Iraq Prepares Ground for Future Contracts

14 June 2004

Iraq’s oil ministry is setting out on a process of preparing a new oil policy, as well as drafting model contracts and a petroleum law, to be approved later by the country’s elected bodies, Iraq’s new Oil Minister Thamer al-Ghadban said in an interview.

The work aims to prepare Iraq for its political evolution, which should see the adoption of a new constitution in around 18 months, followed by the formation of the first non-transitional government since the war.

The policy and legal documents are prerequisites for major oil companies to start substantial negotiations on long-term oil deals with Iraq, which boasts the second-largest oil reserves in the world. However, other companies willing to take a bit more risk could be the first to sign short- or medium-term development contracts for small fields, al-Ghadban suggested.

“There are many small and medium-sized oil companies who are not insisting on production sharing agreements like the majors and are willing to sign service contracts. Theoretically speaking, if we have an approved policy that stipulates awarding service type contracts, then we’ll start working with these companies,” al-Ghadban told International Oil Daily in an interview from Baghdad.

Until the wave of kidnappings in recent months, representatives of European, Asian and Russian oil companies were flocking to Baghdad to try and secure a foothold, ahead of the big oil companies that have kept their distances since the 2003 war.

Despite the establishment of a defined timeframe for the establishment of a legitimately elected government at the end of 2005, which can sign long-term deals, oil majors are still wary of Iraq — although some admit that starting the legwork sometime next year could get them a step closer to signing deals with that government.

The timeline was set by the Transitional Administrative Law (TAL), which was prepared by the Iraqi Governing Council with the Coalition Provisional Authority, and was adopted by the UN Security Council in its latest Iraq resolution last week. This defined several milestones, including the election of a 275-member national assembly by January 2005, which would serve as a transitional legislative authority and select a transitional government. The same assembly would draft a permanent constitution by Aug. 15, 2005, to be approved by Iraqis in a referendum by Oct. 15 of that year. The process will culminate with elections for a permanent government by Dec. 15, which should take office by Dec. 31, 2005, according to the TAL.

“Everyone is taking it semi-seriously at the moment, because the security situation could undermine the political process. The jury is still out on whether it’s going to work,” said an executive from a European major.

Iraqi officials say the security situation is closely linked to the political process. A serious improvement on the political front that is widely felt by most Iraqis is likely to have an impact on the insurgency, they say. So far, Iraqi public reaction to the new interim government, sworn in on Jun. 1, has been generally positive.

“It’s the first time I’m optimistic that the political process will progress as planned,” al-Ghadban said. “This means the door will be open for everyone from inside and outside Iraq to participate in the development projects without restrictions.”

For Iraqis, the amount of preparatory work is daunting. They need to focus on short-term measures to solve oil product shortages, protect infrastructure from attacks and restore prewar capacity at producing oil fields. At the same time, they intend to restructure the oil sector, define an oil policy for the interim and permanent phases of government and prepare a legal framework that includes a new petroleum law and the revision of all previous regulations to enable international oil companies to start substantial talks.

“Iraq needs huge revenue for the development of society and the economy, and to expand and modernize the oil industry itself. Our declared policy is to depend on ourselves and seek outside help too,” al-Ghadban said.

The starting point, according to al-Ghadban, is to start developing a number of discovered fields in the north and south of the country, which were previously offered to international oil companies in the days of sanctions. These include West Qurna, Majnoon, Nahr bin Umar, Nasiriyah, Halfaya, Ratawi and others.

“We also want to expand natural gas production and utilization and we want to become a gas exporting country, which means large projects to build processing plants and lay pipelines,” al-Ghadban added.

In addition to the upstream projects, modernization of Iraq’s three refineries and construction of new ones will also figure at the top of the list of projects for which outside capital and expertise will be sought.

“I can’t say we will have a model contract ready within a few months. What I can say is we’re getting the ball rolling with ideas on model contracts, policies and concepts, and we’ll seek to have them approved by this government or the next one, and all other bodies, as soon as we can,” al-Ghadban said.

At the same time, the oil ministry will start working on tendering documents and data packages, “so that when the time comes, we’ll be ready. Once policies are approved, we will start implementation,” al-Ghadban said.

“The difference with the last government is that we will not put this work aside until the situation allows us to move forward,” he said.

Yet the interim nature of the current government raises questions about continuity with the proposed transitional government and permanent governments.

Here, al-Ghadban is expected to draw on his three decades of experience in Iraq’s oil industry, which included spells in the planning department working on restructuring the oil ministry and its companies, and preparing long-term schemes for the oil industry.

“It’s the same industry regardless of who is minister,” he said. “Our work will ensure that any new government will not have to start from zero.”

He added: “We’re not going to take any action or invent anything that is not already common practice in the oil industry. So if, theoretically, we shake hands with an oil company who is ready to take risks and do work based on the contracts available in the interim period, and if it’s acceptable to the cabinet and approved by all, I don’t see why it should be stopped once governments change.”

While al-Ghadban says the oil ministry is ready to hold initial talks now with interested oil companies, whether inside or outside Iraq, company executives say the opening shot will have to come from the Iraqis.

“It takes the ministry to become engaged. They are the ones who have to give directions on how they want to proceed and set the pace,” said a source at a US major.

Iraqi oil consultants who live abroad and are familiar with international practices say it will take at least six months to get data ready, set up negotiating teams and clear the legal framework.

“Once that’s done, there will be a stampede. But the ministry has to declare first that it’s inviting oil companies to negotiate and state that any agreement reached will be subject to approval by the executive and legislative bodies, according to the new constitution,” said one Iraqi oil industry veteran in exile.

By Ruba Husari, London

(Published in International Oil Daily June 14, 2004)

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