Iraq Oil Report

As the U.S. and world media play with President’s Bush and Ahmadinejad, there is a slowdown of Iraq energy related information.

However, Oil Minister Hussain al-Shahristani is none too pleased with the KRG.

Also in today’s Iraq Oil Report, Iraq offers Jordan more discounts to the oil.

Plus, at the end, I’ll supply some details to a few great comments to IOR.

First, Shahristani and the KRG. He’s long been an opponent of the KRG signing their own deals, calling them illegal. Mariam Karouny of Reuters reports Shahristani said even if the deals result in oil being pumped, it is illegal for anyone but the federal government to sell Iraqi oil.

Iraq has knocked another $4 per barrel off the already reduced price of oil it is selling to Jordan. It’s being billed by the government as a reward for Amman’s cooperation with Baghdad, but Iraq is way behind on the promised shipments and it could be a sign of appeasement to a Jordan with growing impatience.

Iraq’s most important city is Basra, both because 80-plus percent of the country’s oil is in or around the province, nearly 100 percent of the oil exports head to market from its ports, and rival Shiite political parties are violently filling a power vacuum created by the war, British control and now British evacuation.

In Iraqi Kurdistan, oil prospects are a motive to keep the area safe and the economy booming, as the AP’s Christopher Torchia reports.

Security, Society and Politics

A lesser known problem found in war time, but especially worrying as the Iraq war continues, is the threat to journalists. Being one, I’m especially fond of us surviving the wars we cover.
For those looking for information about Iraq, be it war coverage or the status of the hydrocarbons sector, journalists are a necessity.

According to Reporters Without Borders, 203 journalists and media assistants have been killed in Iraq since the war began; two are missing; and 14 are kidnapped.
Sameer Yacoub writes for the AP the Iraqi Journalists Union is teaching Survival Skills for Iraqi Reporters.

His colleague at AP, Lauren Frayer, reports on the bombing of meeting of Shiite and Sunni sheiks discussing reconciliation.

The PKK is a perpetual sore spot in the Iraq-Turkey-U.S. relationship, one that’s vital if there is to be stability in the region. Iraq’s interior minister is in Ankara to discuss the issue. Deterioration even on a sub-level, like additional shelling in the Iraqi Kurdistan area, or an incursion, could affect oil prices if not Iraq oil production itself.

Comments and Responses

Responses aren’t always warranted, and Iraq Oil Report will be a venue for debate and discussion only if it is helpful and civil.

Thanks to those raising issues and looking for explanation and clarification on previous posts. Both were regarding the post Clearing up the muddy Iraq oil debate and the full comments can be found at the end there.

Sources I respect report that the real problem with the hydrocarbon law is the U.S. insistence that PSA’s be signed with international oil interests. Oil is easily accessible in Iraq, and doesn’t require assistance from other nations. They have been harvesting their oil for a long time. These PSAs would be binding contracts for up to 30 years, and payments to the oil companies have been estimated to be as high as 80 percent of the profits.

The problem with reporting and commenting about the hydrocarbons law is there is no final version to point to and pick apart. Numerous previous drafts, however, give insight into the direction the law is heading in.

There is no official “insistence” that the Iraq government sign production sharing agreements with foreign/private oil firms, in or out of Iraq. Official government line is it is up to Iraq to decide what to do with its own oil. The U.S. government has contracted with various experts/lawyers/etc to help answer questions, provide technical advice and other support to not only the Oil Ministry but every ministry.

Of course, this takes place within the context of occupation and the U.S. prerogative to insist Iraq reform its economy. (Numerous debt relief and loan agreements with the global lending community — both Western and Arab nations as well as the IMF and World Bank — have insisted on this reform as well.) The reform is to break open the nationalized economy to a free market model of some sort. And the oil sector is the major sector of Iraq’s economy.

Back to the model contracts. The decision isn’t less about what it takes for Iraq to develop its oil sector, such as “assistance from other nations,” and more about the strategy for developing the sector. If Iraq wants to begin exploration of areas believed to have oil or begin developing discovered but not producing fields right away, then yes, it will need outside funds and expertise. The Oil Ministry and state-owned oil companies do not have the capacity, technology and human resources to do that right now. They are struggling — a struggle made more difficult by war — to improve the capacity of what is currently producing.

After exploration, Iraq is expected to find much more oil and gas reserves, and most likely the oil will be easy to produce and refine, thus lowering per barrel production costs. (I’m only talking about oil in this answer because the natural gas sector, which is huge, requires a lot of investment since there is virtually no infrastructure.) But without an idea of how much oil is located in a certain area, there is a measure of risk involved. Iraq will have to decide how to include that risk in the contracts, whether it is a PSA (or PSC or EPC or however the semantics of the contract model name play out) or another risk contract. There are other options, which include but are not limited to, nor am I discussing the additional political/economic/industry issues involved: holding off on exploration until security/economy improves; do nationwide, modern testing to get a better sense of the structures in the exploration blocks; sign service contracts for exploration.

As far as the terms of the PSA, they aren’t stipulated or mandated in the versions of the law previously published. A PSA is not inherently bad. It is the terms of the deal that decide whether the host country, the people, get the raw end. International/private/foreign oil firms want one thing: the best deal they can get. Expecting anything less is naïve. If they or another government are found to exert undue pressure and control of Iraq’s oil sector, as the anti-oil law campaigners assert, then this is an issue befitting an international court. It is up to Iraq’s government — amidst occupation, war, downward spiraling security and quality of life — to ensure that doesn’t happen.

You rightly describe the Revenue Sharing Law as separate legislation that will arbitrate the distribution of Iraq’s share of oil revenue. That, however, is not where the concerns of the Iraqi oil workers union and others lie. The concerns do lie with the federal oil law and the potential for undue foreign influence on oil contracts (most likely PSAs) by the Federal Oil and Gas Council (FOGC).

The draft Oil Law states quite explicitly that the FOGC will comprise not only Iraqi officials, but also “executive managers of important related petroleum companies.” While the provenance of these managers remains unstated, purposefully so, it is not difficult to imagine who might sit on this council. Moreover, the terms and conditions of the contracts approved by the FOGC will likely be held in the strictest confidence and it is exactly from this point that the concerns about the oil revenue arise. The public will not likely be privy to the revenue details as specified in these PSAs. PSAs will be approved, not by any transparent, democratic body, but by an unaccountable board comprised, at least in part, by unelected and, as indicated above, foreign appointees.

That we have already seen Hunt Oil — closely linked to Bush and Cheney — sign a PSA with the Kurds is precisely how much of the future conduct of the FOGC is expected to act: deals conducted in secret and suddenly announced, while the details of the revenue distribution between Hunt Oil and the KRG remain unknown.

First, as I’ve reported for nearly a year, the unions’ beef with the law is the extent it allows foreign/private oil firms into the Iraq oil sector.

The Oil Law will determine the foreign/private firms’ role in the sector via contracts, as discussed above.

The FOGC is a controversial one, with many complaints that members will include representatives of the state oil company, the regions/provinces and the ministry of oil. The regulated and the regulator, said Tariq Shafiq, a former Iraq oil official who co-authored the oil law and now opposes it because it has been altered too much. The final shape of the FOGC, and its actual role, remains to be seen, both in theory (the law) and practice (when it is formed and rules on contracts). It is possible, when reading the text, but highly unlikely that the president of ExxonMobil will sit on the FOGC and rule on Iraq oil deals.

As far as transparency of the contracts, there are a number of assurances the law will meet international standards. The Ministry is en route, I’m told, to joining the Extractive Industries Transparency Initiative. And earlier this month Oil Minister Shahristani said in public, echoing past words by Iraqi officials, that the contracts would be published whole and posted on the ministry’s website. If this doesn’t happen, there is sure to be outcries from inside and outside Iraq. And Your’s Truly will be writing about it regularly.

The Hunt Oil/KRG deal is important to highlight. Away from the politics/scandal which, I’m getting the vibe here in Washington, are not over yet, details of the contract, and other KRG deals with private firms, are not known. But those deals will have to be evaluated by FOGC, once the law, if the law, is approved, and thus made public.

Iraq Oil Report is still less than a month old, but hopefully is helpful, insightful and important to a wide audience for a variety of reasons. Any comments are welcome, either to me personally or posted on the site. Check out the links at the top right column for more information on that.
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