Middle East Economic Survey
VOL. LII
No 25
IRAQ
Letter To Iraqi Oil Minister From The General Manager Of South Oil Company
[MEES translation from the original Arabic.]
To HE The Minister Of Oil,
Pursuant to the two letters from the South Oil Company, No 325 of 22/2/2009 and No 699 of 20/4/2009 sent by the company’s former managing director Mr Kifah Kamil Nu'man, with regard to giving a practical and objective opinion on the issue of the first bidding round, the company has held a meeting chaired by the undersigned on 8 June 2009 which included the managers of authorities, a number of experts and heads of departments as listed in the attached document. The meeting discussed various aspects related to this matter and listened to a detailed presentation by our company’s representative to the ministerial working team, Mr Salah 'Abd al-Karim Muhammad and those present reached the following decisions:
1. The work program to be carried out by the companies during the first three years is the same program that is currently being carried out by our company. However, our program is superior to it as far as concerns both completion date and achieving a production increase of more than 10% (since there will be no increase in production for 33 months after the signature of the agreement, as specified in the standard agreement with the contracting companies).
2. The mechanism for creating operating units within our company, in accordance with the standard contract, will create obstacles to work and interfere with the effectiveness of our company which will hinder plans to increase output by the required amount, in view of the fact that competitive IOCs are sceptical about them because of the financial, administrative and technical difficulties involved. Moreover the entities of the operating units to be formed for the three fields will be drawn mainly from the ranks of our company, leading to the disintegration of our company as well as the weakening of its financial and technical control over production at a time when our company’s fields are the main source of national income (over 70%) as well as being the building blocks for a national oil company.
3. The ab initio mechanism for determining true production cannot be adopted because operations to maintain the producing wells have been halted, as have operations to maintain reservoir pressure with water reinjection. Its adoption would cause great damage to the Iraqi economy, in view of the fact that our company is currently operating water reinjection and well maintenance units in order to use the capacity available in our company’s fields to halt the decline and raise production.
4. The articles of the standard agreement that have been adopted do not conform with the laws and legislation in force and 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.
5. There is a possibility of carrying out a second round of bidding with international oil companies capable of dealing with undeveloped discovered fields and exploration blocks in an effective and competent manner which raises production to more than 3mn b/d from clearly defined fields. There should be no interference or confusion between the activities or our company and the contracting companies. Moreover it should be possible to reach agreement with them on terms that ensure the financial and legal rights of the Iraqi side with greater justice and logic than the terms of the standard agreement
Proposed Alternatives
The adoption of the following alternatives in accordance with the nature and size of each oil and gas field:
1. The revision of the terms of the Technical Support Contracts (TSCs) for some of the fields in the first round of bidding with the international oil companies (IOCs) in order to reach the required production levels, in accordance with competitive agreement and for a period of five years renewable for fields which produce results more swiftly and easily without causing any economic damage.
2. To consign a number of discovered but undeveloped fields and exploration blocks to the second bidding round or to EPCs in accordance with competitive contracts in order to reach maximum plateau production target within a defined period of time.
3. Direct implementation by our company in coordination with international oil service companies as well as the Iraqi drilling company, the oil projects company and other national companies provided they are given support in the form of the allocations and privileges referred to in the emergency plan and the exceptional privileges attached to it to develop the currently producing fields (the group of fields in the first round of bidding).
Thus we see that it is necessary to avert our gaze from the first bidding round and instead adopt the proposals enumerated above which will raise production over the next eight years to 6mn b/d with appropriate engineering and investment arrangements and to the benefit of the Iraqi economy, knowing that it is not logical to conclude agreements with competitive companies for the most important and richest oil fields in Iraq (and which represent almost 80% of national output) with one bidding round that is over in hours.
_________________
General Manager
Fayyadh Hasan Na'ma
10 June 2009