July 20th, 2011

Signature Bonus



Mr. Jiyad raises interesting questions about the transformation of the signature Bonus into a debt instrument. It is indeed messy, and apparently, the situation is still evolving, with the reimbursable payment seemingly  being transformed into a (much) smaller outright grant. However, the fact that signature bonuses are higher in Angola than in Iraq may be due to any number of causes. Perhaps (as we do not know details of the Chinese/Angolan contract) the Angolan authorities gave the Chinese company other good and valuable consideration… But, more likely also, one of those  other causes may be that Iraq’s Technical Services Contracts leave practically no upside to the oil companies. The fact that there is no exploration risk in Iraq (Rounds 1 and 2 dealt with well-known, proven, produced, fields…), together with the known fee/barrel compensation leaves no upside surprises for anybody. All (most) costs and revenues are known  and market risk (such as it is..) is borne by the state.. and so, no lottery ticket. I would think that in an exploration (PSA) contract, an oil company might offer the state a contingent signature bonus say, $100 million if the field shows proven reserves of X, $200 million if reserves are 2X.. etc. In this way, some incentives can be aligned. In Iraq, however, since all of the upside goes to the state, perhaps it should be the reverse, with the state offering to pay only very  low fees per barrel produced, but offering to give something to the oil company if returns were to exceed certain very high benchmarks… this would be a way of Iraq forcing the oil companies to share some of the market risk. Another consideration is that since the government receives very large oil revenues each year (one might ask how efficiently the government spends such revenues…) perhaps, as PM Maliki has  said, it might be time to consider giving some oil money directly to  Iraqi households. In fact, in all this debate, we are concerned only to maximize government revenue (and power?), while the real maximand is the welfare that the Iraqi people can obtain from the exploitation of their oil. A  filtering through the government is a good thing up to  a point, but then, once public revenues are so large (80-90% of GDP?), and private households remain mired in poverty, giving Iraqi households a dividend directly might be very useful from  poverty-reduction, decentralization, and private sector development  points of view.

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