Iraq prepares to amend its existing oil contracts 3/10/2016
Iraq prepares to amend its existing oil contracts
3/10/2016 0 Comments
BAGHDAD — Oil revenues accruing from oil field development and production in Iraq no longer match the revenues made before the licensing contracts the Ministry of Oil signed in 2009-2010. The Iraqi government will be unable to reimburse the foreign oil companies’ dues, which amounted to $20 billion in 2015, if global oil prices continue to decline.
The financial crisis in Iraq, in addition to the cost of the war against the Islamic State and the increased accusations of corruption, drew attention to Iraqi oil field development contracts with foreign companies that were made when Nouri al-Maliki was still prime minister. Political parties and blocs are demanding to have these contracts reviewed or annulled under the pretext that they are costing Iraq major financial losses.
Oil reserves in Iraq amount to 143 billion barrels, accounting for about 10% of the total of reserves globally. To increase Iraq’s revenues, the Ministry of Oil put forward a plan in February to increase oil production by up to 9 million barrels a day by 2020. However, the revenues generated by this increased amount will have to be paid to the foreign companies as part of the licensing rounds dues. Based on the 2016 budget, $11 billion have been allocated this year alone as dues to these companies.
According to the Oil Ministry’s estimates, the increase in oil production for 2016 will be worth $17 billion, which means that two-thirds of the production revenues goes to the companies’ dues and one-third to Iraq. The budget had estimated that the price of a barrel would reach $45 at the end of 2015, whereas oil prices have declined to less than $30 since the beginning of 2016, which leaves Iraq with less than $6 billion from the increased oil production.
Assem Jihad, a spokesman for the Iraqi Oil Ministry, told Al-Monitor, “The Oil Ministry began new talks with foreign oil companies in an attempt to make adjustments to the contracts’ wording to match the dramatic decline in the global oil prices and the decline of Iraq’s revenues, while the [foreign] oil companies are receiving their dues as before.”
The finalized contracts do not include any provisions on the possible drop in oil prices, and therefore the companies charge the Iraqi government a fixed price for their work in developing oil fields and increasing oil production.
Jihad explained that oil companies seek to increase the duration of their contracts to 50 additional years instead of 20 years in return for agreeing to change the wording. He rejected the idea that the oil licensing has become useless or that there is any suspicion of corruption. “The ministry does not get involved in accusations and political tugging. It is enough to just look at the figures achieved by the development of oil field production for the period 2011-2015,” he said.
He said that the total production in the period between 2011 and 2015 is 4.66 billion barrels and 2.34 billion barrels for basic production. This means that the increase in production over the basic production is 2.32 billion barrels, and the financial returns of the total production amounts are over $395 billion.
Jihad also tackled the foreign companies’ operations for the last five years, noting that over $46 billion has been paid to the companies by the Iraqi government, the profitability of contracting companies is $2.25 billion and the tax paid to the Iraqi Treasury was $1.21 billion, bringing the state’s net gross revenues to more than $348 billion.
The Oil Ministry referred to the figures of licensing contracts in response to accusations of corruption and claims that these contracts were unfair to Iraq. Former Deputy Prime Minister Bahaa al-Araji announced at a press conference in Baghdad Feb. 21 that a lawsuit in regard to the foreign contracts was being prepared “because they harm Iraq.”
As a result, the parliamentary Finance Committee announced that a fact-finding committee was formed to investigate corruption in licensing rounds. Haitham al-Jubouri, a member of the [Finance] Committee, said Feb. 21, “We have formed a fact-finding subcommittee for the oil licensing rounds, the cost of production and the authenticity of contracts and procedures.”
Meanwhile, Ahmed Hama, a member of the fact-finding committee, told Al-Monitor that his committee “began its work and it has so far held three meetings to review the licensing rounds, which gave foreign oil companies a concession to develop Iraqi oil fields. The committee has several questions to ask the Ministry of Oil and officials in the previous government, such as why the contracts did not take into account the possibility of a decline in oil prices and how the contracts can be amended in order to serve Iraq in the current financial crisis.”
He also pointed out that the fact-finding committee is waiting for “the Board of Supreme Audit reports to reveal the funds being transferred between oil companies and the Iraqi government, as well as reports from the Commission on Public Integrity [CPI] about the complaint made by Araji regarding corruption in licensing contracts.”
The Federal Board of Supreme Audit provides clear statements and reports on the fees the government pays to the oil companies and the profits it makes as a result of the work of such companies. The office also determines the feasibility and viability of such contracts and whether or not they remain profitable for the government.
Meanwhile, the CPI is in charge of investigating corruption charges in the oil contracts made by Araji. Thus, the report by the parliamentary fact-checking committee would include all information stated in the reports of the board and the CPI.
In this regard, Hama said, “The final report of the fact-finding committee will be submitted — following the investigation with the minister of oil and after collecting the necessary information and data from the CPI and the board — to the parliament that will take the appropriate decisions and recommendations to address the damage resulting from the decline in oil prices in light of the work of foreign oil companies in the country.”
The Iraqi Oil Ministry regards the contracts reached with international companies to develop oil fields in Iraq for a period of 20 years as a “service,” meaning that companies get remuneration for their services, up to $6 for every barrel. However, these contracts were concluded when the oil prices exceeded $60 per barrel.
The damage does not only result from the decline in oil prices; the Iraqi government had already paid $270 million as compensation to foreign companies for the government's inability to export the oil produced from the development of oil fields because of the weak export system, which led Iraq to lose about $14 billion between 2011 and 2014.
The oil licensing contracts have raised a lot of controversy, as some consider them a new form of foreign tutelage on oil wealth, while others believe they are not economically beneficial and cause losses for Iraq. Thus, these licensing contracts need to be reviewed, especially in light of the financial crisis in Iraq. The review should be made public to avoid any suspicions of corruption and to establish contracts that are in line with the current economic situation.