15 December 2000
A deal reached with India last month could set the ball rolling for a new type of arrangement between Baghdad and “friendly countries.” In return for the award of an exploration contract in the western desert, India could trade wheat and rice for Iraqi oil outside the UN oil-for-food program, Iraqi sources say.
New Delhi is now talking to the UN about applying for a sanctions waiver, to compensate for the damage the embargo has wrought on its economy, sources in Baghdad tell Energy Compass. Under Article 50 of the UN Charter, states “confronted with special economic problems arising from the carrying out of enforcement measures have the right to consult the Security Council with regard to a solution of those problems.” Jordan successfully applied for such a waiver after the Gulf war in 1991, allowing it to buy oil from Iraq at preferential rates without having to submit oil or other contracts to the UN sanctions committee.
India would presumably base its case on the harsh economic impact of high oil prices, an argument Baghdad hopes other oil importers — especially in Asia — might use as well. Indian oil minister Ram Naik raised the subject at the producer-consumer gathering in Riyadh in mid-November, when he appealed to Opec members to give concessions in the form of discounts, deferred payments, or enhanced credit facilities to developing countries that depend on oil imports. His request was turned down.
Enter Iraq. Indian sources confirm that Delhi agreed in principle to barter wheat, rice, and pulses for Iraqi oil during meetings with an Iraqi team headed by Vice-President Taha Yassin Ramadan about two weeks ago. But they refuse to reveal quantities and prices until and unless the UN grants approval. In its fiscal year ending next March, India obtained contracts for 1.5 million metric tons of Iraqi crude. The new deal could provide as much as 1 million tons extra.
In the past, the Security Council has turned down similar waiver requests from Syria and Turkey. Cross-border smuggling between the two and Iraq has since been rife. Delhi may be hoping to swing the case its way by leveraging its status as a nuclear power with the two Security Council hawks, the US and UK, diplomats say.
If – and it’s a big “if” – the Security Council grants approval, this would be a huge boon to Iraq, which has recently been resorting to all sorts of ruses to gain control over oil revenues. Payment in kind now would then end up as payment in cash in future.
In a bid to lure others to follow in India’s footsteps, Iraq is highlighting its generosity on the exploration side. It has just awarded India’s ONGC Videsh a contract to explore and develop Block 8, an 8,000 sq km area of the western desert, after announcing it was canceling production-sharing contracts signed with international companies such as Russia’s Lukoil because of their failure to carry out the deals under sanctions. The award “expresses the strategic relationship between Iraq and India,” Iraqi oil minister Amer Rashid tells Energy Compass. While sympathetic to the Chinese, who have a production-sharing contract for Al Ahdab, the Iraqis say that they could suffer the same fate as Lukoil. Since Total Fina Elf has yet to sign a deal for the Majnoun and Bin Umar fields, these areas could be up for re-negotiation once sanctions are lifted.
ONGC’s 16-year deal, inked by Rashid in Delhi on Nov. 28, is the first exploration contract signed since the UN embargo was imposed in 1990. It is also the first based on the new Iraqi model contract, which replaces the old production-sharing contract. Block 8 covers the Abu Khema field, which ONGC discovered in 1974 on a technical service contract. Iraqi sources say that find, with a production capacity of 12,000 barrels per day, wasn’t commercial. But with the whole block now at the Indians’ disposal, they are almost bound to discover another structure in the highly prospective area.
The contract’s exploration phase will run for five years, with a possible two-year extension. It is divided in two. In the first stage, expected to last three years, ONGC has agreed to process existing 2-D seismic data, and to shoot and process an extra 2,000-3,000 km of seismic. At the same time, it will drill two exploration wells and spend at least $30 million.
At the end of the first stage, it can relinquish up to half the area. The second stage will include shooting another 1,000 km of seismic and drilling two more wells, and spending $20 million more.
Before embarking on the development phase, the company will have to relinquish all acreage, bar nominated areas. Development will occur in three stages. ONGC will be sole operator for the first five years, handing over gradually over the next two years to the Iraqi national oil company. In the final phase, the Iraqi company will be sole operator, though ONGC could obtain a technical service contract lasting up to 15 years. The contract allows an extra two years for extension of any of the development phases.
Remuneration is calculated according to actual investment, getting fine-tuned as work progresses. Remuneration and cost recovery are both paid out of field production — up to 10% for the former and 50% for the latter. Among the incentives is an option to lift up to 25% of production for 15 years after handover at market prices. But ONGC (or anyone else for that matter) will be unable to book reserves.
The contract’s start date will hinge on India’s success in persuading the Security Council to approve the oil barter package. And in the seemingly remote event that it does win approval, the UN sanctions regime will still be in place. Since processing seismic data and conducting studies would take at least a year, the Indians must be hoping that the embargo would be lifted, or at least eased, by the time they are finished.
More signs of India’s special relationship with Iraq emerged this week, when Indian Oil Corp. said that it had won an exemption to the surcharges Baghdad was demanding for lifting oil from Mina al-Bakr. But, in the end, whether this new strategic partnership extends to other areas rests with the Security Council.
Ruba Husari, Baghdad
(Published in Energy Compass, 15 December 2000)