May 6th, 2009

Thamir Al-Ghadban

 

By

Former Oil Minister and Chief Advisor to the Iraqi Prime Minister Thamir al-Ghadban talks to Ruba Husari in London April 29, 2009

Q: What are the chances that the first bid round concludes according to schedule this summer?

A: Based on what has been done so far starting from the announcement of the first licensing round last year and all the steps that followed, including the road-show in London, the workshop in Istanbul, the continuous updating of the contracts and other documents and the main milestones like the final tender protocol sent out to participating companies recently, it’s clear to me that the ministry is doing its best to meet its targets. A two-day meeting with the oil companies is planned for the end of June to get the companies’ offers and award the contracts. The parameters for selecting the winning companies who will be awarded contracts are very clear and simple so the process will be straightforward. I don’t see any problems arising with the conclusion of the first bid round on time or with obtaining the approval of the council of ministers. Of course there will always be people who will call for the contracts to be ratified by the council of representatives (parliament). But I believe that the government is determined to push forward and has already approved the plan to go ahead with the first and also the second bid rounds. I think we could see the first oil contracts signed by mid or end of August this year.

Q: Can parliament put a hold on the process of awarding the contracts?

A: I don’t see a strong group or coalition within parliament which could do that. There will be calls by a number of people who have been vocal in the past, including  in their objections to the Heads of Agreement for the southern gas project signed with Royal Dutch Shell or  in relation to the hydrocarbon law. But the country is in dire need for revenues, especially after the sharp drop in oil prices. There is full understanding and awareness by the government and by politicians within parliament as well as the presidency office, that the only way to improve the standards of living and services and revitalize the economy is by providing more revenues from oil. Therefore those bid rounds seem to be the most effective in achieving that by offering a quick way to increase oil production. Furthermore, it has been clearly acknowledged, and it’s more evident now than at any other time, that there are serious problems in the oil fields in the south of Iraq. Oil production has been going down and we lost production capacity which shot down from 2.25 million b/d to far below 2 million b/d in the south. That’s why I believe it will be very difficult for the council of representatives to take such an action to block the awards of contracts to companies who will help in solving these problems. I expect there will be enough people within the council of representatives who will support the action taken by the cabinet. There was a strong opinion in the past – and I for one was holding this opinion as well – that the efforts of the ministry of oil should have concentrated on contracting and involving the international oil companies (IOCs) in the discovered and undeveloped oil fields, while using the services of engineering companies, consultants and contractors to stop the decline in the producing fields and improve the production rates. But now that things have gone so far, I think it would be unwise to backtrack on the first bid round.

Q: Isn’t there a danger that while trying to be pragmatic about revenues and the decline in production capacity in the fields you might give away more than you should, and consequently give people who oppose the process more reasons to say the interest of Iraq is not being preserved?

A: If one looks in details on the contractual terms on offer, it is clear that the national operating companies will continue to be the only owners of the oil fields and even in reality the operators of those fields. South Oil Co (SOC), North Oil Co (NOC) and Missan Oil Co (MOC) will be represented in the joint management committee (JMC) and below the JMC there will be the field operating division (FOD) which will be managed jointly by general managers from the regional oil company and contractor side at the beginning as stipulated in the contract. So in reality the contractor will not be the operator. He will assist the FOD to improve and enhance production, put plans into action and so on. That’s a major difference between the first bid round and the second round where the IOCs would be developers and operators as well, with some participation by an Iraqi entity. But as far as the first bid round is concerned, the Iraqi side will be in charge but will be assisted by the international company, in addition to the investment and the expertise that the latter will be bringing in. I don’t really see a danger there. The national interest will be fully preserved. I have no doubt about that.

Q: The legislative elections are supposed to take place within months of the award of the first contracts, which means the stakes could be too high for political parties to take a controversial step – the first since nationalization in the 1970’s – in an election year. Could these political calculations disrupt the signing of the first contracts?

A: I haven’t seen until now a major split between the major parties forming the government on the issue of how to develop the extra capacity in the same way there was a split regarding the hydrocarbon law. As far as increasing oil production goes, I think there is full agreement among all the parties. No doubt there is a split on how this should be done and it is an important issue which has been controversial throughout the past decades. It is a nationalistic issue and as I have always said, oil is politics and politics is oil. It’s a source of power and wealth and a source of conflict. Therefore I will not be surprised if political parties make an issue of it. Even if it becomes an issue in the next elections, I can still see that there is awareness among the main political parties who have a strong representation in parliament and in the recently elected provincial elections. They all agree that we should develop extra capacity and that the country is in dire need for more production and revenues. I’ve even seen some critics who until recently were opposed to certain measures taken by the ministry of oil and have changed their position now that they were faced with the dilemma of lower revenue. Some of them even started talking in a pragmatic way about the need to go for production sharing contracts. I don’t agree with them on this last point. But I still maintain that Iraq has lost lots of revenue, capacity and market share in the last three and a half decades, which was taken over by other countries. It is now time to regain some of that lost capacity. This is not just about history. Look at the state of Iraq today – and I can talk with confidence here since I’m directly involved in the civil matters in government – Iraq is in need of billions and billions of dollars to provide potable water, sewage systems, health, education, roads and infrastructure. I have all the way maintained that we should reform the economy and bring in more resources not just oil, but right now there isn’t much. The government is trying its best to encourage investment and lure investments into the country and therefore diversify the economy but this takes years. So to have an impact on the economy we need to improve our production and export capacity and bring in more revenues to the country. That’s why we should not get entangled into the side issues that divide us on how to develop our oil resources. Of course there are opinions, and these are to be respected but we shouldn’t waste our time on doing just that.

Q: IOCs might hesitate to sign on the dotted line even if they are awarded contracts because they need a better legal cover than just the endorsement of the council of ministers on contracts that involve billions of dollars of investments and span over more than 20 years.

A: I have heard this opinion in the past and it was voiced by many of the companies’ chief executives. I consider it natural to ask for a clear and stable legal regime but I haven’t noticed any disinterest or a weakening of their appetite or process of engaging with the ministry so far. They are fully engaged and always come up with new ideas. Even the direct call for the development of the Nassiriya oil field has provoked lots of interest and companies are coming forward and asking to engage in a more intense way. The same applies to the Nahr Bin Umar field where there were direct invitations to companies as well to participate. This is being helped by the improvement of the security conditions on the ground and some companies have already opened offices while others are in the process of doing so.

Q: What if they do raise this legal issue when the contracts are about to be awarded?

A: I don’t think they would because the terms of the contracts are very clear. They have to start work within a defined period of time once the contracts are awarded. They cannot have a contract and then sit there and ask for a new legal umbrella.

Q: You mean that by agreeing to bid they agree to sign a contract based on what has been said so far, i.e. that the contracts become effective once the council of ministers gives its approval?

A: This has been made clear by the ministry of oil. They were engaged together and there were sessions of questions and answers where the ministry has addressed all these questions and this was reflected in the final draft of the contract. I believe there is no way of changing major issues especially the legal aspect in the contract.

Q: Do you think that offering the foreign companies a 75% stake in the joint venture for the producing fields is justified?

A: I think there is a misunderstanding about the 75% stake. This is a stake in the capital required to further develop the oil field according to the contract. It has nothing to do with the ownership of the oil, be it underground or to be produced or the total revenue accrued and certainly does not reflect management power such as representation in the JMC or voting rights. The return the company makes on its investment will come from the fee it’s paid and this fee is linked to the incremental barrels produced as defined in the contract and therefore they will always get a certain remuneration based on their share in the capital and hence it’s not a share in the total revenue from the sale of produced oil. The change was introduced based on the fact that the ministry of oil – and the country in general – cannot put so much capital in the development of the oil fields. In reality, we are utilizing our underground resources to develop them without paying much in terms of capital. We are using the oil as collateral to bring in investments. Bear in mind also that even the 25% stake of the national entity is going to be a carried interest by the companies.

Q: What’s the upside for the companies in financing a 100% of the capital needed?

A: The upside is clear. Let’s look at the picture as a whole. First of all, those fields are proven, producing giant fields by world standards and there is no risk. They have a long history of production. Even the older fields of Rumaila and Kirkuk have high potential of an increased production. That’s why the ministry has put a higher plateau target for all of them. Secondly, there is commitment by the country to increase production. Thirdly the companies need to develop oil reserves and get engaged with the owners of those reserves i.e. the host countries, because there is now a shortage and diminishing reserves held by the IOCs worldwide. The estimate is that they own about 12% of world reserves and the rest is owned by the host countries. A good working relationship will open lots of opportunities in the future. Fourthly, Iraq is well positioned geographically so when oil flows there is a guaranteed market based on the quality of the oil and historical relationships with the consuming countries.

Q: The final model contract is a hybrid model, not a typical model contract as we know them in the region or around the world, with some innovative concepts like the FOD, or the 75% capital investment share without being the full operator, …etc. Do you expect it to work knowing that it’s not a standard contract and has been constructed in a complex way?

A: The basics are the same to any of the known model contracts. The difference is that we are dealing with already developed and producing fields so it had to be tailor-made to our unique situation. There are also many issues that have to be taken into consideration including political issues. The ministry was aware of all of these problems and it tried to get the best terms possible for Iraq. That’s why I agree it’s not a standard contract but I think it will work.

Q: Assuming the contracts are awarded in the summer, how do you see the role of the IOCs evolving over the period of the contract especially once they are past the initial phase of sustaining production and start tackling new reservoirs that are not currently produced? Do you see a possibility that new contracts might emerge with different terms for developing these new reservoirs than the politically restrictive terms currently on offer?

A: It’s true that there is a clause in the contract that if there are undeveloped reservoirs, they can be developed with a separate remuneration fee to be agreed on and the regional oil company such as SOC has the right to develop it separately if no agreement is reached. The possibility is there. But this very much depends on how successful the two sides are in meeting their production target, i.e. maintaining and adding incremental production to reach the plateau and maintain it according to contract. This will definitely improve the relations between the two partners of the contract. Those fields have a lot of potential for new reservoirs and deeper horizons and those two issues of undeveloped reservoirs and new discoveries are well taken care of within the contract. There are clear terms how to deal with them so there is a possibility of another added role for the IOCs. But it is also possible to stick to the producing reservoirs and on the longer run have a greater role for the Iraqi side rather than the IOCs.

Q: Has the Iraqi side thought about how to tackle these new reservoirs and what type of contracts and terms could be offered then or do they have to stick to the same terms because they are within the producing fields?

A: The same terms of the present contract shall apply to developing the discovered but undeveloped reservoirs while the model contract stipulates that a separate agreement shall be negotiated for the exploration and development of potential undiscovered reservoirs with a six year exclusivity right provided to the contractor. I think it’s too early to give a concrete answer about the terms that would apply to the new agreement.

Q: Could this long term potential constitute the upside for the companies on the long run?

A: It will definitely give the IOCs an opportunity to increase production and could also provide objective reasons to extend the duration of the contract. I agree with you it could be viewed by them as an upside.

Q: A change was introduced to the signature bonus in the final draft contract by increasing it considerably and by making it refundable, while in other countries the signature bonus always goes to the treasury of the country. Why did you decide to waive it?

A: It is called a signature bonus but in reality if you look at the model contract and the final tender protocol, it’s not a biddable parameter. So in reality, by making the signature bonus considerably large, the new change introduced transformed it into a sort of commercial loan to the treasury of the country, not to the ministry of oil. It will not go into the kit of the ministry of oil or to fund the 25% share of the national entity since it has been agreed that this will be carried by the foreign companies. In a way, what the ministry is doing is using this bid round to bring loans to the government. We had great difficulties in providing $2-3 billion this year to provide financing for the power generation contracts with GE and Siemens. And therefore I think it’s a very good idea to use this opportunity to provide loans for the government and the collateral is available in the form of the base production, and terms and conditions have been clearly stated in the contract. It seems from the initial reactions that the companies did not object to that and they see that the country really needs financing. Furthermore, this will definitely strengthen the position of the ministry in the first bid round because it will be seen by government and critics as a positive thing.

Q: Are you saying it’s a way of selling the bid round to the public?

A: I don’t think it was planned that way but it came as a reflection from within the government on ways to get financing and supplement our revenues and the ministry reacted positively. They came up with this idea of getting almost $2.6 billion in financing by using oil contracts.

Q: How do you see the role of the national companies SOC, MOC and NOC evolving once the contracts are awarded, especially that the FOD will be financially and administratively independent? What will be left of the regional oil companies?

A: This is a new experience for the operating companies which are the owners and operators of the currently producing fields. They will evolve in a way to become almost like holding companies. And since they are represented at the joint management committee, they will have the vote.

Q: Other than holding companies, what will be their raison-d’etre once the international companies start running the show on the ground?

A: Due to the internal politics of Iraq and the divisions over the oil and gas legislation and the INOC law, we failed so far to re-establish INOC. As a result, the ministry couldn’t find any other way except this. The FOD will not be incorporated, but will be dedicated to operating certain fields and the people will be seconded to them. There could be a legal issue here which I have raised previously and it has been discussed within the ministry, which is whether the FOD is a legal entity or not. Of course a field operating division is not a company like SOC, MOC and NOC. The concept has been introduced to avoid forming a joint operating company while at the same time provide a role for the IOCs in the decision-making and management of the fields, as well as their development and operation. Then the question becomes in what capacity is the FOD going to deal with government agencies when it comes to customs, imports, or sending supporting letters to other government entities and how is it going to do it? It’s agreed that this is going to be done by SOC, MOC and NOC and not the FOD. Legally speaking, SOC, MOC and NOC are the ones representing the government and the ministry in dealing with the contractor, and not the FOD. The FOD is a non-profit and non-commercial entity especially that the facilities, old and new, are owned by the regional oil company.

Q: But when they are seconded over 20-25 years, and we’re talking here about staff as well as assets, in addition to the FOD’s administrative and financial independence over the term of the contract, it’s difficult to imagine that they will go back to their original companies at the end of the contract because this is not practically possible.

A: I’m not worried about the personnel because they will continue operating in the same fields. Most probably they will get better salaries and better chances of developing their skills because they will be working with the contractor and the contractor is responsible for the improvement of their technical and managerial skills. But what is more important is that the assets continue to be owned by SOC, MOC and NOC.

Q: What if INOC is established over the term of the contract?

A: The draft hydrocarbon law stipulates that INOC will own SOC, MOC and NOC and once the law is enacted, it will automatically own those companies. So practically speaking, if INOC is re-established, there will be no change. It will own them and become itself the holding company.

Q: The ministry of oil invited certain companies to bid for engineering, procurement and construction (EPC) contracts for the Nassiriya and Nahr Bin Umar fields but in reality the companies are bidding with full field development proposals. What is it going to come down to at the end, an EPC or a full field development contract?

A: To start with, Nassiriya and Nahr Bin Umar fields were excluded from the first bid round because they are not in full operation. Nassiriya is not in production and Nahr Bin Umar has only limited production. They were then excluded from the second bid round because the idea was that we will develop them ourselves for a number of different reasons. The ministry then came up with the EPC idea. An EPC is a well defined type of contract where normally the host government or national company would have a basic design and would ask the contractor to do the detailed design and do the rest until the full commissioning of the field in accordance with the terms of reference. However, the ministry did not define exact terms of reference. They came up with the EPC idea first for Nassiriya, with the expectation that the terms of the contract from a national point of view would be better than those offered under the first and second bid rounds and that we would be offering a typical service contract. But since it did not issue clear terms of reference, the oil companies were asked to come up with ideas and they came up with their own ideas reflecting their own interests. Their interests are to minimize risk and investment at the early stage unless they have a firm and clear long term contract, and to operate the field. So what they have submitted for Nassiriya was not a typical EPC proposal, it’s a modified service contract. That’s one of the reasons why the ministry asked them to revise their offers after they submitted them. I think it would have been much better if the terms of reference were clearly defined and sent to the companies with the request to make their offers. I hope we will not see the same process being repeated with Nahr Bin Umar. The ministry should draw up clear terms of reference regarding whether the company operates the field or not and for how long; how is it going to be repaid; whether it terminates its involvement after commissioning; and what role for the Iraqi entity throughout. It also has to be precise on whether the foreign company is going to be the operator from the beginning, is it going to be a joint operating company, or will its role be limited to a joint management committee. I also don’t think it’s adequate to use the term EPC to describe this type of contract. They should call it something else.

Q: What would you call it then?

A: It seems to me that if we are going to the IOCs asking for investment, and it seems clear that this is what we’re doing, then let’s go with project finance. What appears so far is that the oil company is being brought in to provide financing and do the design and carry out a contractor’s job including bringing equipment, constructing and commissioning. This is not normally the role of an oil company. In 1990 the ministry came up with a 7-point plan due to the need for investment amid the political constraints at the time. The principles discussed then had some similarities with the model currently under discussion. According to those points, the companies were expected to bring in investment, develop the field and hand over operations once production comes on stream. They would get payment from the oil produced from the field they developed. That model shared a lot of similarities with the Iranian buy-back contract. The reaction of the companies then – though some did show interest – was basically that they are not bankers. They insisted they should be the operators of the fields.

Q: Do you see the approach adopted by the ministry so far leading to a buy-back style contract for Nassiriya and Nahr bin Umar or they are going to end up with a contract similar to that offered under the bid rounds but by direct invitation to a limited number of companies?

A: The model we developed at the end of the 1990’s which was called a development and production contract (DPC) was designed to address the need for investment and know how, including management and not just construction, and also addressed the concern of the IOCs since they wanted to operate. Our interest was to make the period where the companies operate as short as possible so we said we will pay them from the first day of production for their cost and provide a fair remuneration mechanism. That was an improvement on the Iranian buyback. According to that model, once they got their investment back, we enter into a transitional period of 2 years, during which there will be a handover to the Iraqi side. If there is any remaining remuneration we would settle it in one year by installment. By that model, the duration of the contracts for the large fields would be 10-12 years and for the smaller fields 8-10 years. You have people today in Iraq in general and in the ministry of oil in particular who oppose a long involvement of IOCs, which means we have to find a balance. We have to find that balance when it comes to Nassiriya and Nahr Bin Umar and any other undeveloped oil fields that we want to develop in cooperation with IOCs along terms that are significantly better than what’s on offer in the two current bid rounds.

Q: What role did you personally play in the conceptualization of the bid rounds and the finalization of the model contract?

A: The bid rounds are the work of the ministry of oil. But the concept was incorporated in the oil and gas draft law by myself and my two other colleagues who were involved in writing the original draft of the hydrocarbon law — before it was changed during the negotiations by the ministerial oil and energy committee — as an effective tool to insure competitiveness and transparency. I was subsequently involved since they were discussed at the meetings of the council of ministers which I attend. When the minister of oil brings up new ideas, like for example the bid rounds, I’m normally involved in the discussions and in certain cases the proposals presented are forwarded by the council of ministers to the advisory commission for review. When the ministry of oil submitted its plan last year, a committee of three which includes the ministers of oil and planning and myself was set up to review it and make recommendations to the council of ministers. I also participated in brainstorming sessions at the oil ministry on the invitation of the minister, where ideas on launching bid rounds were discussed. There I expressed my opinion regarding the model contracts and raised the points that needed thorough discussion before they went ahead and I was involved in the discussions that followed including at the London road-show for companies. I was also part of a committee that was set up on the request of the Prime Minister Nouri al-Maliki and was overseen by the Deputy Prime Minister Barham Salih to investigate the state of the oil fields and the performance of the three regional oil companies. Our recommendations were adopted following the conference organized in Baghdad in February, including the need to bring the bid rounds to conclusion in the shortest delays. I also try to help through my role in the Oil and Energy department within the Advisory Commission that studies and advises on oil and energy issues and in the secretariat of the energy committee presided by the Prime Minister of which I am a member.

Q: Were you able to influence how the oil sector is being run?

A: I’m personally committed to helping the ministry of oil. I worked all my life in the ministry and I don’t take an antagonistic view even if I sometimes disagree with certain opinions, plans or policies. I have always taken the position that my role is to help the people in the ministry of oil and support them by giving honest advice and I do believe I was able to influence some of the issues in a positive way. My duty is to help the ministry of oil to do the right things but the minister and his staff are the people responsible for running the show.

Q: Are you satisfied with the outcome so far?

A: I cannot say I’m fully satisfied with all that has been done. I believe the ministry has faced a lot of challenges in the beginning, especially during the first two years when it was absorbed in day to day operations and insuring the availability of products and other problems. As a result of these problems little attention has been paid to the improvement of the infrastructure and the networks, offshore and onshore. That’s why we still have major problems with moving oil between the south and the north, and increase exports through the north when we have problems in the Gulf. There are also serious problems in providing enough fuel for power generation even today, which present a major challenge for the government to provide power and better services to the citizens and other economic sectors like agriculture and industries. As far as oil field development plans are concerned, I fully supported the engagement with IOCs but I stressed that it should be done in parallel with the strengthening of the national involvement and in particular the reestablishment of INOC. I was personally involved in the drafting of INOC law. I have always maintained that the interest of the whole nation is of paramount importance and therefore the government of Iraq should not be handcuffed by ideology and slogans. This does not mean in any way that we should compromise on important issues especially where the national interest is at stake, or on issues of transparency in awarding contracts or in combating corruption. At the same time, I look at the issue of involving IOCs in Iraq from a strategic point of view in the context of the regional balance of power. I think they would add strength to the country vis-a-vis our relations with neighbouring countries. I also believe in diversification. We should bring in as many nations as possible with their oil companies to help Iraq in this transitional and critical period of rebuilding, of asserting law and order and of building our armed forces. This international dimension is very important and will strengthen Iraq. I am not happy with the long time it’s taking to increase crude oil production and export capacity as well as upgrading and expanding the capacity of our refineries and gas plants. I also believe that there is a need for a clear vision that should form the basis for reforming the downstream sector. The legislation that was passed in recent years was inadequate and unfruitful.

Have a question/ comment to Mr Al-Ghadban? Post it in the comment section below, Mr Al-Ghadban will answer questions online.

The Interview