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By Ahmed Mousa Jiyad.

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

IEITI Report on “Register of Licenses” - Another Disappointment

Iraq EITI (IEITI) released recently the above report, which it says, “In accordance with Standard 2.3 of the International Initiative”; in part it is among Iraq efforts to re-instate its “compliant” status with EITI.

The report, written in Arabic, provides important data and information; other narratives and descriptions are rather known for those familiar with bid rounds licensing processes that were followed since 2009.

Apart from the fact that the report has no date and who authored it, there are, unfortunately, too many inaccuracies, unexplained terms, missing items, ambiguities, typing errors, inconsistency in number and table formats and unchecked data, among others.

Such serious shortcomings would surely undermine the credibility and usefulness of the report and some of its content could be misleading.

Reading the report thoroughly, as testifies below, and for the interest of IEITI suggest:

• IEITI should withdraw immediately the report and stop its circulation;
• The report should be reviewed, rechecked and corrected by PCLD at the Ministry of Oil since PCLD is the only formal entity that has competence and data on the bid rounds and licenses;
• Both PCLD and IEITI are advised to take into account the below analyses and remarks when redrafting the report;
• After the above are done, IEITI publish the redrafted, rechecked and reconfirmed report and all its contents.

This assessment comprises three parts: part one provides “common remarks”; part two specifies remarks on field level and part three addresses the data on corporate income tax-CIT.

Part one: the common remarks

• Each table for each field has a column with a title “Recovered cost$” and a “number”; the provided “number” apparently has nothing to do with “Recovered cost”, actually it refers to the “contracted Remuneration Fee”. Therefore, it seems the report mixes-up between two very different terms: Recovered cost vs. contracted Remuneration Fee. Incidentally, the report does not use the contractual term “Remuneration Fee”, it uses “Profitability Fee”, which I think is inaccurate and could be misleading. Finally, the report does not mention which year these data belongs!!
• The format of each first table for each oilfield is rather preliminary and confused: the title of the columns do not corresponds to the contents of the rows!!
• The report uses a term “Recovered cost for the State Partner”. This is rather ambiguous and also inaccurate since the cost-share of the State Partner, is contractually “carried” upfront, but has to be “paid” by Iraq as per the quarterly payments outlined in the related contracts, thus it is NOT “recovered” by the State Partner. Moreover, why this item was “quantified” for some oilfields and not for others???;
• Similarly, but for different logic, the report was inaccurate when stating data regarding item “IOCs recovered cost” as this underestimate (or understate) what actually Iraq’s pay to the related IOCs in that year. IOCs’ cost recovery in a particular years includes the total of  “IOCs recovered cost”  PLUS the “Recovered cost for the State Partner”;
• Why the report focuses only on 2016 when it comes to item “IOCs recovered cost” and to the quantified values of item for “Recovered cost for the State Partner”; what about previous years or the accumulated value of the recovered cost!! I think they should be included and corresponding to date for both production and income tax;
• The report do not specify the monetary unite (US Dollar or Iraqi Dinar), though it is more likely a US Dollar.

Part two: Remarks to the provided data on field levels

Al-Ahdab Oilfield:

• Actual annual production has been over the “contracted” Plateau Production Level-PPL that is also mentioned in the report, why? Or that PPL was increased without the knowledge of those who drafted the report!
• Actual production in 2016 was 321KBD lower than that of 2015, why? In the meantime income tax paid by 2016 is higher than those for 2015, how come??

Missan 3 Oilfields

There are no values for “profitability fee” for the IOCs and for the State Partner!!!

Zubair and WQ1 Oilfields

The values for “profitability fee” for the IOCs and for the State Partners are exactly the same for both oilfields, though they differ in production profiles!!! Also the value of the “IOCs recovered cost” are very close!!!

Halfaya Oilfield

While no production was reported for 2016 there was significant Cost Recovery and the paid income tax for that year was the highest since the commencement of production in the field, why??.

Badra Oilfield

• 2016 oil production is surely wrong (probably a typing error or due to number format);
• No “Profitability fee” was reported!!!

WQ2 Oilfield

• Why 2016 is lower than 2015 by 180kbd??? While income tax for 2015 was “0” and for 2016 was $53.7 million; something surely wrong!!
• How come the “profitability fee” for the Iraqi SP was more than 50% of that for IOCs!!!!!

Majnoon Oilfield

• How is it possible that SP “Recovered cost” is three times higher than IOCs “Recovered cost” in 2016!!!
• Values for “profitability fee” for SP and IOCs are surely wrong (probably a typing error or due to number format)

Gharaf Oilfield

• The provided data on the “First Commercial Production-FCP” is surely wrong! FCP is close to 59% of the stated Plateau Production; this is contractually incorrect and operationally impossible! (Probably there is a typing error)
• Because of that error in FCP, the reported annual production data have not, so far (after six years from contract validation) reached and exceeds that FCP!!. Hence, what are the legal and contractual justifications for paying “profitability fees”? And why the IOCs paid taxes from 2015 onwards! Contractually, reaching the FCP triggers fees and cost recover as well as CIT payment.
• How it is possible that the SP “recovered cost” is three-times more than that for IOCs? Another error or wrong perception!!

Gas fields (Akkas, Mansuriya and Siba)

Though no data was provided, the table format (for FCP and Plateau Production) should be corrected and consistent.

Part three: Corporate Income Tax-CIT

The report provides a table comprises the annual and total “deducted” CIT based on “fields level” over the period 2011 and 2018 (both years inclusive). There are many serious problems and observations that need clarifications and correction:

• The table covers years 2011 to and 2018, but the provided data on “Profitability Fee”, in earlier part of the report, was limited to 2016! So what are the “actual bases” for calculating and deducting these annual CIT payments?
• There are no paid CIT for 2012 for three oilfields that paid taxes on 2011 and produced oil in 2012?
• Why companies operating Missan 3 oilfields paid CIT for only one year-2015!
• Why companies operating Badra oilfield did not pay any CIT at all!
• Companies operating Al-Fayha oilfield (the exploration block Nr. 9) for 2017 and 2018, but the report mentions nothing on the status of that field and work progress on it;
• CIT paid by companies operating Al-Ahdab oilfield comes second, in volume, after those for Rumaila. This needs explanation for the following reasons:
• Al-Ahdab began paying CIT in 2013 while those for Zubair and WQ1 began in 2011;
• Al-Ahdab annual production levels are much lower than those for Rumaila, Zubair and WQ1;
• Contractually, CIT for Al-Ahdab is 15% and has a “stabilization clause” that protects it from the 35% CIT imposed latter;
• The grand total for paid CIT is not correct, due largely to number format, which is a persistent problem of inconsistency and inaccuracy for the entire report.

In addition to the above there are too many errors and typing mistakes that should be addressed and edited correctly.

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.

UK-based Petrofac has been awarded a Front End Engineering Design (FEED) modification contract for the KOGAS AKKAS B.V. Nasiriya Gas Treatment Plant (GTP) in southern Iraq.

Petrofac’s scope of work includes the modification and application of an existing field design to meet the needs of the Nasiriya GTP, and an estimation for the engineering, procurement and construction (EPC) costs in line with the revised design requirements.

Steve Webber, Senior Vice President, Engineering & Production Services East, said:

“This award is testament to our engineering design capabilities, as well as our deep understanding of the market and supply chain in Iraq. KOGAS is a new client for us in a core market and we look forward to further developing our relationship through the successful delivery of this scope.

“Throughout the project, we will provide a robust FEED package for the execution of the Nasiriya GTP in alignment with KOGAS’ expectations, to ensure that it can maximise the total value of the field.”

(Source: Petrofac)

By John Lee.

According to a report from Platts, South Korea's state-owned Korea Gas Corporation (KOGAS) plans to sell a 47 percent stake in its 100 percent-controlled Akkas gas field.

The company is under pressure from the Korean government to reduce its debts.

The project was originally awarded to a consortium of Kogas and KazMunaiGas (KMG), but KMG pulled out in 2011, leaving Kogas as sole investor and operator on new contract terms.

(Source: Platts)

By Robert Tollast.

Korean firm STX Heavy Industries has cancelled a proposed 500km pipeline to the Akkas gas field in Western Iraq, which is operated by state Korean gas firm KOGAS.

STX Heavy were working on the project with KOGAS Akkas B.V and work was due to be finished in 2017, however the project ran into trouble in early 2014 as security started to deteriorate in Anbar.

ISIL now control 80% of the province, and clearly work at Akkas is now untenable--it is located near the ISIL stronghold of Al Qaim.

STX Heavy has several other projects in Iraq, all of them located in the south where attacks are rare.

(Source: The Korea Herald.)

By Ahmed Mousa Jiyad.

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

Many countries impose capital gain tax on individuals, companies and corporations when a profit realized from the sale of assets. National and state legislation often has a large array of fiscal obligations and regulations regarding capital gains, however, these fiscal obligations may vary from jurisdiction to jurisdiction.

In other words capital gain tax is a normal component of taxation systems on both national and international levels, and thus has a significant contribution to the state revenues and fiscal policies. Iraq is no different and should consider doing the same.

In Iraq the signed service contracts provide the IOCs with a possibility to assign (sell) wholly or partly their participating interests as specified by a common clause in the signed contract, “any Company shall have the right to assign any of its Participating Interest, shares, rights, privileges, duties or obligations under this Contract to an Affiliate.” Such right for assignment is subject to and governed by a set of provisions outlined in the signed contract.

Due to the long duration of the contracts (the Term) that extend beyond 20 years, and due to the usual practice of Merger and Acquisition (M&A) in the international petroleum business it is highly probable that IOCs might “farm in” and “farm out” by acquiring, selling or exchange participation interests in the related petroleum field.

The transfer of participation interests between IOCs involves financial transactions or transfer of “asset” ownership between the concerned parties: the buyer and the seller.  This assignment deal may (though highly likely) results in significant realized gain (profit) for the selling party compared to the actual cost (investment) it made as a consequence to its participation in the related upstream petroleum development project.

 This realized gain is known to be “capital gain” and in most countries it is taxable. The “Capital Gain Tax” is imposed on individuals, companies and corporations and in many countries it is imposed in addition to other direct taxes such as “Property/Wealth Tax” and “Income Tax” among others. The percentage of Capital Gain Tax differs according to the taxation systems and fiscal policies across the world. 

By Robert Tollast.

Robert Tollast is a consultant at Noorbridge, a Helsinki based consultancy with staff in London and Nasiriyah, Iraq. He has written extensively on security, politics and economic issues in Iraq for various publications, and is currently researching a modern history of Iraq with support from The Middle East Forum. email: [email protected] twitter: @roberttollast

Private Security Companies in Iraq: Think Again. An interview with Haider Abadi of the Al Sajer Security Company.

What comes to mind when you imagine private security firms in Iraq? At worst you might recall the leaked footage (from 2005) of Blackwater personnel firing wildly at civilian cars during the coalition occupation. We then heard of 2007’s infamous Nisoor square massacre, and Blackwater’s reputation hit rock bottom.

Sensationalist books such as License to Kill: Hired Guns in the War on Terror or Hollywood portrayals from The Green Zone and The Hurt Locker have not helped an industry widely perceived as mercenary. Perhaps you are a soldier reading this who served in Iraq and remember nothing but swagger, expensive sunglasses, caps and chinos and the knowledge that these men were making far more money than you.

These days the industry in Iraq is highly regulated, and after coming under significant pressure from the Iraqi government in 2012 it has reformed considerably. 2008 saw the advent of the Montreux document, an international agreement that now has 49 participating states, initiated by groups such as the Red Cross and the Geneva Centre for the Democratic Control of Armed Forces.

It would be hard to argue that from a tactical, strategic, ethical, reputational or business perspective, these regulations do not make sense. A community that is alienated by bad behaviour is more likely to be hostile, and incidents are often broadcast on the global stage in minutes thanks to the proliferation of smart phones.

Some private security companies have adapted to the extent that they are considerably reliant on local staff (not just Iraqi nationals, as specified by Iraqi law.) This bond with the community is often vital and is now happening in Al-Qaim: the town where the Abu Mahal tribe started the first uprising against al-Qaeda in 2005 that shattered the organization (before it was allowed to revitalize) lies close to the Akkas gas field in Anbar, currently being worked on by the Korean company KOGAS.

Haider Abadi, projects manager at Al Sajer Security explains that this could be one of the most dangerous private security jobs in the world. But with the Anbar council supporting the project and local tribal involvement, it is currently manageable. Haider Abadi’s work shows us that PSCs are not only securing their clients, but also Iraq’s economic future.

By John Lee.

The Korea Gas Corporation (KOGAS) is among the state-owned Korean energy firm that have come under heavy pressure from the country's new government to shed assets and pay off debt by 2017, reports Reuters.

Korea's Yonhap news agency says that the company is considering selling a 49 percent stake in its fully-owned Akkas gas field, in Anbar province, for $287 million.

Under the proposals, KOGAS would retain operating control of the project.

(Source: Reuters)

Korea's STX Heavy Industries has announced another major contract win in Iraq.

The $99.5-million deal will see the company build a new gas treatment facility at the Gharraf [Garraf] oilfield.

Malaysia’s state oil firm Petronas holds 45 percent of the Gharraf project, Japan Petroleum Exploration (Japex) 30 percent, and Iraq’s North Oil Company (NOC) 25 percent.

STX said that the project is expected to be completed by the end of November 2015.

Earlier this month, the company announced a $449m order to build a 550km pipeline in the Akkas gas field.

(Source: ConstructionWeekOnline)

By John Lee.

Korea's STX Heavy Industries has won a $449 million order to build a 550-kilometer gas pipeline in northwestern Iraq.

The pipeline, scheduled for completion in June 2017, will take gas from the Akkas gas field in Anbar, which is operated by Korea's KOGAS.

(Source: STX)

By John Lee.

Iraq's deputy prime minister for energy, Hussain al-Shahristani (pictured), has said that 'Big Oil' is about to spend over $25 billion next year to boost oil output towards record levels.

He predicted that the southern fields are expected to pump an extra 500,000 bpd in 2014, compared to just over 3 million bpd this year.

Additionally, Baghdad is increasing security at the smaller fields such as Najmah and Qayara -- operated by the Angolan company Sonangol in the al-Qaeda heartland of Nineveh -- and at the Akkas gasfield in Anbar, operated by South Korea's Kogas.

He told Reuters:

"We are definitely concerned about the upsurge in violence, but our concern is for the Iraqi people throughout the country. Iraq is trying its best to combat terrorism ...

"The security situation has not affected the oilfields in the south and central Iraq and we haven't noticed any hesitation or slow down in investment by the companies."

But Shahristani said he did not expect militants to inflict any lasting damage on Iraq's strategic oil network, which has helped generate revenues of nearly $60 billion this year.

"The security situation is not affecting our investment decisions," said an oil company source. "Iraq has such huge and easy to access resources: one way or another, the foreign oil companies will find a way to make money."

(Source: Reuters)