19 December 2008
Iraq’s latest draft model contract for its first postwar bid round, recently made available to participating firms, has failed to bridge the gap between the oil ministry and international oil companies, analysis of the latest text reveals. The two sides may struggle to narrow their differences in the short time frame announced by Baghdad, which aims to publish the final technical service contract by April 2009 and award contracts by the summer.
In a bid to safeguard its sovereignty and refute criticism for offering oil-producing fields on 20-year contracts, the ministry has adopted strict terms for allowing foreign companies to operate the tender’s six producing oil fields. At the same time, it has placed a large number of responsibilities on the foreign firms that could see them balk at investing billions of dollars to rehabilitate and develop the fields.
The draft model for the “producing oil field technical service contract” dated Nov. 13 gives the existing state regional oil companies — North Oil Co. (NOC), South Oil Co. and Missan Oil Co. — the upper hand in managing the six oil fields by stating that they are “exclusively entrusted with and authorized for development and production” of those fields. These powers would be transferred to a “field operating division” for each field, defined as a “non-incorporated, dedicated, special status entity within the organizational structure of the regional oil company.” This would be established within one month of the contract entering into effect, and would “exclusively serve as operator of the field” on behalf of the contractual parties.
The foreign company or consortium and the state partner — a separate entity with a 51% stake — would together be defined as the “contractor,” and in turn would appoint one company to act as co-operator to coordinate activities and issues on the conduct of oil operations carried out by the regional oil company or its field operating division. All will be under the supervision and control of a joint management committee. According to the draft contract, the co-operator will take a “substantial role” in planning, decision-making and day-to-day operations by the Iraqi operator.
The partners constituting the “contractor” are also expected to enter into their own joint operating agreement and set up an operating committee tasked with decisions, joint policies and proposals to the regional oil committee or joint management committee.
Industry sources say the setup is too complicated to allow a clear definition of the relationship between the foreign investor and the local operator, and the rules are too vague in terms of the relationship of both to the higher joint management committee. “At the end of the day, it comes down to two main questions: who operates the oil field and who is penalized if the targets are not met. If the foreign oil company is not in charge, it cannot be held responsible,” said one industry observer. “There are too many layers of responsibility; this model cannot work,” said another industry source familiar with the latest draft.
The foreign partner, while holding a minority stake of 49% and lacking full control, would be expected to shoulder important responsibilities. The draft contract’s scope of work includes providing all necessary capital, technology and services and incurring all costs to achieve targets for incremental, enhanced and plateau production. The foreign contractor alone — not its state partner — would be responsible for fulfilling contractual obligations with the regional oil company. According to the draft, the establishment of the field operating division “shall in no way relieve the contractor of its obligations to achieve the production targets under the contract.”
The bid round’s offer of two undeveloped natural gas fields is less controversial in Iraq, and the model contract is less stringent — although it still has a similar setup. The draft model for the “gas field service development and production contract” for the northern Akkas and Mansuriya fields puts the state’s participation at just 25%, to be held by North Gas Co. (NGC). The foreign partner and NGC will sign jointly as contractor. The regional oil company, NOC, will have limited involvement in operating the gas fields because it has no current production.
The complex arrangement at the oil fields stems from the fact that the ministry does not want to be seen ceding current production operations to newcomers. The absence of existing production at the gas fields means the foreign firm could become the operator on behalf of its partners. However, it would still report to a joint management committee that would have overall control. Once production starts and revenues start to outstrip expenditures, NOC could request the transfer of operatorship to a new operating company that it would create jointly with the contractor. In that event, the new company’s board of directors would take over from the joint management committee.
Compass Points
• SIGNIFICANCE: Iraq is struggling to reconcile its desperate need for outside help in arresting declines and developing its producing oil fields with increased internal political pressure. Power centers question the oil ministry’s approach of putting the country’s crown jewels — operated by national oil companies since nationalization — in the hands of foreign companies.
• CONTEXT: Critics reject the decision to award oil fields that have been producing for decades to international oil companies under long-term service contracts for up to 25 years. Of Iraq’s 78 discovered oil and gas fields, only about a dozen are fully developed, with the vast majority, including some giants, still awaiting development.
• NEXT: The ministry is planning a workshop for participating companies in the first quarter of 2009. It will take comments to the end of March, then publish a final tender protocol and model service contract. Industry experts say the gap between the two sides may be too wide to bridge in that time frame, and delays could cause the ministry to miss its June deadline for contract awards.
By Ruba Husari, Dubai
(Published in Energy Compass Dec. 19, 2008)