On June 18th an article by Patrick Cockburn, stated that Iraqi Oil Minister, Hussain al-Shahristani, was being criticized for being a sell-out.
Iraq is poised to award a number of licences to some of the world’s largest oil companies which according to the Iraqi government are better equipped in exploring the oil fields than the local oil companies.
The criticism has been strife however, because Iraqis believe that the government is putting the national oil interests in the hands of foreign oil firms.
The main opposition voice has come from Fayad al-Nema, a former director of South Oil Company (a National Iraqi company). His view is that the Iraqi government could lose control of the most strategic resource which is so crucial to the country’s main revenue and survival.
Are these criticisms justified?
In the post-war Iraq, the nationalist sentiment is stronger than ever. The people want to see Iraq rebuild to its former glory, a strong nation in the Middle East. For this Iraq would need the revenue generated from the exploration of oil. Iraqis however want to see this done free from foreign influence.
Most Iraqis believe that the US and British occupation of Iraq was about oil. The opening of the market will only foment these views.
That is however a social-political view. In economic terms can the opening of the market really be construed as a sell-out act?
Let’s review the terms of the contract.
According to Ruba Husari, from Iraq Oil – The Forum website, Iraq is ready to award 6 of the most prized oil fields among the 35 competing international oil companies. The 6 oil fields in question are: Rumaila, West Qurna-phase 1, Zubair, Missan, Kirkuk and Bai Hassan.
The contracts are designated to be service accords of 20 to 25 years, i.e., the companies agree to use the technology at their disposal to build facilities in order to increase the output volume of barrels per day. For this service the Iraqi government will pay the companies an agreed fee instead of sharing the profits of the production.
What this means is that in essence, the Iraqi government retains control of when and most importantly who they sell the oil to for the next 20 to 25 years.
Furthermore, a recent bill was passed where foreign oil firms will be charged with a minimum of 35% corporate tax (the current tax rate is 15%).
Husari points that the petroleum licensing will be divided into 3 categories. First category belongs to the 2 giant oil fields of Rumaila and Kirkuk, which will be reserved to companies with global operations producing more than 500,000bpd. Second category is for all companies bidding for the rest of the oil fields. Third category, is for those companies who don’t qualify to operate on fields but can participate in consortiums led by operators.
This last category allows smaller foreign companies to set up partnerships with the local Iraqi companies. Any joint venture with the state partner will result the state company having 51% majority stake.
Why is the Iraqi government giving out licenses?
Post-war Iraq is a country in turmoil. Rather than being a land of rules, it is a land where chaos rules. Because of its political instability, often state projects will receive unclear objectives and suffer several changes, which can only hamper the execution of those projects.
Also, after several investments by the state, the production levels are still not up to the standard needed. As pointed out by Cockburn, Iraq has already invested $8bn in technology and equipment to improve its current output, but it will need a further $50bn investment in the next 5 years to get the production levels from 2.5milion barrels a day to 6million bdp (the required amount to generate enough revenue for its rebuilding projects).
It has become increasingly clear that the Iraqi government does not have neither the expertise nor the funds required to improve its oil industry. The easiest and fastest solution is to allow foreign direct investment in the country.
Of course it can be argued that Iraqi government could possibly do it without FDI, but it would require a sizable investment which the country at the current state simply cannot satisfy and it would be a prohibitive lengthy process. Time, which Iraq simply cannot afford to wait.
The contracts also seem to be highly in favour of the government. Foreign firms will have to pay a premium of 35% corporate tax. It is a heavy tax duty. The high tax rate will inevitably motivate foreign firms to join partnership deals with local Iraqi companies to avoid the tax rate.
The joint ventures can only benefit the Iraqi companies. These companies will acquire know-how, technology, expertise and gain a more international business ethics that perhaps they currently lack.
Allowing FDI to go in and build the required refineries will speed up the process. According to Husari, the Iraqi government will only start paying the service fees to the foreign firms after the production of oil exceeds the current Iraqi production. The incremental production is expected to come 24 months after the contracts become effective. It is very doubtful that the current Iraqi government could achieve that in less than 2 years without foreign help.
By solving the oil industry’s problems, the Iraqi government can also free itself from one more headache and concentrate its resources solely on the rebuilding of the country, which at the moment seems to be the most critical issue.
Is it really wrong? Or is it just national pride blinding economic acuity?
4 comments:
Thoughmy english level is not this elaborated, i think i got the general idea! It´s nice - and also very necessary - to have different journalism, and by this i mean, i´m tired of journalism only about europe and the G8!
Patrícia!
Thanks Pat
I know very little about the post-war Iraq and the specifics of the proposed awarding of oil exploration licences to foreign companies. In general, however I think your viewpoint is well structured and clearly presented.
The FDI formula has been successfully applied in many countries as a means of accelerating the pace of development.
The way the deal is described suggests that the Iraqui Gov. is mainly seeking service contracts with foreign companies in order to increase their oil production in the shortest period of time. Such contracts should not present the same strategic and price-control problems as might be the case with full oil exploration franchises. Therefore Iraq should stay in control.
In any case, given the political and economic sensitivities of the situation I would say that Iraqui Gov. will need to keep a close eye on the events.
MPMA
Your article sheds light on how a post war country such as Iraq generates its funds to rebuild the country through extracting and exporting oil. The involvement of foreign companies during the extraction of oil seemed to be most cost effective but according to your article, that is precisely what the people in Iraq did not want and that is the intrusion of foreign oil companies.
I thought what was written was comprehensive and provided a somewhat clear picture on the economic realities of what a war torn country with a lot of oil is faced with (minus the political intrusion from the States). One thing I would be interested in knowing more about following this article would be how such funds would be distributed to assist in rebuilding Iraq and whether or not foreign countries will be involved as part of this social and political revitalization in Iraq.
And perhaps that would be the subject of your next article?
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