Budget 2011: Who Gets What

The Iraqi 2011 federal budget voted by parliament today includes two items that are related to payments to oil companies. It stipulates a payment of $1.75 billion as participation in the production cost of oil exported including under contracts of international oil companies signed with the Kurdistan region. The second item is an allocation of $2.73 billion for investment projects of international oil companies.

The budget assumes the export of an average of 2.2 million barrels per day, including 100,000 b/d from the Kurdish region and assumes an oil price of $76.5/bbl.

Both items are novelties under the 2011 budget. Participation in the production costs of oil exported is not new by itself but the inclusion of dues to international oil companies working in Kurdistan is a first. In the past, this item consisted of operating expenditures of the national oil companies i.e North Oil Co and South Oil Co which were traditionally allocated just under $2 per barrels produced as their operational budget. The rest of their budget came from selling crude to the domestic market i.e. to refineries and gas to the local gas companies.

Payments for IOCs projects represent capital expenditures as well as the fee per incremental barrel produced, as agreed in the contracts signed in the first bid round once their output hits 10% above the base production line. At the moment, this involves three operators: BP, ExxonMobil, and ENI.

How allocations to companies in the Kurdistan region are calculated is a mystery. Sources familiar with the agreements reached in January, which allowed the KRG to restart exports, tell me Baghdad agreed to pay the KRG 50% of the price of oil exported. On the other hand the chairman of the oil and energy committee in parliament Adnan al-Janabi said in an interview in parliament in Baghdad he’s aware of two agreements signed by Oil Minister Abdul Karim al-Luaybi, including one in his previous capacity as deputy oil minister. To his mind, those agreements offer only an interim solution, which confirms the concept of a lump sum payment to the KRG equal to 50% of the price of the Kurdistan oil exported by Somo, to allow the ministry of natural resources in Erbil to pay the producing companies for their costs and presumably their share of profit as well under the signed production sharing contracts.

It is assumed that the interim solution stipulates that once Baghdad and Erbil agree on the final fate of the oil contracts the KRG had signed over the years, the accounts would be squared off. But it could be a long time before they are. Every year, the federal budget contains articles that require the KRG to transfer to the federal ministry of finance all federal revenues collected by the region since 2004. To date, this has never happened.

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