawyers, civil society organization, politicians, parliamentarians and media sources among others supported the idea of appealing to FSC.

A small group of Iraqi oil professionals was assembled in Baghdad to maintain contacts with the lawyers and follow-up the matter inside the country especially with media sources and events organization. Two fundamental steps were done: the first is to prepare a draft of detailed appeal against the law on article-by-article base and the second is to provide the lawyers with “Power of Attorney” by the plaintiffs.

Action phase began with many different actions such as writing articles, organise meetings and roundtable debates and a group of Iraqis abroad launched on 4 April an online-campaign against the law.[51]

All components of the AMTA approach are ongoing and continue until this atrocious law is revoked. Increasing number of articles and positions in support of the appeal are evident in the Iraqi media and among the professional networks.[52]

Two colleagues from Baghdad with legal team made the formal appeal before the Federal Supreme Court and the process is moving forward.

On its side, the Council of Ministers-CoM asked the Ministry of Oil on what the Ministry has taken regarding the implementation of the said law and also to provide its opinion on the appeal against the law and which articles in the said law the ministry would appeal against.[53]  The Ministry formed a 12-man committee but focusing on the implementation matters with no mention of the appeal issue![54]

Much of the future development of upstream petroleum, prospect of INOC itself and the integrity of the country, I would argue, hinge on revoking or radically amending this law. Time will only tell!

Another issue of particular and critical importance is the legality and constitutionality of KRG’PSCs and its independent export of oil without the consent of the federal government.  The latter appealed to Federal Supreme Court-FSC many years ago, but KRG resisted appearance before FSC. However, the comparative power shift post the untimely referendum on independence and the collapse of Da’esh had forced KRG to attend before FSC. Accordingly, FSC, on 27 June 2018, listened to the filed case by the Ministry of Oil against KRG and gave lawyers of both sides until 4 August this year to present additional documents and evidences pertaining to Kurdistan region's independent oil policy, and set the next hearing for 14 August 2018.[55]

 

Concluding Remarks

NDPs post 2003 have become increasingly indicative documents with all ministries are non-accountable for adhering to the targets of the NDP or complying to what was included in that plan. A logical consequence of such lack of sound and coherent national planning perspectives is the continued structural imbalance and reliance heavily on commodity export, i.e., crude oil. And with the absent of meaningful structural diversification (both vertical and horizontal) the state “oil dependency” increases, “rentierism ” consolidates, vulnerability to external shocks and leverages enhances and, consequently, sustainable socio-economic development derails significantly.

Similarly, there was no white-paper for coherent and coordinated petroleum policy that integrates the three sub-sectors; all major policies and actions were mostly “Minster-base” even if there were plans or strategies as the case of INES signifies. Over the last 15 years, decision makers, i.e., ministers of oil were mostly motivated by “scoring achievements through contracting” instead of “delivering results and outcomes”. That is why upstream petroleum attained less than half its contracted levels with almost no progress on refining and gas flaring continues unabated.

The political economy of relationship between IOCs and the host developing country, e.g. Iraq can be assessed through the contents of the contracts and their implementations. The foregoing analysis clearly demonstrate a deteriorated condition for Iraq; while the original signed contracts were for the Iraqi interests, the revisions of these contracts and the concluding the recent ones (of April 2018) have shifted the balance towards IOCs interests.

Considerations of and data on cost, effectiveness and payment to IOCs are hardly made on regular intervals, on time and with full disclosure. Hence, there seems to be deliberate persistent efforts to prevent proper and comprehensive economic analysis and assessment. On the other hand, the Ministers and senior officials at the ministry use to make unsubstantiated and mostly contradicting statements on these matters.

It seems that all the above occurred under conditions of lack of transparency, absent of good governance and a return to secrecy with many important deals are concluded behind closed doors, particularly with the American companies, and without the usual economic justification or feasibility assessment. This bad unproductive and questionable style of management had prevailed especially since the last cabinet shift of August 2016.

All the above, and as highlighted throughout the article, deserves further attention and investigations through serious academic and professional research works.

*Originally published on International Journal of Contemporary Iraqi Studies, V12:3, 2018

 

 

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CONTRIBUTING DETAILS

Ahmed Mousa Jiyad is an independent development consultant and scholar. He is founder and owner of Development Consultancy & Research; Norway; Energy Senior Expert mandated by the European Commission; accredited Expert on Extractive Industry Governance by UNDP; Associate of the (former) Centre for Global Energy Studies- CGES, London; Affiliated Expert with European Geopolitical Forum (Brussels); Global Energy Associate with Brussels Energy Club (Brussels); Senior Country Analyst for the PRIX- Index on Political Risk and Oil Exports (Oslo); Blogger Expert for Iraqi Business News-IBN (UK); Senior Associate with Mannara Consulting (UAE); Contributor to and Guest Editor of the academic International Journal of Contemporary Iraqi Studies-IJCIS (UK/USA/Canada); MEES and Energy & Geopolitical Risks; Oil, Gas and Energy Law-OGLE, among others. He has been, and still is, professionally cooperating with many Iraqi, regional and international companies, organisations, institutes, media, civil society organisations and variety of other entities.

Jiyad studied and graduated with BSc in Economics (Univ., of Baghdad), High Diploma in Planning (Univ., of Birmingham, UK), MSc in Development Studies (Univ., of Bath, UK) and MA in Law & International Affairs (Fletcher School of Law and Diplomacy: Tufts and Harvard universities, USA); in addition to attending numerous professional courses.

He has over 40 years of extensive international professional and academic experience working with governments, local governments, academic institutions, private sector, NGO and international organisations in Iraq, UK, USA, Norway, and, with UN organizations, in Poland, former Czechoslovakia, Hungary, Uganda, Sudan and Jordan.

While in Iraq (1968-88) he was a Lecturer at Almustansiriya University; Senior Economist with Ministry of Oil and INOC; Chief Expert and Director at the Ministry of Trade; Chief Expert and Head of Commission with the External Economic Relation Committee- Council of Ministers. During 1975-88 he had actively participated in negotiating major oil projects and contracts, financial agreements, project financing and bilateral economic and technical cooperation agreements.  He left Iraq to the US in July 1988 as Fulbright Hubert H. Humphrey Visiting Fellow.

Jiyad is active scholar with regular participation in international conferences, workshops, seminars and related events. He has written and publishes widely since 1976 on energy and other developmental issues, and he is regular contributor to academic, professional and industry journals and periodicals; most of his contributions and publications, in English and Arabic, can be found online, mostly on https://www.iraq-businessnews.com/category/oil-gas/ahmed-mousa-jiyad/ ; http://www.akhbaar.org/home/search/?sq=Ahmed%20Mousa%20jiyad

He is Iraqi-Norwegian citizen, born in Iraq 1945, and lives in Norway since October 1989. He can be reached at: [email protected] and his mailing address: Skreia 19, 5725 Vaksdal, Norway.

https://orcid.org/0000-0002-0946-9898

[1] This part of the article was based on data and information from 40 detailed Excel spreadsheets, each summarizes one MoU.

[2] I was invited to attend the Symposium, and was co-moderator of the Oil Policy Working Group.

[3] In its meeting Nr. 8 dated 3 March 2009. See http://www.goi-s.com/view.224/. Accessed on 9 February 2010.

[4] For detailed testimony see his interview with Ruba Husari for Iraq Oil Forum-IOF in Dubai dated 11 May 2009, posted 20 May on http://www.iraqoilforum.com/?cat=7 Accessed 21 May 2009.

[5] For example Issam Challabi, in his statement dated 27 September 2008 on the proposed deals including the HoA with Shell provides details suggesting deliberate neglect; Direct email communication. 

[6] Based on information from MEED, 3 September 2008 and International Oil Daily-IOD, 12 November, 2008

[7] Law Nr. 21 of 1997 published in Alwaqee Aliraqia nr. 3683 dated 18 August 1997 ratifying the Development and Production Contract and the Memorandum of Understanding related to Al-Ahdab oilfield signed in Baghdad on 4 June 1997 between MoO and CNOC and CNI, represented by Alwaha Company.

[8] Council of Ministers-CoM Meeting, nr. 8 dated 23 February 2010.

[9] http://www.parliament.iq/Iraqi_Council_of_Representatives.php?name=articles_ajsdyawqwqdjasdba46s7a98das6dasda7das4da6sd8asdsawewqeqw465e4qweq4wq6e4qw8eqwe4qw6eqwe4sadkj&file=showdetails&sid=4343 Accessed 27 March 2011.

[10] This part borrowed heavily from Jiyad (2017).

[11] The proposal was that Adams would consult with IOCs and academics as to ‘the desired features of a model contract”. More on this see Greg Muttitt article- No blood for oil, in this volume.

[12] Basrah Provincial Council held two extraordinary meetings on 24 and 28 June 2009 to debate the first bid round.

[13] Speaker of the House, Iyad Alsammari, met, on 22 October 2009, with delegation from oil professional in Basrah. They outlined and explained the main flaws of the contracts related to the bid rounds and their disadvantages to Iraq from technical, economic and legal angles. Alsammari asserts in the meeting that the Parliament has the rights and responsibilities to go thoroughly through any of such contract. Press Office for the Parliament president, 22 October 2009.

[14] SOC staff held many meetings resulted in drafting and forwarding formal letter to the Minister of oil proposing the further development of the brown oilfields by national efforts through EPC conventional service contracts. See,  Letter To Iraqi Oil Minister From The General Manager Of South Oil Company, MEES, Vol. LII, No 25, 22 June 2009

[15] See, Open Letter from Iraqi Oil Experts to the Parliament (regarding draft oil and gas law), 5 March 2007 http://www.iraq-enterprise.com/oillaw/AmmanMeeting17FebruaryE.htm Last accessed 15 February 2010.

[16] Iraq’s, then Deputy Prime Minister for Energy, Hussain al-Shahristani, said that Iraq does not plan to lower its target for oil production of 12 mbd or to re-negotiate contracts with oil firms over their plateau targets.

https://www.iraq-businessnews.com/2011/05/09/shahristani-denies-rumours-of-reduced-oil-target/ Accessed 12 May 2011.

[17] To that end they signed an agreement on 11 January 2010 leading in a contract, financed jointly, that was signed on 1 July 2010 with an international consulting firm, Booz & Company, selected in competitive bid. A Jul. 17-18 Baghdad symposium was convened to launch the study and help ministries formulate the most expedient approach. See, Council of Ministers (2013): INES has seven elaborated appendixes but they are not in the printed and distributed document.

[18] IEA, Iraq Energy Outlook-World Energy Outlook Special Report, Paris, October 2012. This author was among the participants in the high-level workshop held in Istanbul- May 2012 and a peer reviewer of the Report.

[19] The Council of Ministers approved INES, based on its Executive Summary, at its meeting on 16 April 2013 by its Order No. 157 of 2013.

[20] See, for example, Mackey, Peg (2011), Sharushkina, Nelli (2012) and PIW (2012).

[21] Nefte Compass, 14 March 2013.

[22] For discussion on and calculation of R-factor see, Jiyad (March 2010).

[23] MEES, Vol. 58. No. 08, 20 February 2015.

[24] This author had debated these statements extensively; for detailed debate, see, Jiyad: (May 2015), (April 2015) and (March 2015).

[25] IOR, 2 April 2015.

[26] IOR, 22 August 2016

[27] IOR 2 December 2016

[28] There is good deal of details concerning these and other explanations, but space considerations limit our coverage.

[29] The same text appears in State Budget Laws, see, Alwaqee Aliraqia (2016; 2017). Author translation from Arabic.

[30]  https://oil.gov.iq/index.php?name=News&file=article&sid=718 Accessed 10 November 2016.

[31] http://www.alliraqnews.com/modules/news/article.php?storyid=69623  Accessed 25 December 2017.

[32] MEES, Vol 61, Issue 25, 22 June 2018

[33] http://oil.gov.iq/index.php?name=News&file=article&sid=1768  Accessed 28 November 2017.

 

[34] See http://www.akhbaar.org/home/2018/5/243940.html posted on 9 May 2018

[35] Adam Smith International (ASI), UK, was appointed as the independent Validator to evaluate whether EITI-IS’s work was carried out in accordance with the Validation Guide of EITI. The EITI-IS ’s Initial Assessment was transmitted to ASI on 16 July, 2017, giving also copy to IEITI-NS; ASI draft Validation Report, sent to the International Secretariat on the 10 August 2017. ASI (2017), Validation of Iraq.  https://eiti.org/sites/default/files/documents/asi_validation_report_iraq_first_draft_v1.pdf  Accessed 23 February 2018.

 

[36] As stated by the Minister of Oil at "Kuwait International Conference for the Reconstruction of Iraq", http://www.akhbaar.org/home/2018/2/240670.html  Accessed 13 February 2018.

[37] https://oil.gov.iq/index.php?name=Pages&op=page&pid=113 Accessed 24 February 2018.

 

[38] SOMO’ Energy News Brief, issue 1 March 2018, https://docs.google.com/viewerng/viewer?url=http://somooil.gov.iq/images/DALAL/1-3.pdf Accessed 9 March 2018.

[39] These are Missan, Kirkuk and Ninawa refineries at150kbd each; Karbala at 140kbd and Nassiriya at 300kbd. http://www.moo.oil.gov.iq/studies/STUDIES/projects.html Accessed 4 March 2018.

[40] For example the recent information that Iraqi state is acquiring a stack in the Moroccan SAMIR refiner, see http://www.shafaaq.com/ar/Ar_NewsReader/62919d13-e251-4ff1-ba14-afbe01212f01  accessed 21 April 2018

[41] https://oil.gov.iq/index.php?name=News&file=article&sid=1846  Accessed 29 January 2018.

[42] For further detailed analysis on these issues see Jiyad (January 2017).

[43] On this latest move on data manipulation by the Ministry see monthly data provided by the Joint Organization Data Initiative- JODI.

[44] http://sgc.oil.gov.iq/date_co.php and http://ngc.oil.gov.iq/en_index.htm  Accessed 14 April 2018.

[45] Initially it was end 2018, then the Minister was reportedly said, on 16 September 2017, that gas flaring will ceased by end 2019 (http://newsabah.com/newspaper/133572   Accessed 17 Sept 2017,  then he said, on 2 April 2018, before end 2021 (http://www.akhbaar.org/home/2018/4/242541.html Accessed 2 April 2108.

[46] As reported on Almustaqila on 2 February 2017

[47] https://oil.gov.iq/index.php?name=News&file=article&sid=1913 Accessed 3 April 2018.

[48] https://www.iraq-businessnews.com/2017/12/06/gazprom-neft-commissions-new-gas-plant-at-badra/  Accessed 7 December 2017.

[49] See   http://www.akhbaar.org/home/2018/2/240670.html Accessed 13 February 2018.

[50] This resolution was related to approving a roadmap proposed by the Ministry in 26 November 2017 for the amended Work Plan regarding the World Bank Loan Requirements.

[51] http://ehamalat.com/Ar/sign_petitions.aspx?pid=1002  - the number of cite visitors exceeds 37000 (at 30 June 2018)

[52] For the text of the appeal in Arabic and other articles written by this author on both laws since 2007 can be accessed through the following links: http://www.akhbaar.org/home/search/?sq=Ahmed%20Mousa%20jiyad; https://www.iraq-businessnews.com/category/oil-gas/ahmed-mousa-jiyad/

[53] CoMs’ official communication number 19333 dated 28 May 2018.

[54] See IOR, 20 June 2018

[55] See IOR, 28 June 2018 and Al-Forat News (in Arabic), 27 June 2018, Baghdad, Iraq.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. 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 organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

The full article can be downloaded in pdf format here.

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Below is the full Arabic text and source of what was reportedly said by Abdul Alal AL-Yassiry, the Chairman of the Iraqi Centre for Economic and Investment Consultation in Karbala.

What prompts me to write this commentary is only the inaccuracy of data and information he cited regarding SOMO. In other words I am not defending SOMO; its staff can and should defend themselves. Also, I am not discussing here the corruption issue, which undoubtedly and emphatically plaguing Iraq, particularly by the political parties and provincial councils; these can be discussed separately.

I will provide what he says then make my comment.

First; He says “SOMO sales 4 million barrels daily-4mbd”!

Official data does not support this assertion at all; oil exports by SOMO during the last ten years increased from 1.879 mbd during July 2008 to 3.543 mbd in July 2018. Hence, his figure is absolutely incorrect.

Second; He also says “SOMO sales oil to the companies at $10 discount of the bourse price; this is called commission”.

This is also incorrect for the following reasons;

1. SOMO does not sale all its oil through bourse (stock exchange) or according to bourse prices; however, SOMO sold a few shipments, of 2 million barrels each, through Dubai Mercantile Exchange-DME auctions since April 2017;
2. SOMO’s marketing procedure and modality is primarily based on annually arranged “Term Contract” and the monthly export price is decided by a ministerial committee using at least three pricing equations for the three major market destinations (North America, Europe and east Asia) with different marker crudes taking into consideration the quality of the crude (API) and, specifically, sulphur contents;
3. I have been following SOMO for years and never observed such discounts or “commission” of $10 a barrel! Between January 2016 and June 2017 oil export price for a barrel ranged between $22.21 and $42.2; can anyone believe or imagen that SOMO gives 45% and 23.7% of its officially adopted and declared price that easy without causing devastating outcry against it and the Ministry of Oil!!!

Third; in his explanation or justification for this “commission” it “compensates loading loses and what is known vaporisation”

Actual loading of oil into the tanker is rather rigorous operation done in the presence of the “measurement committee” and after issuing at least 13 different certificates; then SOC/now Basra Oil Company-BOC submits all these certificates to SOMO before loading oil to the tanker takes place.

Nothing in these certificates refers to vaporisation that justifies such huge discount or commission. Moreover, neither oil chemistry nor different metering instruments support his claims.

Fourth; Then he asserts, “What is important, these companies came through the political parties”

According to Iraqi and international data the annual number of companies that buy Iraqi oil- international oil buyers-IOBs during the last 15 years ranges between 34 to 45 IOBs. Most of these IOBs are well known and many of them were also SOMO’ clients well prior to 2003.

Therefore, to claim that these IOBs came through the political parties is, apart from been erroneous, it elevates the international networking and impacts of these political parties, which is laughable, but, more seriously, accuse these IOBs with “collusion”, which renders him subject to legal action.

Moreover, all IEITI annual reports (prepared by different international specialised firms) provide, among others, reconciliation of oil export revenues paid by IOBs, received by SOMO and deposited in a New York bank, and provide explanation of any discrepancies over small “materiality threshold”. None of these reports provide any information supportive of his allegations.

Fifth; He alleged that, “the political parties take $2 a barrel from that commission while the companies keep the $8”

But he did not explain or tell:

1. When, where and how this 2:8 split of the commission was agreed between all political parties and all IOBs;
2. Was SOMO involved in that agreement?
3. Oil exports occur through many shipments to each IOB for each year, so what are the modalities each political party uses to secure its share from the commission for each shipment?
4. What are the modalities for actual payments from each IOB to each political party; to which banks these payments were transferred and deposited and what are the material evidences for such payments etc.?
5. How come there was no discrepancy in distributing that commission as if all political parties and all IOBs work in perfect harmony!!

From and based on the above comments I conclude:

1. His knowledge and understanding of oil export system need serious revision and improvement;
2. Allegations he made are very serious indeed and without strong, emphatic evidence, he could face legal action by SOMO/Ministry of Oil, each political party and each IOB;
3. As he is the chairman of a consulting centre, what he had said undermines, damage and tarnish the credibility, objectivity and professionalism of his centre.

Ahmed Mousa Jiyad,

Iraq/ Development Consultancy & Research,

Norway.

12 August 2018

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11-08-2018  23:57  0  1102

اقتصادي عراقي :هكذا تستحصل احزاب السلطة بالعراق على الاموال

يرى رئيس المركز العراقي للاستشارات الاقتصادية والاستثمارية في كربلاء ان رواتب مجلس النواب ومجالس المحافظات لا تساوي جميعها  ارباح يوم واحد من الكومشن الذي تتقاضاها  احزاب السلطة  من البنك المركزي ووزارة النفط  مبينا  ان الانتخابات في ظل نفس الشخوص والرموز الحزبية والجهوية معناه بقاء كل شيء على ما هو عليه.

بين عبد العال الياسري لوكالة نون الخبرية بأمثلة والأرقام عن كمية المبالغ المستحصلة بطرق مختلفة بقوله ان  " كل الاحزاب لديها مصارف اهلية وقد تقاسمت مبيعات البنك المركزي العراقي من الدولار حيث يباع يوميا من ١٥٠ الى ٢٠٠ مليون دولار بسعر ١١٨ الف دينار في حين وصل سعره بالسوق التجاريه الى معدل ١٢٧ الف وبعمليه حسابيه بسيطه فان معدل ارباحهم من ٥ الى ٨ مليون دولار يوميا!!! اي ١٥٠ مليون دولار شهريا ولا يقل عن ٥٠٠ مليون سنويا وبدون اي تعب فقط فواتير مزوره" , فضلا عن المنافذ الحدوديه وسيطره الصفره.

وأضاف مثلا اخر وهي شركة سومو النفط والتي تبيع يوميا ٤ مليون برميل نقط للشركات حسب سعر البورصه ناقص ١٠ دولار هو مايطلق عليه الكومشين هو مبلغ يعطى للشركات كتعويض للضائعات اثناء التحميل وما يعرف بالتبخر.المهم هذه الشركات جاءت عن طريق احزاب السلطه وهي تستوفي دولارين من الكومشن من تلك الشركات وهي تعطيها بكل سرور لانها رابحه ٨ دولارات وبحسبه بسيطه ٢$×٤ مليون برميل =٨ مليون دولار أرباح الاحزاب الحاكمه.

واختتم الياسري الذي كان يشغل منصب رئيس مجلس محافظة كربلاء سابقا حديثه " ان من يعتقد ان مجالس المحافظات هي الممول للأحزاب الحاكمة فهو غير مدرك للامور فما تصرفه تلك المجالس ليست سوى نقطه في بحر ما تدره العاصمة لتلك الأحزاب".

اسامة الخفاجي

http://www.non14.net/102748/

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. 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 organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The market’s consolidation continued for the second month running with both turnover and the market continuing to decline. Average daily turnover declined by about -57% from that of the prior month, itself down about -15% from the preceding month. The market, as measured by the RSISUSD Index, paced these declines, down -5.8% for the month (see chart below) but up +10.1% YTD.

While a monthly market decline of -5.8% following a -2.6% decline the prior month might be thought of as a correction and a not a consolidation. Yet the term consolidation is more appropriate given the internal market dynamics which are not captured fully by the RSISUSD Index given its heavy representation by banks with a 51% weighting and almost 40% of that accounted for by lower-quality banks.

(Source: Iraq Stock Exchange (ISX), Rabee Securities, Asia Frontier Capital (AFC))

Buying by both locals and foreigners continued in the high-quality names such as mobile operator Asiacell (TASC) and Pepsi bottler Baghdad Soft Drinks (IBSD), up +68% and +49% respectively YTD. Foreign buying in these names has been consistent and persistent since early December, 2017 driven by improving fundamentals as discussed in January’s article. The high-quality banks which joined the rally in February, discussed in February’s article, have been dragged lower over the last two months by concerns over the earnings outlook for the lower-quality banks.

This concern has been driven by the declining margins on foreign exchange dealings as a consequence of the narrowing of premium of the market price over the official exchange rate of the Iraqi dinar (IQD) vs the USD, as will be explained below.

As discussed in the last few months, increasing signs of an improvement in liquidity in the broader economy have resulted in steady improvement in the market price of the IQD vs the USD, lowering its premium over the official exchange rate to 1.2%- the lowest point in a number of years from just under 6% at the end of 2017, and  10% at the end of 2016 (see chart below). Although, the premium would likely return to the 2-4% range once this liquidity feeds into increased consumer spending and the resultant increase in demand for imports.

(Source: Central Bank of Iraq, Iraqi currency exchange houses, Asia Frontier Capital)

(Note: The Spikes in 2012, 2013 & 2015 were due to CBI policies that restricted the sale of USD, but abandoned after causing a rise in market rates)

The Central Bank of Iraq (CBI) conducts daily currency auctions in which participating banks buy the USD at the official exchange rate on behalf of clients: international transfers mostly to finance private sector imports, and fixed/limited cash payments to meet citizen’s needs for travel. The attractiveness of buying the USD at the official rate and selling it at the market rate has made the system susceptible to abuse and has led to lower-quality banks focusing on it almost exclusively as a source of revenues.

Higher quality banks, in particular those majority owned by regional banks, have either avoided the auctions or tended to use them sparingly especially in the last two years. The upshot is that while FX spreads constitute the bulk of earnings for the lower quality banks, they are one of many sources of revenues for the higher quality banks.

Worries on the banks’ earnings power from shrinking FX spreads have been one of many reasons that high-quality banks have outperformed the lower-quality ones in the last few months, yet the speed of the narrowing of FX spreads has led to fears that this would affect the higher quality banks in a similar fashion. Coupled with foreign selling in some of the higher-quality names exasperated these declines and resulted in them trading at valuations that are at extreme odds to the underlying improving fundaments in their outlooks.

These are the bottoming of the negative developments that prevailed over the last three years, i.e. declining/negative deposit growth, declining/negative loan growth and increasing non-performing loans (NPL’s). Their outlook is brightening as the expansionary effects from the reversal of the escalating costs of conflict and collapsing oil prices that crushed the economy in 2014 provides them room to recover further and grow.

The valuations of the higher quality banks are as attractive as they were in mid-2017, discussed in the July 2017 article, but the current outlook and the state of the economy are significantly better today.  The table below is a snapshot of current valuations of three of the “bluest-chip” banks, but to appreciate the significance, a quick review of the banking sector:

• Less than 20% of the population have bank accounts and out of those that do, about 60% have their deposits and loans with state banks, which in turn control over 90% of total assets and deposits;
• Lending is a small part of most bank’s income stream which is mostly from trade related fee income esp. trade financing, other fee income, interest income from T-Bills, and deposits with the Central Bank of Iraq (CBI);
• Banks are extremely liquid; most assets are in cash and cash equivalents, consisting of cash deposits with other banks and with the CBI, CBI & Ministry of Finance T-Bills;
• Book values are understated vs banks elsewhere given the low interest income generation and the high dividend-pay-out ratio;
• Note: Bank of Baghdad’s dividends are assumed to be in-line with last year’s which might be optimistic, Mansour Bank’s are based on dividends declared in March and Commercial Bank’s are based on its stated dividend intention to be confirmed in its upcoming AGM next week.

(Source: Company reports, ISX, AFC, Data based on latest trailing 12 months)
(Note: Prices as of 03 May 2018. Fundamental data from the latest quarter (unaudited) and not average of last two years as in the last few quarters some banks have cut their loan books significantly through increased provisions and write-offs and enforcing loan repayments)

As reported in the March article, the improved government finances have yet to be reflected in a return of liquidity to the economy as measured by growth in broad money supply.  While this is likely to happen over the next few months, the timing would probably be delayed and complicated by the uncertainties and government paralysis ahead of the parliamentary elections on 12^th May, and the subsequent negotiations over the formation of the new government.

The low turnover during the month, a likely function of the uncertainties during the election season, underscores that the increased liquidity in the form of both local and foreign inflows reported over the last few months needs to be maintained for the market’s consolidation to lead to further recovery and for this recovery to be sustainable.

The backdrop continues to be positive as the sustained improvements in government finances should ultimately lead to better market action. The time lag involved coupled with the election uncertainties, implies the recovery will likely unfold over the next few months and it will likely be in fits and starts with plenty of zig-zags along the way. Which continues to underscore the opportunity to acquire attractive assets that have yet to discount a sustainable economic recovery.

For those who have not been to Baghdad recently, this article is worth a read as it shows that the decline of violence is felt with a return of night life in Baghdad.

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS). He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Alessandro Bacci.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq’s Fifth Licensing Round: Some Preliminary Considerations After the Auction

On the morning and afternoon of April 26, 2018, I participated in a petroleum scholar workshop organized in London by the Association of International Petroleum Negotiators (A.I.P.N.). There I gave the presentation “Current Trends Concerning Petroleum Service Contracts in the Middle East.”

I explained the difficulties that Iraq was experiencing with its technical service contracts (T.S.C.s) and that, exactly while we were discussing in London, Iraq was holding in Baghdad its fifth licensing round after the introduction of some amendments to its service contracts in the previous weeks. After the end of the workshop, I stopped in café where I started collecting information concerning the results of the licensing round.

Iraq’s fifth licensing round was related to the offering of 11 blocks. In specific, 10 onshore blocks located along the Iraqi borders with Kuwait and Iran, and 1 offshore block in the Persian Gulf waters. In the end, six blocks were awarded, while five of the exploration blocks did not receive any bids. So, what is a correct evaluation of this fifth licensing round? Probably, a balanced answer would be that Iraq’s fifth licensing round ‘on the day of the auction’ obtained a mixed result.

In fact, if, on the one side, it’s true that six blocks were awarded, on the other side, it’s also true that no major international oil company (I.O.C.) won any bids. Of the big names in the petroleum industry, Italy’s E.N.I. alone decided to participate and made two unsuccessful bids. U.A.E.-based Crescent Petroleum obtained three blocks, China’s Geo-Jade two blocks, and China’s United Energy Group one block.

One initial explanation for the mixed result might be that the Iraqi government had previously changed the date of the auction. Initially, the Ministry of Oil wanted to have the auction in June 2018, but, then, it moved the date of receiving the offers of the international qualified companies for the licensing round forward to April 15. At the same time, the Oil Ministry’s Petroleum Contracts and Licensing Directorate sent the document concerning the final form of the tender, the conditions of the tender, and the formula of the exploration, development, and production contract (E.D.P.C.) and of the development production contract (D.P.C.) only on April 13.

However, when the Oil Ministry realized that the I.O.C.s—fourteen companies had purchased the documents required to participate in the bid round—would have had only two days to study the new contracts and submitting an offer, it postponed the deadline for submitting an offer to April 25. Then, the Oil Ministry held the licensing round on April 26.  In any case, the time for studying the dossier relating to the 11 blocks was limited according to either deadline. On top of this, Iraq will hold its national elections on May 12, and, before committing to investing on a long-term basis in additional projects in Iraq, investors might want to know the results of the coming elections.

For sure, political reasons played a role for changing the date of the bid round. Until a few months ago, the official schedule required that the final contract and tender protocol be issued by the end of May 2018 and that the submission of bids and the awards occur in June 2018 (see also BACCI, A., Iraq’s Fifth Licensing Round, in Iraq Business News, Dec. 20, 2017). Honestly, because Iraq has not been investing in the development of the border fields for the last 50 years, it’s is difficult to see what would have been the economic loss for Iraq’s government if Iraq had organized the auction two months later, i.e., in June, as it had previously planned. Two months would not have been a stark difference for the government, but it would have been a consistent difference for the I.O.C.s, which might have studied more completely the offered blocks and the new contract.

So, politics played a role. In Iraq, 320 members out of the 329 members of the Parliament are elected through the open list form of party-list proportional representation—the remaining 9 seats are reserved for the minorities. Iraq’s 18 governorates act as the constituencies. The ten onshore offered blocks are in the following Iraqi governorates: Basra, Diyala, Wasit, and Missan. In total, in May, these four governorates will be responsible for the election of 60 seats, or more than 18% of the seats (Basra, 25; Diyala, 14; Missan, 10; and Wasit, 11). However, at the same time, these governorates are home to the majority of Iraq’s most important oil fields (in particular Basra Governorate). And, because in Iraq the economy is dominated by the petroleum sector, which provides about 90% of government revenues and 80% of foreign exchange earnings, it’s easy to understand the pivotal economic role played by these governorates.

Moving forward the development of the additional blocks located in the above-mentioned governorates to before the elections may indeed provide a political support to Oil Minister Jabar Ali al-Luaibi who is a member of the Victory Alliance, which is led by Prime Minister Haider al-Abadi. In practice, holding the fifth licensing round would be a sort of additional tool to increase the chances of victory for a specific political group in the affected areas, because this move shows that the present government is concerned with the economic development of the above-mentioned governorates. And considering Iraq’s present fragile political environment, this political move has a certain logic. Now, according to the schedule, the deals must be signed on May 10. If they are not approved by the present government, it will be the task of the new government to approve them.

Considering these political reasons, it’s difficult to say whether we can consider the fifth licensing round finished and not just a politically useful stopgap. In any case, what is surprising is that important amendments to the structure of the offered service contract have been carried out with limited input from the industry and the stakeholders. In fact, the basic truth of the petroleum industry is that if a contractor is able to generate a return exceeding its planned internal rate of return (I.R.R.) threshold, it will go ahead with its investment. If the planned return is less than the I.R.R. threshold, the contractor will not invest.

This problem stood out very clear in 2009 during Iraq’s first licensing round. The day of the auction the result was negative because the companies did not see any profitability in what was offered. In practice, only after a few months of additional negotiations, was the government able to transform a failed licensing round into a success. What happened at that time was that the average cash outlay was renegotiated so that the I.O.C.s could have an improved profitability. And in just a few months, Iraq could sign contracts for the Rumaila field, the Zubair field, the West Qurna 1 field, and the Maysan field.

Moreover, after the end of the fifth licensing round, the Ministry of Oil correctly affirmed that the lack of bids for five exploration blocks— Zurbatiya and Shihabi on the border with Iran, Jebal Sanam and Fao on the border with Kuwait, and the offshore block—was also linked to additional difficulties, which could have increased the costs for the contractors. In fact, some blocks cover former battlefields (Zurbatiya and Shihabi), some have an infrastructural gap, and the offshore block lacks complete data.

Crescent Petroleum, a subsidiary of the multinational conglomerate Crescent Enterprises, is the first and the largest private upstream oil and gas company in the Middle East. It has operations in the U.A.E. and in the Kurdistan Regional Government (K.R.G., a.k.a. Iraqi Kurdistan). In the U.A.E., the company operates the Sharjah onshore concession and the Sir Abu Nu’ayr concession, while in the K.R.G. it operates the Khor Mor and the Chemchemal gas fields. In addition, Crescent Petroleum is the founder and the largest shareholder in Dana Gas, which is the first and largest publicly listed private-sector natural gas company in the Middle East.

Geo-Jade Petroleum is an oil exploration and production company with operations in Kazakhstan and Russia. This company started its oil and gas investments only in 2010—before the company was involved exclusively in real estate. Today, it is independently operating six exploration blocks and three development blocks. United Energy Group (U.E.G.) is an oil and gas exploration company having projects in Pakistan and Indonesia. In 2017, U.E.G. had an annual production of more than 4 million tons. After the acquisition of BP Pakistan in 2011, the company has expanded its operations in the country, and, today, U.E.G. and United Energy Pakistan Limited (U.E.P., U.E.G.’s Pakistani subsidiary) are the largest foreign E&P company and investor in Pakistan.

With reference to the contracts, the Ministry of Oil has introduced some amendments that have changed the structure of Iraq’s service contracts. During the previous four licensing rounds, Iraq had used service contracts in which there was a per-barrel fee remuneration linked to an R-Factor. The amended contract is different in that it sets a link between oil prices and the remuneration given to the I.O.C.s. At the same time, it introduces a 25% royalty on gross production.

In practice, out of the overall revenue, first, the contractors will pay a 25% royalty on gross production, second, they will recover the incurred costs according to a specific formula, third, they will split the remaining part, i.e., the net revenue share, with the government according to the percentage established at the time of the bid round, and fourth, they will pay the 35% corporate income tax (C.I.T.) on their percentage of net revenue share. Moreover, the amended contract does not consider any longer oil byproducts (for instance liquified petroleum gas) as companies’ revenue.

The key to understanding the new contractual framework is Article 19 of both the exploration, development, and production contract (E.D.P.C.) and of the development and production contract (D.P.C.). Art. 19 explains that in any quarter, Iraq’s involved regional oil company (R.O.C.) shall be entitled to a royalty of twenty-five percent (25%) of the deemed revenue, which is the value of net production in barrels of oil equivalent. With reference to the petroleum costs, Art. 19.5 explains that

[i]n respect of Petroleum Costs, in any Lifting Quarter due and payable Petroleum Costs shall be paid to Contractor to the extent of the Percentage of Net Deemed Revenue. The Percentage of Net Deemed Revenue shall be determined by reference to SOMO’s [the contract here means the State Oil Marketing Organization or its successors] average OSP [official selling price] during the Spending Quarter and in accordance with the following formula:

Percentage of Net Deemed Revenue= (Average OSP / 50) * (70%) * Net Deemed Revenue

The said formula shall be applied throughout the Term, provided that where the average OSP is equal to or less than twenty-one point five US Dollars (US$ 21.50) per Barrel, the Percentage of Net Deemed Revenue shall be thirty percent (30%) of Net Deemed Revenue and where the average OSP is equal to or greater than fifty US Dollars (US$ 50.0) per Barrel, the Percentage of Net Deemed Revenue shall be seventy percent (70%) of Net Deemed Revenue.

The percentage of net deemed revenue means the available portion of net deemed revenue allocated for the payment of the petroleum costs. The net deemed revenue means deemed revenue less royalty.

Then, the contractor shall be entitled to a remuneration equal to the product of the remuneration percentage bid and the remaining net deemed revenue. The remuneration percentage bid means the percentage of the remaining net deemed revenue bid by the contractor. And the remaining net deemed revenue means the net deemed revenue that remains after the payment of the petroleum costs to the extent of the percentage of net deemed revenue.

And then, the contractor shall pay the corporate income tax at a percentage of thirty-five percent (35%) on the actually received remuneration generated from the implementation of the contract to the General Taxation Commission in accordance with the Law No.19 for year 2010.

These are the remuneration percentage bids according to the six awarded blocks:

• Khashim Ahmer-Injana (gas, Diyala Governorate): 19.99%, Crescent Petroleum
• Naft Khana (oil and gas, Diyala Governorate): 14.67%, Geo-Jade
• Khider al-Mai (oil, Basra Governorate): 13.75%, Crescent Petroleum
• Gilabat-Qumar (gas, Diyala Governorate): 9.21%, Crescent Petroleum
• Huwaiza (oil, Missan Governorate): 7.15%, Geo-Jade
• Sindabad (oil, Basra Governorate): 4.55%, United Energy Group

A first consideration is that the percentage of the remuneration varies consistently according to the considered block. However, this should not be surprising because these blocks might well, for instance, have different geological characteristics. In fact, already with the technical service contracts used in the first four licensing rounds, the per-barrel fee was different according to each auctioned field. Now, with the new contract model, the Oil Ministry is trying to provide a fee that is based on commodity prices and costs.

At least on paper, the Oil Ministry should be able to give in this way more flexibility to its contracts. In fact, the three main factors that determine the amount of resource wealth linked to a petroleum field (oil and gas) are the produced volume; the price of the petroleum; and the involved exploration, development, and production costs. From an economic point of view, the best option for both the contractor and the government would be when the following three factors coexist: a high production level; low exploration, development, and production costs; and high oil prices in the international markets.

Thanks to the new contractual structure, the government would like to force the contractors to act in a more efficient manner, while at the same time, because the remuneration fee is based on the remuneration percentage bid, the contractor would now be affected positively by the increase and negatively by the decrease in oil prices. At the same time, the new contracts have a time limit concerning the requirement for the contractors to stop flaring. Iraq would like to stop completely flaring by 2021.

Iraq has currently a daily oil production of about 4.43 million barrels from Baghdad-controlled oil fields (March 2018). The country’s exports averaged 3.45 million barrels a day last month from the southern ports. According to a 5-year development plan, the government wants to reach a production of 6.5 million barrels per day by 2022.

Alessandro Bacci is an independent energy consultant in relation to business strategy and corporate diplomacy (policy, government, and public affairs). Much of his activity is linked to the MENA region, an area where he lived for four years. Alessandro is now based in London, United Kingdom (www.alessandrobacci.com), and he is a member of the Association of International Petroleum Negotiators (A.I.P.N.). A multilingual professional, Alessandro holds a Bachelor of Laws and Master of Laws from the University of Florence (Italy), a Master of Public Affairs from Sciences Po (France), and a Master in Public Policy from the Lee Kuan Yew School of Public Policy (Singapore).  

By Wassim Bassem for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News. 

By John Lee.

Iraq's Ministy of Oil has awarded all four development projects, and two of the seven exploration blocks, that it offered in its fifth auction of oil licences.

Only nine of the 26 companies originally pre-qualified took part in the auction, with majors such as Lukoil (Russia), ExxonMobil (US) and Total (France) not bidding.

Development blocks:

• Gilabat-Qumar, in Diyala: Crescent Petroleum (UAE)
• Khashim Ahmer-Injana, in Diyala: Crescent Petroleum (UAE)
• Huwaiza, in Missan (Maysan): Geo Jade Petroleum (China)
• Khudher Al-Mai [Khider al-Mai], in Basra and Muthana: Crescent Petroleum (UAE)

Exploration blocks:

• Naft Khana, in Diyala: Geo-Jade Petroleum (China)
• Sindibad [Sindbad] field in Basra: United Energy Group (UEG) (Hong Kong)
• Zurbatiya [Zarbatia, Zurbatia], in Wasit and Diyala: not awarded
• Shihabi in Missan and Wasit: not awarded
• Fao, in Basra: not awarded
• Jabal Sanam [Jebel Sinam, Jebel Sanam], in Basra: not awarded
• Offshore Gulf block: not awarded

Abdul Mahdi al-Ameedi, director general of the Petroleum Contracts and Licensing Directorate (PCLD), told Reuters that the failure of five blocks to attract bids was due to a combination of factors, including the fact that some of them cover former battlefields, some are hard to access, and the one offshore plot needs more data.

He said another round could be held for those five blocks.

More details here from Iraq Oil Report (subscription required)

(Sources: Iraq Oil Report, Reuters, Associated Press, AFP)