1st Licensing Round-Factbox (Summary)
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Results of the first licensing round announced in Baghdad June 30,2009
Objective of the Process
Prequalification Criteria
Process Timeline
Contract Areas
Fields Overview
Participating Companies
Participation Fees
Consortia
Bidding
1st Licensing Round Fields Reserves (table)
1st Licensing Round Prequalification Process & Results
1st Licensing Round Fields Map
Signature Bonuses: From Revenue to Debt
The amount of Signature Bonuses on the 6 oilfields and the 2 gas fields included in the first bidding round is $2.6 billion. MoO treats each signature bonus as recoverable loan. The signature bonus/loan is repaid with interest over five (5) years in quarterly installments commencing two (2) years after the Contract’s Effective Date.
The wisdom of the decision to convert signature bonuses into interest-bearing loans is questionable since it causes serious financial losses and tantamount to giving away what should be a financial revenue and, moreover, create financial burden with its own complications. This is explained briefly below.
The first issue is about giving away what should be a financial revenue.
As it is well known the bidding fees, signature bonuses, and various rental fees are among the “pre-production” fiscal terms in petroleum upstream contracts between the host government and the IOCs. The purpose is to allow a host government to earn revenues even before discovery/production occurs. Furthermore, and to maximise such revenues also, it can be used as a bidding parameter when there are many competitors.
It is worth mentioning in this juncture that record high signature bonus of $2.2 billion was paid by the Chinese company “Sinopec” in 2006, to outbid its competitors to get the rights for oil and gas exploration in two blocks in Angola. (UNCTAD,WIR 2007. P. 124).
Two exploration blocks, with all risks involved, in Angola generate $2.2 billion in signature bonus revenues, while 6 producing oil fields (currently producing over 2 million b/d, according to MoO “Information on Contract Areas”) and 2 known gas fields in Iraq generate nothing in signature bonuses! But this is not the end of the story.
It is therefore, very regrettable that instead of including signature bonus among the bidding parameters that could have generated financial gains to Iraq at this financially critical time, MoO not only gave them away but converts them into debt.
And this takes me to the second issue, the interest rate on the recoverable signature bonus.
Few questions are relevant here awaiting answers:
- First: is the rate of interest fixed or floating? If it is fixed then how much, less than 1% per annum, for example, or more than that? And if it is floating what is the reference rate: the Prime Rate (USA), the LIBOR (London inter bank offered rate), or others? Is there any “margin” over-and- above the reference rate or not, and if yes how much? Floating rate causes uncertainty on how much will be paid upon debt maturity.
- Second: is the interest rate “simple” or “compound”? Most likely it is compound.
- Third: is the interest rate “nominal” or “real/effective”? If it is nominal and simple then the payment of the loan in quarterly instalments has no “real burden”. But if interest were “compound” and “real/effective” then the quarterly instalments would produce interest burden higher than the annual instalments.
- Fourth: is the interest rate the same for all “creditors” (i.e., the winning bidders) decided by MoO or it will be negotiated collectively or separately? If it is decided by MoO then why not announcing it but if it is negotiable then the issue gets even more complicated and time consuming, which could affect the structure of the contract and its effective date since signature bonus is payable within 30 days from Contract’s Effective Date according to the Process Timeline.
- Fifth: why the commencement of repayment was linked to time factor (two years after the Contract’s Effective Date) instead of performance related factor such as, for example, six months after reaching a specific production level of the related field as stipulated in the contract. This is to avoid the financial pressure of repayment in case of a delay in project execution for whatever reasons.
- Sixth: what is the legal document governing the signature bonus/loan? Will it be part of the Technical Service Contract of the related field or separate loan agreement? Will it be with the “Contractor” or with external bank or other financial entity? And if it is with a bank will it take the form of a standard Euro bank loan agreement? If so, will there be additional bank charges such as management fees, commitment fees, etc? Finally, will there be any “guarantee” for repayment, and if so will it be oil as collateral?
These questions regarding the issues of interest rate and loan governing framework, especially if it is bank loan agreement, are and could be complicated and daunting. From my extensive experience in negotiating many of such agreements in the eighties I would suggest that MoO take them seriously.
I sincerely hope to get some satisfactory answers and feedback regarding the two major issues discussed above.
Ahmed Mousa Jiyad,
Norway.
1st June 2009
“Choice of Law” for contracts related to 1st bidding round
Information available on these contracts indicates the following:
- The contracts will be construed and governed under the “Law.”
- The Contracts will be in both the Arabic and English languages; in the event of a conflict, the English language version prevails.
- Provisions for resolution of disputes between the parties to the Contracts include recourse to independent expert, as well as to international arbitration (International Chamber of Commerce rules; in Paris or mutually agreed alternate venue; English language).
The purpose of this brief intervention is to shed light on the implication of the above provisions with specific reference and focus on the issue of choice of law for the contracts related to 1st bidding round due for announcement on 29th and 30th June, 2009.
Unless “Law” was defined in the concerned contracts, as “the Iraqi Law”, leaving it open-ended like that could mean “Foreign Law” and thus constitute serious departure from an established practice that oil contracts construed, interpreted and governed by Iraqi laws.
What is worrisome, though, is that the Council of Ministers-CoM had decided recently in favor of accepting foreign laws with regards to other contracts.
In its meeting no 17 dated 17th Mai 2009 CoM approved the Swiss Law instead of the Iraqi Law to govern the contract between the Ministry of Electricity and a British company regarding AlQuds power station. Earlier, in its meeting nr 25 dated 13 January 2009, CoM decided to approve both the Swiss and British Laws instead of the Iraqi Law with regards to the contract between the Ministry of Electricity and Seimens and GE.
Though these two contracts are for delivery of equipments- generator and gas units, the decisions nevertheless constitute precedence that could have bearing on the forthcoming oil contracts due to be announced by the end of this month. And if that takes place then it could have serious ramifications.
As it is known in the international private law of contracts the “Choice of Law” is an important matter for international business and contracts since “Arbitration Clouse” and “Dispute Settlement Mechanism” are cornerstones of such contracts to protect the interest of the foreign investors. From the perspectives of the foreign investors the “structure of the contract” is what matters, and thus due attention is usually granted to these cornerstones. In addition to the contracts themselves, there is a good number of bilateral and multilateral instruments and legal framework designed to provide protection of such international investment.
Now, in the likelihood of Iraq decides to waiver and accepts foreign laws to govern the Producing Field Technical Service Contract (PFTSC) for the 6 oilfields and the Gas Field Service Development and Production Contract (GSDPC), for the two gas fields, this is actually could have grave consequences.
First, the MoO asserts that “All oil and gas in-place and produced belongs to the people of the Republic of Iraq.” This is in conformity with the “Ownership” principle enshrined in the Constitution. I would claim that the choice of any law, except the Iraqi Law, to govern these contracts is gross violation of the constitution, since the “produced” of oil and gas will be govern by foreign laws. In this case, the choice of law other than the Iraqi law could very well compromise another core constitutional principle, namely the “highest interests of the Iraqi people”
Second, All three versions of the draft of Federal Oil and Gas Law-FOGL refer to the Iraqi laws. Thus accepting foreign laws contravenes the provisions of the proposed FOGL where it is mentioned that contracts are to be govern by the Iraqi Law. In case the contracts are concluded and signed with foreign laws have the governing status then this in fact constitute a preemptive regulatory capture, and once again an attempts to circumvent the parliament and even derail further any attempt to deliberate on leading to the enactment of the FOGL.
Third, the duration of the contracts, each with “An initial duration of up to twenty (20) years from the Contract’s effective date”, is unusually long. While recognizing the usefulness and needs to have a reasonable duration to attain the stated production capacity objectives the expression of “initial duration of up to twenty (20) years” is indeed unjustifiable especially when compared to the range of less than 9 years for such service contracts.
Leaving the contractual relationship under foreign laws for such a long duration represent major legal uncertainty for the Iraqi side. Disputes could arise for variety of reasons and causes: different interpretations, change of circumstance, different depletion policies etc, and the possibility of arbitration is not farfetched. In such eventuality and with contracts governed by foreign laws, the English version prevails and the choice of forum (arbitration site) then the Iraqi side would be in greave disadvantageous situation, and this undoubtedly would compromise the Iraqi interests to greater extent. Furthermore, it would be almost impossible to have meaningful petroleum policy geared to national developmental objectives under sovereign control, when the main source of income is governed by foreign laws, and for such prolonged durations.
Fourth, the 33 companies that have been pre-qualified to participate in this 1st licensing round and have paid at least one Participation Fee belong to as many as 18 countries. Obviously, the winning company or consortia of companies would belong to many countries with divers legal tradition and laws.
Some of these laws are “common laws”, comprising the body of principles and rules of action, which derives their authority from usage, customs and judgments and decrees of courts; others are “statutory laws”, which are generally created by the enactments of legislature. The English law, for example, belongs to the first category while the second prevails in the US. But even in the US each State has its own statutory law. Let alone the Chinese, Spanish, Korean, Danish, Dutch, Norwegian, Malaysian, Indonesian, Turkish and other laws, if each company requests to apply its country law!
Obviously this would represent a very complex and challenging operational and professional tasks before the legal staff of the MoO if they have to address various and diversified laws and legal traditions.
Once again unless the word “Law” is defined clearly and unambiguously in the contracts themselves to mean the “Iraqi Law”, this could mean “foreign law” and thus represent serious eradication to Iraq’s interests, weakens the MoO stand with IOCs and could have further negative consequences. Finally, it is about time that the MoO makes the contracts public in fulfillment of its repeated promise of openness and transparency of the bidding process.
Ahmed Mousa Jiyad,
Norway.
Email: mou-jiya@online.no
14th June 2009