Wednesday, July 02, 2008

Kurds bad-mouth the fee-for-service approach to oil

AlHayat calls attention to the fact that the oil-policy dispute between Baghdad and the Kurdistan Regional Government now involves not only the question of who can sign contracts, but also the question of the fundamental nature of the contracts themselves, as a matter of government policy. Baghdad oil minister Husein Shahristani said on Monday that the Iraqi government failed to sign the expected package of "short-term technical support agreements" with a group of oil majors, and he said this was because the companies "rejected our proposal that they provide advice (or consultancy) on developing oil production, demanding instead a production-sharing proposal, but we are still negotiating with them". Shahristani added: "The model contract that Iraq will offer will be tender of services and not production-sharing, for this reason: This wealth belongs to Iraq and we will not permit anyone to share with Iraqis in its oil".

In reply, the Kurdistan Regional Government resources minister Ashti Hawrami said at the 19th World Petroleum Conference in Madrid yesterday (Tuesday July 1) that the policy of his government is diametrically opposed to that. "Since when did the majors become consultants," he wanted to know, adding hat the contract on offer by Baghdad is "lousy" (AFP report from Madrid; the same remarks are featured in the AlHayat story this morning). He said Kurdistan has been highly responsible in offering contracts that are in accord with "proven international standards".

It had been expected that the initial short-term contracts, described as oilfield service agreements, covering six existing oil-production areas, would have been signed by now, but somehow this has turned into a dispute over production-sharing versus service-contracts. AFP put it this way:
Iraq said on Monday that it had failed to sign technical support deals with global oil majors hoping to cash in on boosting the war-torn country's extensive but underexploited oilfields.

Iraq is still negotiating with Shell, BP, ExxonMobil, Chevron and Total, and a consortium of other smaller oil companies, to develop six oil blocks and two gas fields, Oil Minister Hussein al-Shahristani told a press briefing.

"We did not finalise any agreement with them because they refused to offer consultancy based on fees as they wanted a share of the oil," he said.

"The TSAs (technical support agreements) are only simple consultancy contracts to help us raise the production during the interim period" before the ministry enters into long-term contracts to develop the oil and gas fields.

In any event, the main point being made by the AlHayat reporter this morning is this appears to have developed into full-scale dispute in principle between Baghdad and the Kurdistan region, not just over the nature of particular contracts, whether short- or long-term, but over the basic policy respecting service-contracts versus production-sharing.

Not only that. The Kurdistan resources minister went on make remarks apparently aimed at chilling oil-company interest in the initial set of six short-term agreements being proposed by Baghdad. AlHayat:
Hawrami advised the global oil companies "not to use the contract on offer from the oil ministry without open bidding, because this is not in the interests of Iraq", and he said, "Iraq does not need office-studies done at a distance from outside Iraq; what it needs is investment and actual work by corporations on the ground."
Notice the peculiar fact that he is warning the majors off dealing with Baghdad, not because this isn't in their own interest, but supposedly because this isn't in the interests of Iraq.

What the AlHayat reporter is pointing out is that over and above the details of particular negotiating situations, the fundamental disputes between Irbil and Baghdad are two: (1) Who can sign contracts; but also (2) whether government policy is to be for service contracts or for production-sharing contracts.

Oddly enough, this point has been completely absent from the recent outbreak of indignation over the initial proposed short-term contracts.

See also the comments

10 Comments:

Blogger jhwmeasor said...

Without engaging in a 'Kurd's only interest is in undermining the Iraqi state vs. Kurds have only the people's best interests at heart (through a federal arrangement)' tit-for-tat I'd say that Hawrami's got a point.

The Iraqi parliament won't pass such contracts through - certainly not prior to adoption of the petroleum law (which will be adopted in about 2025).

Otherwise its a combination of development planning and interests. Simply not only is it in the federalists interest to have the provincial entities more involved; its also important for *his* region to get production moving (and revenues flowing) at this time.

The central government has not only an interest in keeping the petroleum under central authority, but also in slowing the development process as it simply cannot spend the revenues associated with a growing development project in the foreseeable future. Moreover, Iraqi strategic planning may see the petroleum left in the ground as more valuable at present than rushing to put fields online with outdated and inefficient production methods.

Simply, the KRG can use those revenues for political and economic development purposes asap, Baghdad is under no such hurry - it can't spend the money its brining in now and needs to rebuild the Iraqi oil industry for the long haul.

John

1:20 PM  
Blogger badger said...

John,

I think I understand your point about near-term cash flow (via production-sharing) versus longer-term planning (starting with fee-for-services contracts, until the national expertise is re-established).

What I can't figure out in the current case is this. This initial Baghdad package of six short-term contracts has always been described as service contracts. Now, suddenly (to me it seems sudden anyway) the corporations seem to be also demanding production-sharing. What happened? Any ideas?

2:39 PM  
Blogger jhwmeasor said...

Hi Badger,

Maybe I'm missing the question, but I believe that Big Oil is negotiating for two things: first, they believe oil is more valuable that cash at this point (if US$ I'd tend to think they are right) so they want to be paid in future production rather than set contracts, and second they (naturally) want to secure their position for future production and development contracts and not limit their role to the service end of things. If they can access production and exploration efforts they not only stand to profit, but they can add the reserves to their own books and carry weight in global energy discussions as well (much as newly discovered reserves provide such cache to the Iraqi government).

IMO the Iraqis are trying to bring in the expertise to make up for the devastation of Saddam and sanctions era management practices without having to give up that access/control over future production and development. As I stated above they aren't in a terrible hurry either. Frankly the oil is more valuable going forward, they need immense investment that needs to be accrued on the international markets as current production cannot raise enough capital fast enough, and they need to remain somewhat cautious as they need to factor in future political violence (I'm sure they know how vulnerable any such development will be without the political sharing agreements completed and understood by all).

The federalists (not just Kurds but SIIC as well) would prefer short term production increasing to cement local control over the resources - de facto operation trumps constitutional arguments - as well as for access to the cash to develop other business' and support patronage networks. SIIC and others in the south also have the potential revenues of the shrine/pilgrimage/tourist trade (estimated in the billions) so they are not as hurried as the Kurdish parties.

Negotiating service contracts with the majors is feasible and these games are simply negotiations; other oil companies simply will *only* work on a production-sharing basis as they don't have the capital possessed by the majors.

In the end we'll probably see a lot of different deals made.

Did you see the breaking news on the Hunt Oil deal today? [http://www.warandpiece.com/blogdirs/007651.html] Waxman's committee seems to have documents clarifying that Hunt and the White House were well aware of Hunt's move into Kurdistan prior to their acknowledged receipt of the move.
Am I misunderstanding your query?

4:32 PM  
Blogger badger said...

No, I think I've got it. (You understand I'm partly just picking your brain here...)

On the current six-deal package, there was this question of how the corporations were to be paid, whether in oil or in dollars, so that was one point. But I guess you're saying that in any negotiation with Big Oil, they're also going to be always pushing for "future participation" in exploration and/or production partly for the profits and partly for what they can put on their books. So this current standoff would be just part of the usual push-and-pull, (between fee-for-service on the one side and "participation" on the other) you will always have between a nationalist government on one side and Big Oil on the other.

So far so good. Maybe I misunderstood or oversimplified in my mind earlier accounts of this, but it seemed to me that in this caseit had already been agreed that these were to be fee-for-services deals (subject to that question of the mode of payment, in oil or in dollars), so I was wondering if perhaps Uncle Sam (directly or via the Kurds in some way) might have put his thumb on the negotiating scales recently, but I guess that's the kind of thing we will never know.

I haven't been following that Hunt story, I'll take a look...

5:41 PM  
Anonymous Kjetting said...

There are two things to this narrowly. As correctly pointed out, International Oil Companies (IOCs) want to get paid in oil. This is not only because this is more valuable, because by the nature of the Technical Support Agreements (TSAs) - the first six contracts - they will be paid a per centage sum of profit. This means that the number of barrels will fluctuate depending on oil price to reach this per centage of profit. Getting paid in oil, however, is a more secure way. That is probabaly why this is preferrable. They will send in a tanker to lift their oil payment, rather then to wait for cash payments, something that bean counters consider/fear a loss of value.

On the other hand, some of the IOCs want a "Grandfather clause" which gives them rights to the same project in the next phase. This demand, however, is probabaly limited to only some of the companies, as other realise that they will not get it. They will anyway be in a good competitive position having aquiered knowledge in this phase.

As for the Kurdish statements, this is related to the wider battle over the future of Iraq. The longer the Kurds are able to hinder Baghdad from progressing, the better for them as this will endanger the position of Shahristani.

I therefore see some of their arguments as pseudo-arguments used to prevent Baghdad from moving ahead, as that will bolster the Kurdish negotiating position (or so they belive) on the oil law. In addition, they got very annoyed that Baghdad are putting out fields in the licensing round that are by their account in disputed territory.

I do not think this is an issue where Uncle Sam weighing in and creating last minute problems. This is the ongoing conflict over the nature of the Iraqi state between ISCI and the Kurds and the rest (here including Maliki).

1:49 AM  
Anonymous gj said...

Whatever the arguments between the Kurds and the central govt, once the Iraqi govt can demonstrate security over the oil fields then Iraq will return to the prosperous state it was in the 1970s before Saddam unleashed the wars against Iran and Kuwait, no? Whatever decision it takes?

3:42 AM  
Blogger badger said...

thank you Kjetting. (whose last sentence, just for complete clarity, I believe means "...the ongoing conflict over the nature of the Iraqi state between ISCI and the Kurds [on one side] and the rest, here including Maliki [on the other]."

4:34 AM  
Anonymous Kjetting said...

Thanks for correcting that Badger.

I think unfortunately the whole debate on oil in Iraq has been premised on some very flimsy arguments.

First of all it is presumed that the current GOI is completely unable to protect the interests of Iraq or are so beholden to the US that it jumps when the US say jump. I think this is wrong.

I have never belived that the super giant fields in Iraq will be "given away" to the IOCs. Iraqi nationalism is way too strong and oil to integral to that nationalism for that to happen. The disconnect between the GZ and the rest of Iraq notwithstanding, the GOI have to look to their constituents before they make decision if they want to exist beyond the immediate future.

In essence, a lot of the critics here reduce GOI and the oil technocrats to objects upon which the West can act, rather then subjects that have at least some ability to see and defend their own interests.

Secondly, the argument about PSAs is just silly. Some of the critics, such as Antonia Juhasz, simply do not understand what they talk about. In addition they have a tendency to establish solid facts out of nothing but thin air (re. op-ed in NYT back in 2007 that was so riddled with mistakes it is hard to know where to start).

PSA is just another way of structuring an agreement. It does not give away ownership of the resource itself. It is not a concession. A PSA can be good, mediocre or bad just as much any agreement between two legal subjects can be.

In the end, PSAs are a tool to structure the most efficient and best development of particular fields. Some fields will be suited for this, others, like the super giants, is suited for other arrangements.

Within these arrangements there will be a battle over who benefits most. This is decided in negotiations, where of course Iraq in some respects are in a weak position due to their inexperience. But at the same time they will have a hell of a lot of companies to choose from, something that can work to their advantage.

Iraq needs help with their oil industry. They will get help, but they can themselves choose in which way. It they for instance do it the Iranian way, they have complete control, but they only get what they ask for. This means taht it very often will be supoptimal as companies tend to learn as they go along in the lifetime of a project (which should be rememberd can be upwards to 25-30 years).

In Norway, for instance, the recovery rate for some of the first fields are now approaching 60 % (which due to geological issues cannot be achieved in Iraq), and some of the fields are on lifetime of operation + n years. This has increased the wealth of the oil companies, of course. But it has also generated a very significant wealth for Norway and Norwegians. Much more then if there never was a contractual incentive for the companies to earn more money by developing fields in an optimal way.

These are considerations that the Iraqis will have to make and decide. It is not helped by creating a political mythology about laws, PSAs and other tools at their disposal.

As to GJ's question, I think that is rigth, but with one qualification: Although the state may become rich, it is by noe means certain that Iraqis will benefit. That depends on teh system which handles this wealth.

5:43 AM  
Blogger jhwmeasor said...

The ‘sides’ aren’t always so clear – especially as constitutional and political issues are congealed (they’re never seemingly settled). ISCI/SCIRI and the Kurdish parties (KDP/PUK) are on the same side on the federalism issue – everyone else is pretty clearly opposed and prefers either a centralized unitary state (as Iraq was prior to 2003) or a unitary state with a special autonomous region of Kurdistan … with both of the latter groups believing that Kirkuk should remain under Baghdad’s control while the KDP/PUK obviously believe it should be part of a greater Kurdistan.

I agree with Kjetting that the oil debate has its bizarre nature in how it is being framed; but, would only add that that is constituted outside Iraq by politicos (i.e. Antonia Juhasz) with other agendas – IMO Iraqis are well aware of the stakes and the arguments. As Kjetting states they (in this case) are not to be acted upon – Iraqis waged a multigenerational struggle – across sect and ethnicity – for the right to control their own mineral resources and political sovereignty; they are doing so again as we speak. That is especially so for those Iraqis such as – and surrounding – al-Shahristani and Hawrami.

Once again – as we are all on the same page regarding the intertangled nature of this issue being about not only petroleum allocation and development but also constitutional matters and future Iraqi economic development – I must stress that the Kurdish position is IMO not nefarious nor ‘pseudo-argumentation’ in any fashion. They are arguing for a decentralized arrangement akin to that of the province of Alberta in Canada whereby the mineral resources are the property of the provincial (or in this case regional) government – not that of the central government. Such a position is entirely sensible on its face and moreover the argument is central to their political position based on the unique experience of Kurds within the Iraqi polity – its not simply a cash grab by Kurdish elites but a sensible way to both devolve power from the central government as well as diminish that central governments power over their region. Following the political violence of the Ba’thist regime as well as the acrimony of Kurdish nationalism vs. the Iraqi state since its inception this position is understandable.

This is why I believe that Hawrami is being forthright in his response to the reporter: a) the current Iraqi Parliament will never vote to approve any such agreements prior to passage of the Petroleum Law, he can be fairly confident on this due to a clear understanding of Iraqi nationalism as well as his own compatriots not insignificant voting block in that very same parliament (which would oppose for their own reasons); b) such agreements are not focused on short term revenue generation and production – like those signed by his own ministry in the KRG – and thus are ‘stupid’; and c) [I’m being kind here] reflects his understanding that such agreements will need to be well focused on longer-term profitability and maximizing the rents accrued from petroleum as the capital generated will all be required to rebuild the infrastructure of the Iraqi state and society – something I believe the Kurdish political elite see as a constitutional duty of the central government more than that of the KRG on its own (i.e. if education, energy provision or roads are a federal matter then the central government should pay for them etc.).

Thus, oil reserves and production – and the profits generated – need to be maximized as no matter how high the price of oil goes / remains it will probably not generate enough to deal with all of the investment needed to rebuild the country. The devastation of Iraq and its people over the last three+ decades has been enormous and it should serve as some measure of sobriety to us all that its quite possible that all of the petroleum and two or three decades of all-out effort is required simply to return to the levels of the 1970s in terms of economic and social development. On this see the work of Abas Alnassrawi – the numbers are simply stupendous and the devastation brought by war, poor management, the 1991-2003 air war, sanctions, and the 2003 war and aftermath should give us all reason to pause. I’ll be up front that I believe many owe the Iraqis compensation for what has been wrought upon their society; but that is another discussion.

As for GJ’s query I wholeheartedly agree with Kjetting that this will be a result of how such resources are distributed. Past experience as well as regional and global comparisons do not bode well. A model akin to that adopted in Norway or Alaska would make a great many people happy – but that is what the Petroleum Law is all about.

1:15 PM  
Anonymous gj said...

All that was a fascinating and informative discussion, thank you.
Agree it all rests on how the resources are distributed, but aren't they already being distributed to the provinces? You'd think the provinces would be screaming blue murder if they weren't getting a reasonable deal? Iraqis are not exactly known for keeping silent.

Re the devastation of Iraq. I seem to recall reading that the Iraqis were fairly quickly able to rebuild after the Iraq/Iran war? It might be that security and stability after the horrors of the last three decades will unleash an awesome burst of energy and optimism, granted that the security and stability will rest very much on the bona fides of the Iraqi governmnt now it has a substantial army at its disposal.

8:34 PM  

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