Carbon Web.org & Kamil Mahdi / The Guardian – 2007-01-16 22:23:07
Crude Designs: The Rip-off of Iraq’s Oil Wealth
While the Iraqi people struggle to define their future amid political chaos and violence, the fate of their most valuable economic asset, oil, is being decided behind closed doors.
This report reveals how an oil policy with origins in the US State Department is on course to be adopted in Iraq, soon after the December elections, with no public debate and at enormous potential cost. The policy allocates the majority (1) of Iraq’s oilfields — accounting for at least 64% of the country’s oil reserves — for development by multinational oil companies.
Iraqi public opinion is strongly opposed to handing control over oil development to foreign companies. But with the active involvement of the US and British governments a group of powerful Iraqi politicians and technocrats is pushing for a system of long term contracts with foreign oil companies which will be beyond the reach of Iraqi courts, public scrutiny or democratic control.
COSTING IRAQ BILLIONS
Economic projections published here for the first time show that the model of oil development that is being proposed will cost Iraq hundreds of billions of dollars in lost revenue, while providing foreign companies with enormous profits.
Our key findings are:
. At an oil price of $40 per barrel, Iraq stands to lose between $74 billion and $194 billion over the lifetime of the proposed contracts (2), from only the first 12 oilfields to be developed. These estimates, based on conservative assumptions, represent between two and seven times the current Iraqi government budget.
. Under the likely terms of the contracts, oil company rates of return from investing in Iraq would range from 42% to 162%, far in excess of usual industry minimum target of around 12% return on investment.
A CONTRACTUAL RIP-OFF
The debate over oil “privatisation” in Iraq has often been misleading due to the technical nature of the term, which refers to legal ownership of oil reserves. This has allowed governments and companies to deny that “privatisation” is taking place. Meanwhile, important practical questions, of public versus private control over oil development and revenues, have not been addressed.
The development model being promoted in Iraq, and supported by key figures in the Oil Ministry, is based on contracts known as production sharing agreements (PSAs), which have existed in the oil industry since the late 1960s.
Oil experts agree that their purpose is largely political: technically they keep legal ownership of oil reserves in state hands (3), while practically delivering oil companies the same results as the concession agreements they replaced.
Running to hundreds of pages of complex legal and financial language and generally subject to commercial confidentiality provisions, PSAs are effectively immune from public scrutiny and lock governments into economic terms that cannot be altered for decades.
In Iraq’s case, these contracts could be signed while the government is new and weak, the security situation dire, and the country still under military occupation. As such the terms are likely to be highly unfavourable, but could persist for up to 40 years.
Furthermore, PSAs generally exempt foreign oil companies from any new laws that might affect their profits. And the contracts often stipulate that disputes are heard not in the country’s own courts but in international investment tribunals, which make their decisions on commercial grounds and do not consider the national interest or other national laws. Iraq could be surrendering its democracy as soon as it achieves it.
POLICY DELIVERED FROM AMERICA TO IRAQ
Production sharing agreements have been heavily promoted by oil companies and by the US Administration.
The use of PSAs in Iraq was proposed by the Future of Iraq project, the US State Department’s planning mechanism, prior to the 2003 invasion. These proposals were subsequently developed by the Coalition Provisional Authority, by the Iraq Interim Government and by the current Transitional Government. The Iraqi Constitution also opens the door to foreign companies, albeit in legally vague terms.
Of course, what ultimately happens will depend on the outcome of the elections, on the broader political and security situation and on negotiations with oil companies. However, the pressure for Iraq to adopt PSAs is substantial.
The current government is fast-tracking the process and is already negotiating contracts with oil companies in parallel with the constitutional process, elections and passage of a Petroleum Law.
The Constitution also suggests a decentralisation of authority over oil contracts, from the national level to Iraq’s regions. If implemented, the regions would have weaker bargaining power than a national government, leading to poorer terms for Iraq in any deal with oil companies.
A RADICAL DEPARTURE
In order to make their case, oil companies and their supporters argue that PSAs are standard practice in the oil industry and that Iraq has no other option to finance oil development. Neither of these assertions is true.
According to International Energy Agency figures, PSAs are only used in respect of about 12% of world oil reserves, in countries where oilfields are small (and often offshore), production costs are high, and exploration prospects are uncertain. None of these conditions applies to Iraq.
None of the top oil producers in the Middle East uses PSAs. Some governments that have signed them regret doing so. In Russia, where political upheaval was followed by rapid opening up to the private sector in the 1990s, PSAs have cost the state billions of dollars, making it unlikely that any more will be signed. The parallel with Iraq’s current transition is obvious.
The advocates of PSAs also claim that obtaining investment from foreign companies through these types of contracts would save the government up to $2.5 billion a year, freeing up funds for other public spending. Although this is true, the investment by oil companies now would be massively offset by the loss of state revenues later.
Our calculations show that were the Iraqi government to use PSAs, its cost of capital would be between 75% and 119%. At this cost, the advantages referred to are simply not worth it. Iraq has a range of less damaging and expensive options for generating investment in its oil sector.
These include: financing oil development through government budgetary expenditure (as is currently the case), using future oil flows as collateral to borrow money, or using international oil companies through shorter-term, less restrictive and less lucrative contracts than PSAs.
IN WHOSE INTERESTS?
PSAs represent a radical redesign of Iraq’s oil industry, wrenching it from public into private hands. The strategic drivers for this are the US/UK push for “energy security” in a constrained market and the multinational oil companies’ need to “book” new reserves to secure future growth.
Despite their disadvantages to the Iraqi economy and democracy, they are being introduced in Iraq without public debate.
It is up to the Iraqi people to decide the terms for the development of their oil resources. We hope that this report will help explain the likely consequences of decisions being made in secret on their behalf.
1. The Iraqi government would be left with control of only the 17 fields that are already in production, out of around 80 known fields.
2. The precise terms of proposed contracts are obviously be subject to negotiation: our projections are based on a range of terms used in the most comparable countries, including Libya, which is commonly viewed as having some of the most stringent in the world. Multinational oil companies are pushing for lucrative terms by international standards, based on Iraq’s high level of political and security risk.
These risks place the Iraqi government in an extremely weak negotiating position. The projections are given in undiscounted real terms (2006 prices). The contract duration is assumed to be 30 years as 25-40 years is the common length. The (2006) net present value of the loss to Iraq amounts to between $16 billion and $43 billion at 12% discount rate.
3. The terminology of PSAs labels the private companies as “contractors”. This report illustrates that this label is misleading because PSAs give companies control over oil development and access to extensive profits.
4. These might include buyback contracts, risk service contracts or development and production contracts.
1 — THE ULTIMATE PRIZE: Anglo-American interests in Gulf oil 7
2 — RE-THINKING PRIVATISATION: Production sharing agreements 10
3 — PUMPING PROFITS: Big Oil and the push for PSAs 13
4 — FROM WASHINGTON TO BAGHDAD: Planning Iraq’s oil future 16
5 — CONTRACTUAL RIP-OFF: the cost of PSAs to Iraq 20
6 — A BETTER DEAL: Options for investment in Iraqi oil 28 7 — CONCLUSION 34
1 — How a Production Sharing Agreement works 35
2 — Discounting in oilfield economics — key concepts 37
3 — Iraqi oilfield data 39 4 — Economic analysis — methodology and assumptions 40
List of tables
5.1 — Impact of PSAs on Iraqi state revenues
5.2 — Impact of PSAs on discounted Iraqi state revenues
5.3 — Impact of PSAs on Iraqi revenues at different oil prices
5.4 — Impact of PSAs on oil company profitability
5.5 — Oil company profitability at different oil prices
6.1 — Foreign investment in the world’s major oil reserves
A3.1 — Data on 25 undeveloped Iraqi oilfields
Iraqis Will Never Accept this Sellout to the Oil Corporations
Kamil Mahdi / The Guardian
BAGHDAD (January 16, 2007) — Today Iraq remains under occupation, and the gulf between those who profess to rule and those who are ruled is filled with blood. The government is beholden to the occupation forces that are responsible for a humanitarian catastrophe and a political impasse.
While defenceless citizens are killed at will, the government carries on with its business of protecting itself, collecting oil revenues, dispensing favours, justifying the occupation, and presiding over collapsing security, economic wellbeing, essential services and public administration.
Above all, the rule of law has all but disappeared, replaced by sectarian demarcations under a parliamentary facade. Sectarianism promoted by the occupation is tearing apart civil society, local communities and public institutions, and it is placing people at the mercy of self-appointed communal leaders, without any legal protection.
The Iraqi government is failing to properly discharge its duties and responsibilities. It therefore seems incongruous that the government, with the help of USAid, the World Bank and the UN, is pushing through a comprehensive oil law to be promulgated close to an IMF deadline for the end of last year.
Once again, an externally imposed timetable takes precedence over Iraq’s interests. Before embarking on controversial measures such as this law favouring foreign oil firms, the Iraqi parliament and government must prove that they are capable of protecting the country’s sovereignty and the people’s rights and interests.
A government that is failing to protect the lives of its citizens must not embark on controversial legislation that ties the hands of future Iraqi leaders, and which threatens to squander the Iraqis’ precious, exhaustible resource in an orgy of waste, corruption and theft.
Government officials, including the deputy prime minister, Barham Salih, have announced that the draft oil law is ready to be presented to the cabinet for approval. Salih was an enthusiast for the US-led invasion of Iraq, and the Kurdish militia-led administration he represents has signed illegal oil agreements that it is now seeking to legalise.
Given that parliament has not been meeting regularly, it is likely that legislation will be rushed through after a deal brokered under the auspices of the US occupation.
Iraq’s oil industry is in a parlous state as a result of sanctions, wars and occupation. The government, through the ministry of oil’s inspector general, has issued damning reports of large-scale corruption and theft across the oil sector. Many competent senior technical officials have been sacked or demoted, and the state oil-marketing organisation has had several directors.
Ministries and public organisations are increasingly operating as party fiefdoms, and private, sectarian and ethnic perspectives prevail over the national outlook. This state of affairs has negative results for all except those who are corrupt and unscrupulous, and the voracious foreign oil corporations.
The official version of the draft law has not been published, but there is no doubt that it will be designed to hand most of the oil resources to foreign corporations under long-term exploration- and production-sharing agreements.
The oil law is likely to open the door to these corporations at a time when Iraq’s capacity to regulate and control their activities will be highly circumscribed. It would therefore place the responsibility for protecting the country’s vital national interest on the shoulders of a few vulnerable technocrats in an environment where blood and oil flow together in abundance.
Common sense, fairness and Iraq’s national interest dictate that this draft law must not be allowed to pass during these abnormal times, and that long-term contracts of 10, 15 or 20 years must not be signed before peace and stability return, and before Iraqis can ensure that their interests are protected.
This law has been discussed behind closed doors for much of the past year. Secret drafts have been viewed and commented on by the US government, but have not been released to the Iraqi public – and not even to all members of parliament.
If the law is pushed through in these circumstances, the political process will be further discredited even further. Talk of a moderate cross-sectarian front appears designed to ease the passage of the law and the sellout to oil corporations.
The US, the IMF and their allies are using fear to pursue their agenda of privatising and selling off Iraq’s oil resources. The effect of this law will be to marginalise Iraq’s oil industry and undermine the nationalisation measures undertaken between 1972 and 1975.
It is designed as a reversal of Law Number 80 of December 1961 that recovered most of Iraq’s oil from a foreign cartel. Iraq paid dearly for that courageous move: the then prime minister, General Qasim, was murdered 13 months later in a Ba’athist-led coup that was supported by many of those who are part of the current ruling alliance – the US included.
Nevertheless, the national oil policy was not reversed then, and its reversal under US occupation will never be accepted by Iraqis.
Kamil Mahdi is an Iraqi academic and senior lecturer in Middle East economics at the University of Exeter_K.A.Mahdi@exeter.ac.uk
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