27 March 2007
The Iraqi government decided to renegotiate an old production sharing contract which had been signed by China National Petroleum Corp. (CNPC) to develop the 90,000 barrel per day Al-Ahdab oil field with the former Iraqi regime “for political and legal reasons” rather than retender, a senior Iraqi government official told International Oil Daily late last week.
CNPC officials traveled to Baghdad earlier this month for a first meeting with the Iraqi oil ministry on the fate of the production sharing agreement it signed in 1997 following the Iraqi cabinet approval of a draft petroleum law in late February. The draft bill, which has yet to be endorsed by the Iraqi parliament, stipulated in Article 40 that the oil ministry is to review all existing exploration and production contracts signed by companies before the law enters into force “in order to make them in line with the objectives and principles of the law.” The revised contracts would then be submitted for approval to the federal oil and gas council within three months of the official publishing of the law.
“The contract was signed between two states at the time and the view in Baghdad is that we have to respect state commitments even if the regime has changed,” the senior Iraqi government official said.
“It’s also important for the sake of our future relationship with China,” the official added.
In 1997 CNPC agreed to spend $1.3 billion to develop Al-Ahdab in southern Iraq with Chinese partner North Industries Corp. (Norinco), but did not break ground because of UN sanctions. Although in 2002 the Iraqi government decided to cancel Lukoil’s production sharing deal for the 600,000 b/d West Qurna field, which was signed in 1998, it did not invalidate CNPC’s contract. At the time, Iraqi officials said that, although CNPC could be considered noncompliant in the same way as Lukoil was, its contract was for a smaller field and China was considered politically closer to Baghdad than Moscow was.
According to the Iraqi official, given that production sharing contracts are not on offer any more, the CNPC contract would have to be entirely revised and adapted to the development and production model contract. The development and production contract was designed by oil ministry officials in 2000 as a hybrid between production sharing and the buyback deals introduced by Iran in the 1990’s.
The new contract will also have to take developments since the signing of the original contract into account — for example, changes in technology and in market conditions.
“One of the technical issues that have to be reviewed is drilling. Iraq made no requirements on firms to drill horizontal wells when it negotiated contracts in the 1990s, but with all the urban developments around Al-Ahdab in recent years, vertical drilling is not an option today,” the official said.
“Another issue under negotiation is the economics of the project. Oil prices today are not where they were in 1997, so all issues related to the fiscal terms will have to be revised,” he added.
According to the Iraqi official, negotiations with CNPC are likely to take several months, as the Iraqi cabinet has yet to submit guidelines for the model contracts to parliament for approval. Similar negotiations are also likely to follow with other companies which hold valid deals, although opinions in Baghdad are divided over whether or not Lukoil’s deal still stands.
Six contracts were signed before the 2003 US-led war on Iraq, five of which were approved by a presidential decree giving them the power of law. In addition to CNPC’s contract, Vietnam’s Petrovietnam, and Syrian Petroleum Co. (SPC) had development deals for the 80,000 b/d Amara and 50,000 b/d Noor oil fields, respectively. At the time, Syria’s contract was not approved by decree at its own request. Three exploration agreements were signed for blocks in the Western Desert with Indonesia’s Pertamina for Block 3, Russia’s Stroitransgas for Block 4, and India’s Oil and Natural Gas Corp. for Block 8.
From a legal point of view, legal experts argue that a change of government has no impact on the enforceability of deals agreed with an ousted regime. But as countries have a sovereign right to terminate contracts regardless of enforceability, companies which signed contracts with the ousted Saddam Hussein regime could find themselves deprived of their deals if the new government judges it is in its interest to do so.
Companies accused of nonperformance could invoke force majeure, such as UN sanctions, as a defense. But the outcome would hinge on the force majeure provision in their contract and whether this force majeure could not have been foreseen, experts say.
Lukoil’s 25-year deal, signed in 1998, included a provision to carry out a minimum work program, regardless of UN sanctions. It was in fact awarded with the aim of breaching the sanctions regime.
By Ruba Husari, Dubai
(Published in International Oil Daily March 27, 2007)