Iraqi Oil: The influence of the 1st Bid Round on the Future of Iraq’s National Oil and Gas industries


On June 30, 2008, the First Licensing Round for the development of Iraq’s oil and gas fields was announced, to develop two giant gas fields and six super giant producing oil fields, in order to provide extra production of 1.5 million barrels per day (b/d) within three-four years, with an estimated investment of $15 billion.[1]

All the oil fields offered, which included the Rumaila (North and South), Zubair, and West Qurna Phase-1 oil fields in Basra, the Misan oil field in the Amara, and the Kirkuk and Bai Hasan oil fields in the North were planned to be developed by the Iraqi National Oil Co (INOC) as listed in Annex 1 of the draft of the oil and gas law dated February 2007. Thirty five international oil companies (IOCs) were pre-qualified and invited to tender offers, but only 22 participated.

On June 30, 2009, the Federal Ministry of Oil in Baghdad offered the IOCs in a live auction, under so-called 20-year technical service contracts (TSCs), the two giant gas fields and six super giant oil fields, which between them turn out about 80 percent of the 2.4 million b/d of oil which Iraq produces today. However, the Ministry was able to nail down just one deal for the Rumaila field, which consists of two fields, North and South Rumaila in southern Iraq. The Iraqi Oil Ministry reached an agreement with British Petroleum (BP) and China National Petroleum Corp (CNCP) to increase the production of the field by 1.9 million b/d beyond its current levels. Rumaila, Iraq‘s biggest oil field, has an estimated 18 billion barrels of oil reserves, an amount equivalent to more than half the reserves of the entire United States.

But in order to be able to fairly analyse the views on the 1st bid round, it is important to look at both the opposing and the supporting views.

First we will look at the views of the people who are on the ground and who will be most affected by the outcome of this auction and what they have been saying since the announcement on June 30, 2008.

To date, there have been some very clear messages, from the people on the ground opposing the 1st bid round from all levels, including both previous and existing managements, oil field experts and the representative of the oil workers (IFOU) who are the major players in the Southern Oil Co. (SOC).[2] This includes the statement by the IFOU[3], and a statement by the existing Director General of the SOC, Mr. Fayyadh Hasan Na’ma,[4] who has been appointed recently by the Ministry of Oil in Baghdad to his position, indicating that he had the support of the vast majority of the SOC’s technocrats, oil field engineers and experts. In addition, there was the statement by the previous Director General of the SOC, Mr. Jabbar Al-Luaibi,[5] who was a well respected DG of the SOC before he was removed by the Oil Ministry back in early 2008 and supposedly "promoted" to become an adviser to the Oil Minister.

The contrary views are of several Iraqi oil experts and technocrats including some who are working in the Ministry in Baghdad and who came out to support the Federal Oil Minister, Dr. Shahristani.[6] They based their views not directly on the support of the 1st bid round, but largely in support of the Minister against the strong and coordinated campaign of the unholy alliance against Dr. Shahristani. This is a campaign which is led by the two main political parties of the Kurdistan Regional Government (KRG), the Kurdish Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK) and their oil ministry in Erbil. Alongside them are several other political movements and politicians from within the "front of the moderates," such as the vice president, Adel Abdel-Mahdi, and the Federal Finance Minister, both from the Islamic Supreme Council of Iraq, ISCI. Backed by the IOCs, the KRG parties, the ISCI and their supporters in the Federal Parliament are jointly working to replace Dr. Shahristani with their favoured man, the Prime Minister’s oil adviser, Thamir Al Ghadban (see annex below).

There is no doubt that the Oil Minister has his constructive policies which are supported by many anti-privatisation Iraqi oil experts and analysts who also oppose his stand on the 1st bid round.

His positive policies firstly include his drive for the Federal Oil Ministry to centralise the strategic planning for the development of oil and gas resources so that decisions would be made and carried out at the Federal ministry level, but with the participation of the regions and governorates, in opposition to the KRG government which wants the strategic planning to be done at the regional level.

Another constructive policy is his opposition to the KRG in their drive to go all out for the Production Sharing Contract (PSC) model of agreements which satisfy all the needs of the IOCs, and other KRG oil polices. I have already covered both issues in some detail in my previous analyses and those factors still stand.[7]

But on the other hand we should look at the unconstructive sides of the Oil Minister’s policies which include:

First of all, in the opening eighteen months of his appointment as Oil Minister back in 2006, the Minister had intended to go a long way in his privatisation polices and to deliver a large number of the nationalised oil and gas giant reserves to the IOCs. We have seen during that period several versions of the drafts of the Iraqi oil and gas law, all of them based on privatisation of the nationalised Iraqi natural resources but varied in their level of privatisations. The February 2007 draft of the oil law is still on the table as the strategic privatisation plan in the long term, and if approved by the Federal Parliament, will lead to the return of the IOCs to control Iraq’s nationalised oil and gas resources.[8]

Secondly, is his refusal to recognise the oil workers union, the IFOU, as the elected representative of the oil and gas workers within the oil and gas industries, and his insistence to carry on the 1987 Baathist law which abolished all workers’ unions.

Furthermore, during the past two years we have heard and seen several conflicting statements by the Oil Minister on several issues. These include his early support for the PSC contracts with the IOCs, then his rebuff to them at a later stage, only for this to be followed by his acceptance of some of them on some fields. It has become impossible to find out his real intentions from his many statements to various newspapers and his interviews on several TV stations. The only true indication of his real intentions was to be read from the two contracts the Ministry signed. The first was on the giant Al Ahdab oil field with China‘s national oil company, CNOC, which was a significant improvement in comparison to the previously signed PSC agreement on this oil field between the Baathist regime and CNOC back in 2000.

However, the second contract was the ‘Heads of Agreement’ with Shell which was signed on September 22, 2008, to form a ‘joint venture’ (JV) company between Shell and the Federal Oil Ministry and which gave Shell a 25-year monopoly on the whole of the gas industry of southern Iraq and practically privatised the production of the gas resources in the south of the country.

It is quite obvious that within the Iraqi camp which opposes the privatisation of the Iraqi oil and gas resources there are differing views on the stand taken by Dr. Shahristani.

This should not be seen as divisions regarding the strategies, but more of a disagreement on tactical but important policies and on deducing the Minister’s future plans and intentions.

What are the future concerns of the Southern Oil Co. (SOC), the North Oil Co. (NOC) and the Iraqi National Oil Co. (INOC) following the 1st bid round?

Annex 1 of the February 2007 draft of the Iraqi oil and gas law lists North Rumaila oil field as number 19 with oil reserves of 10.3 billion barrels; South Rumaila, No. 22, with 7.5 billion barrels; Zubair, No. 27, with 4 billion barrels; West Qurna Phase 1, No. 26, with 21.5 billion barrels (as a total for Phase 1 and 2); Missan, No. 4, with 0.14 billion barrels; Kirkuk, No.14, with 9.8 billion barrels together with nearby fields; and Bai Hassan, No. 5, with 2.5 billion barrels. This indicates that all six oil fields which are covered by the 1st round, are intended to be developed by INOC as they are all existing oil producing fields and they represent the backbone of the SOC, NOC and the new INOC.

The first concern is that the "field operating divisions" (FODs), which will be created by the 1st bid as legal entities and have been introduced to avoid forming a joint operating company, will at the same time provide a major role for the IOCs in their decision-making, control, management, development and operation of all the giant fields.

The second concern is that all the NOC and SOC personnel are going to be assigned  to the FODs for between 20-25 years, and we’re talking here about staff as well as assets, and who will have an administrative and financial independence over the term of the contract. It’s difficult to imagine that they will go back to their original companies at the end of the contract because this is not practically possible and their experience will be lost forever.

The third concern is regarding the introduction of all these new FODs, which would mean the fragmentation of NOC and SOC, which together employ over 20,000 people and produce more than 2.4 million barrels per day. Between them they have more than three decades experience in the management and operation of oil and gas fields throughout the worst conditions of war, sanctions, and the follow-up insecurities. Their role will be reduced to no more than sub-holding companies for the giant oil fields, and limited in their management to distant and marginal fields. Also as these companies represent key components of the new Iraqi National Oil Company which is to be re-established when the INOC law is passed by Parliament, this will result in the fragmentation and reduction of the role of the two companies and consequently will make INOC an empty structure which operates as a holding company, overseeing the IOC’s operators.

All this will signify a major concession, undermining the national effort in the management of oil fields and handing it over to the IOCs through joint control and to foreign bodies. This will represent a tragic end to the role of NOC, SOC and INOC, which have always been considered to be the pillars of the national wealth, which cannot be wasted. Both national operators — NOC and SOC — would be facing the risk of losing their identity as guardians of Iraq‘s national resources.

What should the priorities of the Ministry of Oil be?

It is time for the Ministry of Oil to stop and think about Iraq‘s priorities. The Ministry has set both short- and long-term targets for production capacity. But it’s clear that this is not part of a well-structured policy that defines where the sector is heading or how it should be run. Output targets are not a policy in themselves nor are successive bidding rounds, unless they form part of a well-considered plan tying all the components together.

Many oil producing countries went through similar processes of transformation as they reopened their doors to international oil companies. Those that succeeded best had strong, modern laws which put their national interests as their first priority and formed regulations that clearly defined the roles and responsibilities of state companies versus foreign partners, but Iraq is apparently not doing this.

However exasperating it may be, the Ministry would have done much better through a more gradual approach, by prioritising the rehabilitation of the existing oil producing fields, concentrating on the work which is within the capabilities of the national companies, utilising where required the foreign oil service companies for particular technical jobs and tendering for one or two of these fields at a time which would have given an opportunity for learning and developing Iraq’s capacity at the same time.

Instead what we see today and after 30 years of wars, sanctions and major instabilities, is that the Ministry is planning to sign 20-25 year contracts with IOCs in their 1st and 2nd bids rounds, for fields containing 80 billion barrels which are around 75 percent of Iraq‘s accredited reserves within 6 months of 2009. No other oil producing country in the world has ever tried to develop its oil and gas industries in such a panicked and rushed way.[10]

The Ministry should also give more authority to the managements of the SOC, NOC and the recently formed Missan Oil Co. to make decisions, confer frequently with the operating companies and see what problems, constraints and bottlenecks each is facing and where inefficiencies are occurring and try to help to correct them.

The Ministry would also be wise to focus on developing its internal capacity by attracting back the Iraqi overseas experts, and to engage in a constructive program of training the Ministry’s staff.

The Ministry should have gone for direct execution of the work by SOC and NOC, in coordination with the well established "international oil service companies" and not the giant IOCs, as well as the Iraqi national drilling company, the Iraqi national oil projects company and other national companies.

CONCLUSIONS

1. The standard agreements that have been adopted within the contracts do not conform to existing laws and legislation in force, particularly the law on the conservation of hydrocarbon resources No 84 of 1985, nor has the agreement been endorsed by the advisory board of the Ministry of Oil or been passed by the Federal Parliament.

2. The work program to be carried out by the IOCs during the first three years of their 20 year contract is the same program that is currently being carried out by SOC and NOC and on which the Oil Ministry has already spent $8 billion. In addition, the SOC and NOC programs are better than what were requested in the TSCs, in terms of both completion date and achieving a production increase of more than 10 percent, since there will be no increase in production for the first 33 months after the signing of the agreement, as specified in the standard agreement with the contracting companies.

3. A better option for the Ministry of Oil would have been the revision of the terms of the TSCs for some of the fields in the first round of bidding with the IOCs in order to reach the required production levels, in accordance with competitive agreement and for a maximum period of two to five years, renewable for fields which produce results more swiftly and easily without causing any economic damage.

4. It is time for the Iraqi and international oil experts and analysts who are against the privatisation of Iraqi oil and gas to recognise that the issues regarding the future of Iraq’s economic independence should not be solely focused on thinking that so long as the contracts are not PSCs, then it’s a step forward for the country, or at least not that harmful.

In fact, the ‘Heads of Agreement’ with Shell, which gave Shell full control of all the Iraqi gas wealth in the south for 25 years, is as disastrous to the future of Iraq’s economy and political independence as any PSC contract, if not worse.[11]

5. Also, the so-called TSC contracts which are signed or to be signed with the IOCs, will give the control of 80 percent of Iraq’s oil producing fields for 20 years to the foreign companies through their control of the "field operating divisions" — the FODs. To date, nobody has seen the secretive financial conditions or many other details of the contracts, which indicates that there is insufficient transparency by the Ministry. These contracts could be as devastating to the future of the national oil industry as the gas agreement with Shell. In addition, all indications coming from the people on the ground are that these contracts will result in the diminishing in size of the SOC and NOC, if not their total disappearance, and the same will face the future of INOC.

6. Nobody so far have seen any justification from the Ministry of Oil for its withdrawal of the 2 year TSC contracts which were supported by almost all the management, technical staff and the workers union (IFOU) on the ground. Had these contracts been signed back in June 2008, the companies would have been in the fields working by now. It was not the right decision to cancel the scheme and as a result both the industry and the country are suffering. The 2 year TSC short-term contracts would have cost no more the $3.0 billion and would had increased production in less than 2 years by at least 0.5 million barrels per day from the existing 2.5, to achieve 3.0 million barrels per day, and would have improved SOC’s and NOC’s future ability to produce more oil, without harmful effects on the future of INOC.

7. The failure of the Oil Ministry to award 7 out of the 8 contracts in the 1st bid has created more hopeful prospects for the future survival of NOC, SOC and INOC. If the Ministry withdraws all the 7 other oil and gas fields from any future bids and keeps them for the NOC, SOC and INOC to develop, then INOC will have a better chance of expansion when it is re-established.

8. This analyses did not cover the 2nd bid round which was announced on 31st December 2008 as this topic will necessitate a more detailed analyses. The second round intends to execute full development of ten explored but not yet fully developed oil fields, distributed widely throughout the country, which include Majnoun, West Qurna Phase 2, Halfaya, Gharaf, Badrah, East Baghdad, Central Euphrates oil fields (Kifil, West Kifil and Marjan), Diyala oil fields (Qamar, Gilabat, Naudoman and Khashm al-Ahmar), and Najmah and Qayara in the North. It is intended that contracts for the second licensing round will be awarded by the end of this year.

9. It is becoming more evident that the draft of the oil and gas law will not become a law during the life of this Parliament. None of the internal Iraqi dynamics which brought to a halt any progress to pass the law through the Federal Parliament since the first draft of the oil law came to light over three years ago has changed. The government’s attempts to develop the new oil and gas privatisation law, and its negotiation with the KRG in order to agree on a compromise form of law which will be acceptable to both sides and can be presented to the Federal Parliament, have not succeeded to this date.


10. One of the most vital goals in the latest Biden visit to Iraq was to put the weight of the new US administration behind the pressure on the Iraqi government to pass through Parliament the oil and gas law, using similar threatening methods which were used by the previous Bush/Cheney administration.[12]

11. It is becoming more evident that the reinstatement of INOC which was established in the mid 1960’s following law 80 of 1961 which unchained 99.95 % of Iraqi’s territory from the IOC’s control and was the driving power of the Iraqi oil and gas industries, will also not take place during the life of this Parliament. This is also due to the unsuccessful tactics of the central government in Baghdad to present the INOC law to the Federal Parliament as part of a package, together with the new oil and gas law, the ‘Revenue Sharing law,’ and the ‘Ministry of Oil laws.’


12. it is very likely that the drive behind the last minute tough policy of the Oil Minister and his insistence that BP and CNOC will be paid no more then $2 for every additional barrel of oil they will produce, was the wide ranging opposition to the bids by all the employees of the SOC including the oil workers’ union IFOU, the general public and some members of the Federal Parliament.

13. If the Federal Oil Minister has genuinely changed his views on the future of the oil and gas industries, and wishes to keep both industries nationalised, as some of the Iraqi oil experts believes, then he should first withdraw his strategic plan to privatise these resources — namely his draft of the hydrocarbons law. He also should abandon the ‘Heads of Agreement’ with Shell, which gave Shell 25 years of control of Iraq’s giant gas fields in the south of the country, and returned real control of Iraq’s wealth to the IOCs — and also work honestly to reinstate INOC. Such steps will indicate beyond any doubt that he has genuinely changed his views, as no contradictory speeches, articles and TV interviews could prove otherwise.[13]
14. The 20 year TSC contracts of the 1st bid round should not be looked at on their own as privatisation measures. However, the danger from them is that they represent a very destructive move, leading to the dismantling of the Iraqi national oil and gas industries with its 40 years of expertise, and therefore with time they will drive Iraqi’s to rely in the future on the IOCs, and will leave the Iraqi government with no alternative but to privatise the entire oil and gas industries.

Annex

Who is Thamir Al Ghadban, the favoured man for the IOCs and the KRG?

Thamir Al Ghadban is an Iraqi oil expert and a technocrat who is always ready to serve his political bosses whoever they are. He has become well known to the IOC’s and the Western oil lobbies since the start of the US occupation of Iraq. He was a Baathist who worked hard within the top Oil Ministry’s teams since the privatisation policies started by the Baath regime, with the dismantling of INOC in 1987, which was followed in the 1990s by the signing of several PSC’s contracts. He then became one of the first of the Iraqi technocrats to offer his expertise to the US occupation and their Governing Council (GC) He was appointed as Oil Minister by the GC as part of Alawi’s government and worked to formalise the entire secret planning to hand over the Iraqi oil and gas natural resources to the IOCs and especially the American oil companies. He was then selected as one of the three Iraqi oil experts to work on the first draft of the oil and gas law, but he was the only member of that team who continued to support the first leaked draft of the law after the other two members of the team disassociated themselves from it. He has been very forthright to admit that he will be ready to serve his political bosses with any of their privatisation policies.[14] He became involved in almost all the open and secret meetings between the IOCs and the Iraqi government and the Ministry of Oil after being appointed chair of the Prime Ministerial Oil Advisory Commission (PMOAC).

 

Notes


1. Ruba Husari, "1st licensing Round — Factbox," Iraqi Oil Forum, June 1, 2009.

2. Patrick Cockburn, "Who Will Control Iraq’s Oil?" Counterpunch, June 19-21, 2009.

3. Statement by Iraqi oil workers’ union IFOU.

4. Fayyadh Hasan Na’ma, "Letter To Iraqi Oil Minister From The General Manager Of South Oil Company," Middle East Economic Survey, vol. LII, no. 25, 22-Jun-2009

5. "Interview with Jabbar Al-Luaibi," Iraqi Oil Forum, May 20, 2009.

6. Hamza Al-Jawhri, [Analysis in Arabic].

7. Munir Chalabi, "Views on the Prospects of Iraq’s Oil and Gas Resources," ZNet, March 21, 2009.
 
8. Munir Chalabi, "Political comments on the draft of the Iraqi oil law," ZNet, March 15, 2007.

9. Reidar Visser, "The First Licensing Round Gets off the Ground: The Politics of Oil in Iraq," www.historiae.org, 28 June 2009.

10. Greg Muttitt, "Iraq’s Oil Field Bid Rounds — Development Or ‘Stabilization’?" Middle East Economic Survey, vol. LII, no. 19, 11-May-2009.

11. Ben Lando, "Shell-Iraq gas company is a monopoly, secret agreement shows," UPI, Nov. 2, 2008.

12. Munir Chalabi, "What is holding up the delivery of the long-awaited Iraqi oil law?" ZNet, Aug. 22, 2007.

13. Husain al-Shahristani, "Development Of Iraq’s Petroleum Capacities," Middle East Economic Survey, vol. LII, no. 14, 6-Apr-2009.

14. "Interview with Thamir Al-Ghadban," Iraqi Oil Forum, May 6, 2009.
 


Munir Chalabi is an Iraqi political and oil analyst living in the UK.


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