Middle East Economic Survey
VOL. LI
No 30
IRAQ
Iraq’s Technical Support And Production Service Contracts: Pros And Cons
By Tariq Shafiq
The following article was written for MEES by Mr Shafiq, a principal drafter of Iraq's petroleum law. He is director of Petrolog & Associates, Chair of Fertile Crescent Oil Company, and a former Executive Director and Vice Chairman of Iraq National Oil Company.
The original objective of Iraq’s technical support contract (TSC) was to provide a temporary solution allowing the Ministry of Oil to expand production capacity and improve performance and recovery, while the political debate went on between the Kurdistan Regional Government (KRG) and the Iraqi federal government about the conflict over distribution of power and decision-making authority. In the meantime the KRG has actively granted some two dozen production sharing agreements (PSAs) and pursued oil exploration and production operations without reference to the federal government or the draft petroleum law in its modified version, previously accepted by the KRG. The oil ministry’s principled stand in this respect and with respect to other vital oil plans and policy has gained the respect and approval of the bulk of Iraq’s oil technocrats.
Some aspects of the plans and policy announced recently by the Minister of Oil and the Prime Minister (PM) are alarming. They contravene the draft petroleum law, which has been approved by the Ministerial Committee and the Council of Ministers, and exhibit management failures.
The PM’s call to form a National Council for Reconstruction and Development (see Energy Compass, 18 July), which may include the oil sector, is in conflict with all draft versions of the petroleum law, which places authority for the oil resource management with the oil ministry, Iraq National Oil Company (INOC) and related regional organizations. It is contrary to sound management practices and highlights the Council of Ministers’ inability to formulate overall policy and supervise the plans, policy and performance of its ministries. It is tantamount to an admittance of incompetence on the part of ministries and/or a tendency to centralize decisions by the office of the PM.
The Ministry of Oil’s declared plans to tender long-term PSCs for current producing fields infringes on INOC’s rights and scope of work and appears to deviate from its past stance.
The first draft petroleum law, adopted by the Ministry of Oil in full, stipulated that INOC be ear-marked to operate all the producing and discovered fields. The approved draft of February 2008 adopted a compromise by dividing these fields into three categories, of which only two were allocated to INOC, to accommodate KRG, which still considered it unacceptable. To restrict INOC’s options now and remove it from its role of the operator is unwise and uncalled for, if not totally unsound policy.
INOC had been authorized, in accordance with all the different versions of the petroleum law, to manage these fields and to call for technical support as it sees fit from among consultants, engineering and contracting firms or international oil companies (IOCs). The oil ministry’s plan to grant PSCs with IOCs undertaking the operator’s role, for a 20-year term and with 75% participation, removes from INOC and/or the North and South Companies the operator’s role and reverses a three-decade-old practice, placing operatorship back into the hands of IOCs.
Already two regional companies have recently been founded, in addition to the existing North and South Companies and KRG’s own regional national oil company. If this plan is pursued further and alleviates the need for INOC, it would form a nucleus for uncoordinated and fragmented management of the oil and gas resources. It would also facilitate adoption of the open-market policy demanded by the US’s neoconservatives prior to the 2003 invasion, and more recently reiterated by one or two political leaders, to the extent that it becomes a free-for-all for IOCs and private enterprise to the detriment of Iraq’s domestic economy and the unity of Iraq as a country and a nation.
If this plan is pursued, it would be a reversal of the first draft petroleum law stipulation whereby INOC was tasked to rehabilitate the infrastructure and build production capacity from the 80 discovered producing fields through its profit-making operating subsidiaries (50% owned by the regions and/or provinces) incorporating the regions and provinces at board level, to share in the management of the development sector and thus unite, not fragment, the resource mangement of the nation.
Neither the TSC nor the PSC model contracts of the Ministry of Oil have yet been made public, nor have they been studied or approved by a formal committee, such as the one postulated in the Federal Oil and Gas Council and its professional think-tank, or one made up of Iraqi oil professionals engaged by the Ministry of Oil.
The ministry’s announcement of the use of long term PSCs in the forthcoming tenders, following the application of TSCs for the old super-giant producing oil fields, is incompatible with the constitution and the latest draft petroleum law of February 2007, adopted by the Council of Ministers and passed to the Council of Representatives (Parliament). The highest return demanded by the Constitution for Iraq’s most valuable natural resource, its oil and gas assets, owned by the state, is best entrusted to an enterprise accountable to the nation, which unites the nation and operates in cooperation with IOCs on technology transfer and related parameters, not the other way around by placing INOC under de facto custody of IOCs and its joint management in accordance with the PSCs. The PSCs theoretically preserve the country’s sovereignty intact, but it is their detailed terms which decide whether this may or may not occur. It would have been prudent for the Ministry of Oil to plan the development of discovered but undeveloped fields, rather than the current producing fields, while passing a law to launch INOC. The federal government should no longer hold up legislating the INOC draft law, which has been on the back burner for two years, while it waits for the enactment of the draft petroleum law and related oil revenue distribution among the Governorates, simply on the dictation of the KRG, which has gone ahead with legislating its own petroleum law and national oil company and granting a dozen PSAs.
The original intention behind the TSC, as a temporary solution for a year or two to increase the production capacity of current producing fields by 500,000 b/d, would have been welcome had it not been for its escalated cost, the negotiated approach taken, the replacement of transparent tender specifications and competitive bidding, and the first right of refusal demanded by the IOCs in addition to other attached benefits and privileges.
Memorandum of Understanding (MOU) holders have been given the advantage over others in the process of pre-qualifying and granting of contracts, thereby undermining the transparency and credibility of the prequalification and competitive bidding process. This is unjustifiable in the first place. MOUs were enacted on the principle of no obligation or remuneration, yet IOCs have been granted no-bid TSCs and some have even been ear-marked for PSCs for particular fields and multi-billion dollar projects, on the basis of negotiations instead of a bidding process!
It is regrettable that despite criticism the Ministry of Oil, like most other Iraqi government establishments, has not yet managed to adapt to a more open, transparent way of working. It is time that the ministry built an organization of sufficient capacity and competence to be able to enlighten the public on the most vital economic resource of the nation. Often oil policy, plans and agreements are complicated. The absence of transparency, not keeping the public informed and not encouraging debate by the nation's oil technocrats, NGOs and civil society, invite unhealthy speculation to the detriment of the government and national interest.
The Ministry of Oil’s moves to activate the rehabilitation of the infrastructure and enlarge production capacity are vital, but should not have prevented an equally proactive move towards the unitization of the border fields, of which there are more than half a dozen with Iran, Kuwait and Syria. With every day’s delay, there is a huge loss of national wealth, potential damage to the underground oil and gas resources and difficulties from having to reverse the clock to extract lost assets. Iraqi skills could and should have been used to complement the ministry’s dire need for competent managerial personnel to assist in negotiations, to make plans, and to decide policy and related managerial unitization issues.
Furthermore, many Iraqi oil professionals and expatriate consultants are playing an important role in the Kurdistan and the international oil industry. Is it not time for the Ministry of Oil to engage them to meet its own needs, to fulfill a vital role in participating with IOCs holding PSCs or TSCs and particularly on consultancy assignments involving sensitive national issues, such as model contracts, bid specifications and evaluations?
The petroleum draft law demands ‘Local Content’ obligations from foreign firms. However, experience demonstrates that foreign firms are reluctant unless the Ministry of Oil also engages its own nationals on terms commensurate with their counterpart foreign consultants, and issues directives to IOCs to comply with the same obligations regarding local content.
It is time that the Ministry of Oil borrowed a page from the book of other major producers, such as Iran and Russia, where national participation in accordance with local contracts, rules and regulations is set at a minimum of 51%, and in Norway where it is 70%.
It is in the national interest to include and activate a local content clause in consultants’ contracts, so they take on technically qualified Iraqi consultants. Likewise, IOCs should provide participation for Iraqi oil companies as shareholders from within, and not limit the use of local content to sub-contracting local firms to provide services from without.
It is regrettable that the Prime Minister has moved to establish this National Council for Reconstruction and Development. Equally regrettable is the fact that the Minister of Oil plans to award no-bid TSCs exclusively to MOU holders and long-term PSCs for currently major oil producing fields, while leaving on a slow track the unitization of the border oil fields and paying little attention to applying the principles of local content.
Clearly, the PM and the Minister of Oil are ill-advised.