In its 21st ordinary meeting held on 9th June 2009 the Council of Ministers-CoM in Iraq decided to propose a draft law which provide every producing province (Governorate) a 50 cent for every barrel of oil produced by it. The decision was said to be a fulfilment of Article 121 sub-paragraph “Three” of the Constitution regarding equitable revenue sharing.
Apart from this brief note the CoM website provides no further information on the draft of the proposed law, when it will be sent to Parliament, and if this proposal has anything to do with current moves and deliberations around the Federal Oil and Gas Law-FOGL in Parliament, or the forthcoming joint conference on Oil and Gas Law and Water Problem to be held on 14th June 2009 organised by UNAMI (United Nations Assistance Mission for Iraq) with the cooperation of Parliament.
CoM decision deserves careful assessment and scrutiny before the enactment of the proposed law related to it by the Parliament. However, the purpose of this quick and brief intervention is to attract the attention to this decision and its impact on the important issue of revenue sharing. For the time being the following comments and observations are made on the basis of the limited information available on the said CoM decision since no information on the text of the proposed law relating to it was provided.
The sub-paragraph referred to says, “Regions and governorates shall be allocated an equitable share of the national revenues sufficient to discharge their responsibilities and duties, but having regard to their resources, needs, and the percentage of their population.”
Obviously, the sub-paragraph addresses the complex issue of “revenue sharing” among “all” regions and governorates, while the CoM decision was confined to “producing governorates” only.
As it is clear from the text of the said sub-paragraph there are two sides to the equation of equitable sharing. On one side the term “national revenues”, which includes oil but not confined to it only. Other national revenues should be added to this side of the equation. On the entitlement side there are “resources”, “needs” and “percentage of population”, each of which requires specific modalities to properly define, measure and assess their relative weight in the equation.
Considering the complexity of the matter the CoM decision, therefore, does not fully or properly applies the stated sub-paragraph of the Constitution. And this could generates even more controversy and prolong the stalemate surrounding FOGL within the parliament, unless further information and clarity of purposes, modalities and functional modus operandi are made available.
If, on the other hand, the CoM decision was meant to provide the producing provinces with $0.50 per every produced barrel “over and above” what the producing governorate gets under the provision of the referred to sub-paragraph, then this could be assessed once the details of the proposed law are known.
This “additional” income to the producing provinces might be considered as “location rent”, and could work as an incentive for the local authorities to support, protect and facilitate the development of the upstream activities in their locality. Undoubtedly, more income would be forthcoming, and with good management and sound planning this could generate more prosperity. Economies of scale entail that the more a province produces the more additional income it generates. This might work well in upturn times with increasing production, regardless of oil prices since the earmarked 50 cents a barrel is geared to production not to “export” or “price”. This also means that the “quality” of the crude has no impact; provinces produce light crudes that has higher value at the distillation column receives similar threshold per barrel of heavy crude produced by itself or other producing province. But at the downturn times, at the market glut or shrinking demand that necessities production cuts then distributing production cuts among the producing provinces becomes an issue which needs handling on the central/federal level presumably by Federal Oil and Gas Council-FOGC.
Since there are also many gas fields, then provisions should be made to incorporate allowances for the gas produced there in terms of “oil equivalent”, otherwise gas producing provinces will be unfairly discriminated.
There are many gas fields in the country. Known among them are Tall Ghazal, Mansouriya, Khash-alhammar and Jaria Peka in Diyala province; Chemchemal and Kormor in Sulaimania province, Akkas in Alanbar, and Siba in Basrah.
It should be mentioned that both Mansouriya and Akkas gas field are included in the first bidding round, the result of which is eminent. And gas fields of Khash-alhammar and Siba are included in the second bidding round, which is scheduled for finalization and contracts are planned to be awarded by the end of this year 2009.
This makes it imperative to address the incorporation of gas production allowances to facilitate the smooth development of the fields once the awards are finalized and the works begin, especially for Alanbar and Diyala provinces.
The proposed law should also address the border oil and/or gas fields between neighbouring provinces, and provide suitable modalities on how to distribute these additional revenues among them. Failure to do so could generate local conflicts, which in turn could adversely affect the development of the related petroleum operations and fuel tension among the neighbouring localities.
Some fields are extended to two or even three provinces. Kirkuk field where the two main domes (Baba and Avana) are located in Kirkuk, while the third one (Khurmala) is located within Erbil), The Kifil field consists of two domes, the eastern one in the province of Najaf, and the western one seemingly astride Najaf and Karbala. The Ajil field is situated in the province of Salaheddin and it is a boundary field with Kirkuk. There are other similar fields, such as the Rafidain in Nasiriya and the fields of Anjana, Gelabat and Chemchemal, which may extend into the neighboring provinces. East Baghdad field could be extended to three provinces. It lies between the two provinces of Baghdad and Salaheddin, and probably extends southward into Wasit.
Also the law should address the issue of joint fields with neighbouring countries mainly, Iran and Kuwait, since the development of joint fields will add production, and thus additional income, to the related producing provinces, especially if the development of the joint fields was done through cooperative and “unitization” approach.
There are 15 fields and structures common with Iran. They are located in the eastern limit of the Governorates of Sulaimania, Diyala, Wasit, Misan and Basra. Three Iraqi fields extend to Kuwait, these are South Rumaila, Zubair and Umm Qasr fields. In addition to Sfaya field Iraqi prospects are believed to be hydrocarbon bearing between the Iraqi discoveries south of Ain Zala-Butma fields and the Syrian discoveries at the border areas to the west. The Jordanian Risha gas field might have limited extension in Iraq. Future discoveries in the Western Desert and Jazira Area (North of the Euphrates) may reveal further discoveries.
A national comprehensive system of “good governance” to insure complete transparency and accountability should be in place to protect provincial authorities from the attack of “resource curse”.
Finally, with this extra income to the producing provinces additional effort is needed to enhance the capacity development of the local institutions and authorities on how to use these additional financial resources effectively and efficiently, and in conformity with budgetary requirements both for ordinary and investment purposes. Modalities to deal with “absorptive capacity” limitations and its consequences are also needed for optimal utilization of financial resources. Early and dynamic attention should be given to address the possibility of provincial disparities in socio-economic development patterns.