Analysis: Ending the ExxonMobil Presence at West Qurna 1

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Ending ExxonMobil Presence in WQ1 Oilfield

Legal-Contractual Discussion with Economic-Financial Analysis

Information indicates that the Iraqi Ministry of Oil (MoO) proposed to acquire (buy) ExxonMobil's participation interest (PI) in the West Qurna 1 (WQ1) oilfield for $300 million, and that the final decision depends on the formation and approval of the new government.

The proposal revives the divergent positions that prevailed within MoO when discussing a similar situation in 2018 relating to the same oilfield.

Click here to download the full report in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Analysis: Ending the ExxonMobil Presence at West Qurna 1 first appeared on Iraq Business News.

Debating the Iraq-Jordan Oil Pipeline

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

A confused and confusing decision by the Council of Ministers-CoM followed by an imprecise statement from the Ministry of Oil-MoO regarding Iraq-Jordan/ Basra-Aqaba Oil Pipeline-BAOP project had ignited a new wave of serious concerns and protests that eventually led to filing two lawsuits of appeal before the Federal Supreme Court-FSC and, probably, more cases are in the making, but surely the heated debate continues unabated.

To clarify what surrounds BAOP project, a debating platform, Al-Mushtarek, invited me to address the mater; by utilizing Zoom facility and with help of PowerPoint the event was successfully convened.

The topic is, Basra - Aqaba Oil Pipeline: Economic, Legal, Geopolitical, Geostrategic and National Security Perspectives.  My purpose is to make independent, professional, constructive, and facts/evidence-based contribution to the national ongoing debate regarding this pipeline.

Throughout my presentation I covered some basic issues before opining the debate by and with the direct participants who are in many different countries and others who posted questions through other social media means, particularly Twitter.

The first issue was "Reality and Implications of Semi Landlocked Geographic Location".

The reality, Iraq is the only Arab resource rich (oil and gas) country that has very narrow access to international waters through north Arabian Gulf; due to its imbalance economic structure, it has high dependency on natural resource, specifically oil, exports revenues, and after almost a century of oil discovery the failed economic policies only deepen such imbalance, making it more chronic and the country as clear example manifesting "Dutch disease" and "Resource curse" effects, exacerbated by devastating kleptocracy of post 2003 invasion.

Geography is sovereign, and thus there are, for Iraq, many implications of relevance to our topic- oil export pipelines.

Each of the neighboring countries, i.e., Jordan, Syria, Saudi Arabia, Turkey possesses a "location rent"; this could be economical and financial (in terms of transit fee, oil supplies or operating the pipeline) and political leverage, competition and interference.

Each export outlet has, simultaneously, geopolitical risks and geostrategic importance and, thus, there are high degrees of associated vulnerability and uncertainty.

The diversity and capacities of oil export outlets through pipelines and seaborne represent an economic rationality problem, i.e., if all oil export outlets are developed, total export capacity would exceed total oil production capacity by many folds.

The above reality and implications are bound to impact Iraqi decision making and the national debate on any proposed oil pipeline.

My second talking point is to provide brief background and data on BAOP.

This project has been under official and formal considerations for four decades; it went through two distinct periods of intensive attention while shelved for almost 28 years in between.

The first period, 1983/4, was short but witnessed very intensive efforts at high level of decision making.

A pipeline of one million barrel daily, the US Bechtel Co., was selected to execute the project that could cost estimated to be one billion US Dollar, half of which would be offer by the US EXIM Bank' financial guarantees.

Iraq requested US government security guarantees for the pipeline against any Israeli attack, but the US government refused to make such undertaking.

The project was shelved, and Iraq pursued other options; the first was to expand the capacity of Kirkuk-Ceyhan (Turkey) pipeline-ITP through a loan from APICORP of OAPEC and, the second was a new pipeline through Saudi Arabia-IPSA, financed fully by Iraq.

BAOP project was completely forgotten due to ITP expansion, IPSA, Kuwait invasion, the sanction and US led invasion of 2003 and its dramatic far reaching consequences.

The second period started in earnest in 2012 and continued to date.  Every government and prime minister stated and asserted they have concluded a "Frame Agreement" with Jordan regarding the pipeline, but no substantive verifiable complete documents comprising such frame agreement and feasibility study ever made public!!!!

From whatever available information, I premise my assessment on the following formal data:

The pipeline project is composed of two parts: Part 1, between Basra and Haditha with designed capacity of 2.2mbd, while Part 2, is between Haditha and Aqaba with designed capacity of 1mbd. The two parts have different pipeline sizes, length and there are many pumping stations and tank farms along them and a loading terminal at Aqaba.

The entire project was reportedly estimated cost at $26billion ($4billion for part1 (15.4%) and  $22billion for part 2 (84.6%)) as an "investment BOOT/BOT", or between $8.5 - $10.9billion as "EPCF".

Obviously, the difference is very huge indeed, but no official clarification was provided, and our repeated questions remained unanswered by any authority within the government!!

I move now to my third item which is about MoC Decision 95 of April 2022.

MoC agrees to adopt a plan to execute the pipeline by the Chinese CITIC' consortium with Worley Engineering as supervising consultants, according to the proposed EPCF by the Ministry of Oil; the project is to be financed by the Iraq-China strategic cooperation framework and, after 2022 state budget law is promulgated.

The above decision raises more questions than offers answers, clarifications, or assurances.

Discussion within the MoO revealed that no sufficient funding is available under the Iraq-China strategic cooperation framework; no other mean of funding is secured and, 2022 state budget law has not been even proposed so far as the new government has not been formed!! Moreover, nothing at all was released regarding the EPCF proposed by the ministry- utter lack of transparency. Also, it is not clear whether the proposed EPCF is the same or different from that proposed by the MoO in October 2021 and sent then to the Ministry of Planning-MoP for inclusion under the investment provisions of the state budget. And, what makes the matter murkier is a follow-up statement by the MoO asserting MoC decision was only a "roadmap" as the project is still under study and consideration!!

No surprise, therefore, that the pipeline project and MoC decision ignited powerful reactions, mostly by Iraqi parliamentarians and oil professionals.

These reactions include "parliamentary questions" that require formal answer from the MoO, various public statements by parliamentarians and other legal actions. Two legal cases were field before the FHC by the outspoken parliamentarian Dr. Hanan Fatlawi: a "stay/ restraining order" (Amr walaei) and an appeal case, both dated 16 April 2022. Also, a former member of the parliament, Lawyer, Yosuf Al-Kolabi and a group of lawyers and parliamentarians have been considering launching another appeal before FHC.

For the economic evaluation of the project, I used and calculated three criteria as presented briefly hereunder.

  • Cost of funding (based on EPCF contract according to MoO October 2021 and MoP December 2021 official data) of capital cost ca. $9 billion, funding cost-accumulated interest ca. 1.9billion. Total cost payable in six equal annual installments.

Funding cost, i.e., accumulated interest, ranges between 21% and 109% of capital provided by the contractor, depending on when these six installments start: after the completion of the pipeline or at the commencement of the construction of the pipeline.

These funding costs are unreasonably high and, if the project is to be financed by the Iraq-China strategic cooperation framework, such cost of funding is totally unacceptable and contravene with the provisions of that framework.

  • Cost of "piped-barrel". This cost was estimated by using full-cycle method; 25 years economic life; $300 million operating cost, $0.25/b transit fee; 4 years construction period with capex distributed evenly; pipeline capacity utilization rate-PCUR ranges from minimum 20% and maximum 80% of designed capacity.

The cost ranges between ca. $10.4/b at 20% PCUR and ca. $2.7/b at 80% PCUR. The implications are if seaborne barrel cost Basra FOB- Aqaba is lower than $10.4/b, it is not rational then for Jordan to import 200kbd through this pipeline AND if it is lower than $2.7/b the pipeline then has ZERO feasibility; it loses any competitiveness!!!

  • Limitation and deception of conventional commercial feasibility indicators such as NPV, IRR and Payback-period; this is due to the intrinsic biasness to oil price and its impact. This was proved analytically and empirically in my previous articles on the pipeline and how such arguments prompt corruption, favoring contractor interest and ignore efficiency considerations.

In addition to the above standalone assessment, this project should be subject to thorough comparative assessment; such comparative evaluation covers exports options comprising existing, possible, and potential alternatives.

This takes me to address very briefly these comparative options for export outlets.

  • Southern route/Basra export outlets. Now KAOT is expanding to add 600kbd and 300kbd within 6 months and, adding one more SPM would add 900kbd; both options are cheaper, quicker, fully sovereign, have more oil marketing flexibility and generate higher "Netback" for Iraq. Hence, either option is more valuable compared to the BAOP from capacity & operation, economic, financial, national economic security, strategic importance, and geopolitical complications among others.
  • The Turkish route provides three options. I- Rehabilitation of pipeline section Kirkuk- Feishkhabor measurement station on Iraq-Turkey borders; II- Use/buy current KRG (KAR/Rosneft) pipeline; III- revive Turkish 2011 proposal for a new Basra-Ceyhan pipeline at, then, $2billion cost for 1.6mbd and 18-24 months construction period. Either option I & II is better than "Part 2" of BAOP, and option III is highly favorable than entire BAOP.
  • The Syrian route. This route has many unique advantages: two pipelines- more than 2mbd; two types of crude- regular and heavy oil; two export facilities- Banias and Tertus on the Mediterranean; pipeline to Lebanon; it goes along Railway line Iraq-Syria; mutually supportive to IIS gas pipeline; it benefits from China's BRI. But this route currently faces formidable geopolitical risks: American policy and military, Qasad, Daesh presence. Also faces opposition from Turkey, SA and Jordan.
  • Rehabilitating IPSA; the pipeline costed Capex $2.7billion, Opex $72 annualy, pipeline capacity 1.65mbd (1990). Using same BAOP methodology IPSA had piped-cost of $1.49/b at 20% PCUR and $0.37/b at 80% PCUR (these should be escalated by annual index increase). IPSA rehabilitation remains viable option with competitive/ comparative advantage (from cost, marketing flexibility and geopolitical complexity) over BAOP if it requires partial rehabilitation. But for complete rehabilitation, this route has one disadvantage since most of it is in Saudi Arabia compared with other routes; but this depends on cost of full rehabilitation.

Pro BAOP arguments emphasis the strategic importance of the project; but Aqaba location refutes such claim. Analytically and empirically three strategic national security equations should not be ignored:

  • Where there are four states that have direct presence in the area, the geopolitical risks are highly probable and thus the geostrategic importance, for Iraq, diminishes; this applies to Aqaba.
  • When a location has Global Strategic Importance, the local geopolitical risks are less probable and less impactful and, thus, geostrategic importance for Iraqi oil exports are secured; this applies to Basra seaboard export outlets via Strait of Hormuz.
  • BAOP-P2 route is highly susceptible to local terrorist and sabotage inside Iraq and Jordan, thus very vulnerable from national security and strategic perspectives.

What to do and the way forward

Recent government move contravenes the constitution on many aspects and thus, any legal action against government action should be supported. The government and MoO in particular, should provide and make the FEED and/or a comprehensive feasibility study publicly available.

BAOP' Frame Agreement is an international bilateral treaty with over 25 years term and, thus it should be debated, approved, and legalized according to the current constitution and valid laws.

Aqaba area is the most vulnerable geopolitically as four states can have very serious impacts: Egypt, Saudi Arabia, Jordan and Israel. Iraqi Ministry of Foreign Affairs should provide its assessment particularly regarding Wadi Araba Agreement between Jordan & Israel and advise on possible implications on this project.

Based on the published data and information, the economic, financial, geopolitical and geostrategic analysis do not support this project and particularly so through thorough comparative assessment. More data and transparency are urgently needed and thus are prerequisite for making final decision on expanding Iraq's oil export outlets.

The debate on this BAOP with my PowerPoint slides, in Arabic, is available through the following link  https://www.youtube.com/watch?v=apg0JY51rQ4

Click here to download the full report in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Debating the Iraq-Jordan Oil Pipeline first appeared on Iraq Business News.

Iraq Petroleum Sector Chronicle, Volume 2 – 2011

Iraq Business News Expert Blogger, Ahmed Mousa Jiyad, has completed the second volume of his chronicle of the Iraqi oil industry, this time covering 2011.

The first volume, published in October 2021, covers the development in the upstream petroleum in Iraq prior to 2011 and has a subtitle "Grand Opening for Big Push Strategy".

The subtitle reflects the mood, sentiments, actions and views that prevailed then both inside and outside Iraq, expecting Iraq to be a game changer in the international petroleum scene; that was premised on the concluded service contracts pursuant to the bid rounds, particularly the first and the second, as evidenced by the contents of volume one of the book.

One year later, in 2011, signs of powerful restraints began to emerge and thoughts for revising downwards the unrealistic, unattainable oil production targets were contemplated; many views and opinions covered by volume 2 of the book were explicitly or implicitly advocating such revision.

Hence, the subtitle for this second volume reflects that dramatic shift from high expectations originally formulated after concluding the above mentioned contracts; it is "A Game Changer, No More".

Click here to read the introduction to the book.

The post Iraq Petroleum Sector Chronicle, Volume 2 - 2011 first appeared on Iraq Business News.

Ahmed Mousa Jiyad: Nullification of KRG Oil Contracts

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

KRG' Contracts, Laws and Oil Exports are Unconstitutional and Nullified, Federal Supreme Court Decides

Federal Supreme Court-FSC in Iraq issued, after ten years of debate and deliberate procrastination tactics, a long-waited constitutional verdict; a sweeping unprecedented verdict that could surely have very serious long lasting ramifications on the legality of upstream petroleum contracts and agreements concluded by Kurdistan Region Government-KRG and, consequently on the entire upstream petroleum sub-sector in the country.

The nine men judges took a majority, of seven, decision; all signed the verdict without specifying who the dissented are.  The Chief Justice, Chairman of the Court signed every of the 15 page verdict. FSC decisions, according to the 2005 Constitution are final, should be uphold, implemented and adhered to by all parties of the case and all other authorities in the country from now on.

The 15 page document, dated and publically announced on 15 February 2022, elaborated the case at length, which goes back to 2012, though, actually, the root of the case goes much earlier than that. Many, including myself, argued for years that KRG actions, laws, contracts and agreements contravene both the 2005 Constitution and earlier legal governing modalities, and thus, inflicting serious damages to the interests of the Iraqi people.

This is a quick brief intervention from me, as this verdict introduces substantive impacting game-changing rulings that eradicate the fate-a-comply, probably create a new normal in Iraq's upstream petroleum and causing seismic uncertainty for IOCs in Kurdistan; there will be much more attention to and writings about the verdict, its pros and cons, and its ramifications in the weeks rather than months ahead.

What the Verdict Says

The following are my translation, wording and highlights of the specific components of the verdict:

  • KRG Oil and Gas Law number 22 of 2007 is unconstitutional and thus nullified for contravening articles 110, 111, 112, 115, 121 and 130 of the 2005 Constitution.
  • KRG is obliged to deliver all oil produced from oil fields in KR and other areas where the KRG' Ministry of Natural Resources-KRGMNR had extracted oil from, and deliver all such oil to the federal government represented by the Federal Ministry of Oil-FMO and enabling FMO to exercise its constitutional authorities with regards to exploration, extraction and exporting oil.
  • FMO have the right to pursue and follow-up the illegality of oil contracts and agreements concluded by KRGMNR with all external parties, states and companies, regarding exploration, extraction, exporting and selling oil.
  • Obligate KRG to enable FMO and the Federal Board of Supreme Audit -FBSA to review all oil contracts concluded by KRG regarding export and sell of oil and gas to audit these contracts and determine the federal financial dues that KRG should re-pay back. And to determine KR share in the state budget to insure the delivery of the rights/ entitlements of KR' citizens and governorates from the federal state budget without delay, after KRG implement all contents of this verdict and inform that to federal government and FBSA.

In addition to the above four basic items of the verdict, FSC made further important assertions throuout the document.

  • The federal authorities are constitutionaly mandated regarding soveriegn economic and trade external policy; therefore, it is not permissible that governorates and regions in all of Iraq exercise this exclusive role instead of the federal authorities; as such exercise by governorates and regions contravens the conctitution.
  • The Iraqi people have the rights to and should know all about oil and gas revenues and how such revenues are distributed since they are the owner of oil and gas.
  • KRG' noncompliance with the federal authorities exclusive mandates regarding oil and gas had caused complications between the federal government and KRG and that in turn prevented the delivery of KR people share in the annual state budgets.
  • KRG should comply with and adheer to the constitutional exclusive mandates of the federal authorities including exclusive mandates regrading oil and gas exploration, extraction and export; such compliance enables KR people receiving their due entitlments from the annual state budgets.

And in a follow-up statement, FSC asserts that during the deliberations of a legal case before US courts in September 2015, KRG representative had, after losing the case, requested re-routing the oil shipment from US to delivery in Israel; the US court refused even that request. The rulling of that case was in line with and substantiates current FSC verdict.

What Next

The urgency of the matter and the scope of the FSC decision require taking promptly serious specific steps and actions to comply with and implement the said decision. For this purpose I proposed, on 15 February 2022, to the authorities, particularly the Federal Ministry of Oil forming a special team comprising well qualified experienced staff members and tasked with the following:

1- Receiving copies of all contracts signed by KRG for each oil/gas field and exploration block and all amendments to those contracts;

2- Receiving all documents, accounts, development plans and data relating to the development, production, export, cost and revenues relating to those fields to date;

3- In light of assessing the contracts and documents mentioned in the two paragraphs above, an "alternative model service contract-AMSC" is prepared to replace the current production sharing contracts/agreements- PSCs/As, and any other upstream contracts enforced by KRG; the proposed AMSC is guided by and premised on the experience of Al-Ahdab oilfield contract, which was converted from a production sharing contract to a service contract, and the service contracts signed by the Ministry resulting from the first four licensing rounds only;

4- Preparing alternatives and options to be presented to the IOCs contracted with KRG, including accepting the AMSC and then negotiating to determine the specifics and numerical values of the basic variables in it, such as remuneration fees, capital cost recovery ratio, ... etc., in light of the specificity of the field concerned; or to relinquish IOC participation interest in the contracts signed with KRG; or any other feasible alternatives.

5- Publically announce that the presence of every IOC currently operating in the KR and do not comply with and adhere to the Federal Supreme Court decision is considered illegal and unconstitutional, and thus that company bears the consequences of its illegal presence and operation in Iraq;

6- Assessing how to deal with oil pipelines in the region, including the pipeline invested by the Russian company Rosneft;

7- Rapid, effective and constructive cooperation between the Ministry and the Iraqi Council of Representatives-CoRs, through forming a joint committee comprising members of known professional and legal experience, to approve the AMSC that would be the base for insuring CoRs approval of the final AMSCs upon concluding them with the IOCs operating now in the KR; this provides solid legal premise for any concluded AMSCs, reduces risks and enhances certainty.

8- Preparing a plan of action at the international level, through legal, diplomatic and oil industry means, to publicise FSC decision as widely as possible, its implementation and consequence of non-compliance by IOCs currently working in KR-Iraq;

9- Cooperating with SOMO for notifying international oil buyers, oil tanker companies, and insurance companies of the legal consequences of the Federal Court's decision and consequence of non-compliance;

10 - Coordination with the Ministry of Finance regarding the implementation of FSC decision regarding articles relating to the KR share in the state budget law for the current year.

The federal authorities should act and act quickly, firmly, openly and transparently. This decision by FSC provides strong and timely support to Iraq's case of arbitration that has been before ICC- Parise for years, a resolution of which is anticipated in the coming few months.

Officially so far, the National Security Ministerial Council, chaired by the Prime Minister convened on 16 February and tasked the Ministry of Oil to coordinate with KRG, the states and oil companies regarding the implementation of this verdict.

Views and Reactions

Expectedly, reaction to and views on the verdict were prompt and diverge; most are supportive but some are bewildered and very few are condemning; this is very natural and expected in the Iraqi discourse.

Reactions of Kurdish Barzani family, KRG and Kurdish Parliament in Erbil were sharp, harsh, hot-tempered and regrettable. Masoud Barzani says the verdict is "purely political and against Kurdistan"; KRG even accused the Supreme Federal Courte of being "unconstitutional" and vowed to "defend" its oil and gas contracts; a statement by the Kurdish Parliament followed similar line of accusations for refusing the verdict. This type of reaction weakens further KRG stand and contravenes its repeated claim for upholding and adhering to the Constitution!!!!!!!!

On the other hand, many other known Kurdish parliamentarians, politicians and parties are cautiously supportive.

But the most interesting socio-political development which could indicates a dramatic shift in the Kurdish public opinion and tendencies is a strong public statement endorsed by a big group of Kurds from inside and outside KR Iraq. The statement begins by welcoming the abrogation of KRG' Oil and Gas Law, which it describes, "a Law through which political families monopolise all basic resources.

; it is a remarkable wakeup call and collective social action.

 

Final Remarks

FSC verdict is final; it inflicts serious blow to upstream petroleum legal foundations in Kurdistan Iraq; IOCs operating there are now put on notice and they are advised to prepare themselves for direct talks with the federal ministry of oil and, also, they should demonstrate that the sooner the better; their shares in the bourses might nosedive sharply and their Kurdistan expedition might be over. Keep watching shares movement on the bourses websites!

Also, the verdict asserts significant pro-transparency legal premise, i. e., the Iraqi people by virtue of their ownership of oil and gas, are constitutionally entitled to know all about upstream petroleum contracts, agreements, exports revenues, and how such revenues are shared and utilised for the best interests of all Iraqi people.

We all, including the members of the new parliament, should capitalise on this assertion when addressing the dubious deals and agreements concluded recently, unconstitutionally, by the care-taking government and the Ministry of Oil, particularly and precisely the agreement with the French IOC- TotalEnergies (which I addressed in three recent articles written in Arabic and circulated widely)

The 2007 proposed federal oil and gas law has been, for years, in a coma, now it is dead and buried; it is futile to revive it and so even to consider it as part of the "political deal" for forming the new "national majority" government, which some have called for!!

But, on the other hand, much is at a stake; we are, therefore, destined to witness many interesting developments and propositions, read and write about them. Stay tuned!

Click here to download the full report in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Ahmed Mousa Jiyad: Nullification of KRG Oil Contracts first appeared on Iraq Business News.

Iraq-Jordan Oil Pipeline: Financially Costly, Contractually Complex

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq-Jordan Oil Pipeline -- Financially Costly, Contractually Complex

Since 1983 the Basra-Aqaba, or Iraq-Jordan, oil pipeline (IJOP) has been on and off the screen of the bilateral relation between the two countries.

And from 2011 to date, every Iraqi government had "approved a frame-agreement" relating to the same pipeline, but none of these agreements was published and, thus, nothing known about the terms of these, so claimed, approved agreements!

Scope of the pipeline, route, length, funding, execution, duration and cost have been on a changing course since 2011, but the most dramatic change is the staggering cost, which reportedly, increased from $3 billion to $26 billion between 2016 and 2022!

No surprise, therefore, that this pipeline has been viewed diametrically differently and with absence of full transparency, on the part of the Ministry of Oil (MoO) and its affiliate SCOP, the feasibility of this project remains a pure intelligent guessing.

This article addresses first the different views and what prompted them by recent development and information on the pipeline, then in part two calculates the barrel-cost corresponding to actual pipeline utilization.

Part three examines the re-export options in the comparative, and part four provides cautionary notes on the limitation of cash flow analysis for such a project.

Moving from the quantitative mode to real life environment, part five debates strategic considerations, geopolitical vulnerability and security risks and that is complemented, in part six, by highlighting and identifying the needed contractual and legal modalities; then the article ends with concluding remarks.

Click here to download the full report in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Iraq-Jordan Oil Pipeline: Financially Costly, Contractually Complex first appeared on Iraq Business News.

Jiyad: Iraq’s Oil Licensing Rounds, Ten Years On

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq Oil Licenses Rounds - Views of the Architect and the Technocrat, Ten Years On

Petroleum licensing rounds, 2009-2010, are the most significant and impacting development that took place in post 2003 upstream petroleum and they manifest a grand opining for big push strategy.

These four bid rounds would make Iraq a game-changer with a total production plateau target of more than 12 million barrels daily (mbd) by 2017 from mostly supper giant and giant oilfields with a combined 68% of the country's proven reserves.

Number of directly contracted international oil companies (IOCs) exceeds 15, belonging to 12 countries including the five permanent members of the UN Security council. The governing modality is a long term service contract, a uniquely hybrid type, with a duration of ca. 30 years each.

The issue, i.e., the licensing rounds, has been and still is divisive and those standing against the bid rounds personalize the debate and were persistent in their opposition to the extent that they managed to introduce legal obligations to revise them.

That concerted anti efforts succeeded in forcing the Ministry of Oil (MoO), in 2018, to premised its fifth bid round on "profit-sharing contracts, which is the monetary side of production-sharing contract; MoO was, obviously, ill-advised and badly too.

Click here to download the full report in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Jiyad: Iraq's Oil Licensing Rounds, Ten Years On first appeared on Iraq Business News.

Jiyad: IEITI Annual Reports Continue, but Changes are Needed

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

IEITI Annual Reports Continue but Changes in Form, Quality and Substance are Crucial and Needed

Iraq Extractive Industry Transparency Initiative (IEITI) issued its 2018 annual report and, currently, is processing its combined annual report, i.e., for 2019 and 2020 in a single issue.

Releasing the annual reports, though with two year time-lag, is undoubtedly commendable efforts. But the qualitative aspects and lack of impacts of these reports have been constantly identified with flaws and, thus, cause much concerns and raise very serious questions.

Consequently call upon IEITI and EITI is long overdue to undertake thorough revision aiming at making such annual reports different, better, relevant and helpful in enhancing real and effective transparency in the extractive industry in Iraq, more than what has been the case so far.

IEITI issued its tenth annual report, covering 2018, by end March 2021. 2018 preliminary report was delivered on 5 February 2020 and the final version was supposed to be released by latest end of 2020. Due to Covid-19 effect an extension of three months was granted by the International Secretariat of EITI- Oslo; it was release by 20 March 2021.

Currently, IEITI is processing its combined annual report, i.e., for 2019 and 2020 in a single issue; the preliminary report was presented to the MSG on September 2021 and the final report is scheduled for publication on March 2022.

Davinci Consulting / Geneva Group international (DCGGI) was contracted as the Independent Administrator- IP (according to EITI guidelines) to produce the annual reports for 2018, 2019 and 2020.

I reviewed all previous nine IEITI annual reports, and this current review is a continuation of my constant follow-up and monitoring of IEITI activities and my database relating to this topic.

This review covers first IEITI 2018 report followed by brief notes on the preliminary report of the forthcoming 2019/2020 combine report and ends with a few concluding remarks

IEITI 2018 Report

The 2018 Report comprises seven sections with executive summary and list for terms and abbreviations. It is a rather long report, 131 pages, and has 25 files (accessed through different web-links)

After reading the report I can make the following brief remarks on this report.

The executive summary, comparative to previous annual reports, is poor and  limited in coverage, conceptually ambiguous, misleading and, though it is short, its' data was presented twice in tabular and graphic forms; totally unnecessary.

Except a few substantive improvements much of the contents of the main report were repetition from previous reports and sometimes using the usual copy, modify and paste- CMP method.

The web-links to the above mentioned 25 files indicate those files are either prepared or provided by the related entities, mostly Iraqi entities. Some of the files are in MS Excel with many sheets of varying size, while others are in MS Word.

The consultant, i.e., the IP did not analyse or provide explanatory notes or reconciliation of the contents of most of these files. A random check on the contents of some of these files raises many questions on the validity, accuracy and relevance of their contents. IP left the burden of assessing and using these files on the readers. And since no comments on or revision of the annual report were posted on IEITI website, it seems the MSG members, probably did not read thoroughly the report itself and most or all these 25 files!!!

The reports uses excessively and unjustifiable both tabulations and graphs even for simple two items; this lengthened the report (page wise) and increase its size (bitwise). Moreover, some of the graphs are confused and confusing.

All tables in the reports haves no number and no title and some of them are not professionally done. No references were provided for these tables and thus, it is impossible to check their accuracy or validate their contents.

There are many methodological and conceptual flaws, which could cause serious misunderstanding; below are a few examples.

Neither all activities of the Ministry of Oil nor all activities of the Ministry of Industry and Minerals are "extractive"!!!

Similarly, "associated gas", "free gas", "dome gas" all are "natural gas"; but the distinction between them is vital when one considers their data and how it is used. Moreover the term "gas burnt non-investable" is technically wrong and misleading as it justifies flaring!!!!  Also there is difference between "liquid gas" and LPG!!

There is no "Amman" oil in SOMO's export price setting mechanism for the Asian market. This error has been repeated in previous annual reports due to CMP method; but, why SOMO representative in the MSG did not correct this apparent repetitive flaw!!

Also SOMO do not use "ICE Brent" or "NYMEX WTI" as marker crudes in its price formula for European and Americas markets.

SOMO is not "The revenue recipient government agency" for "Crude oil exports" and not recipient government agency for "the value of oil loaded by IOCs operating within the licensing rounds".!!!!

Moreover, IOBs do not make direct payment of export revenues to DFI.

When it comes to SOMO, the IP seems to be totally confused in understanding the role of SOMO and the flowchart of oil export revenues, or different parts of the report were written by different people without coordination among them!!!

The focus on "Budget allocation" and "actual transfer" regarding petrodollar and governorate development funds is misleading because it ignores the chronic problems regarding actual spending and how it was done; as the experience since 2010 demonstrates.

There is no West Qurna oilfield; what there are WQ1 and WQ2 oilfields and each is contracted to very different consortiums of IOCs, offered under different bid rounds and thus having different technical service contracts.

Moreover, Majnoon oilfield has been under the National Efforts since mid-2018.

There are no reconciliation done for "Quantities and Values of Crude Oil, Oil Products and Gas provide to Refineries, Oil Products Distribution Company and Ministry of Electricity during" between related entities and MoE.

Occidental (Oxy) relinquished its participation interest in Zubair oilfields in 2016; so why it lifted more than 7.6 million barrels in 2018!!

I have computed that average oil price for "Crude oil lifted by the licensing round companies in exchange for cost recovery and remuneration fees entitled to them" was $64.29426 a barrel, while the average oil price for "Exported crude oil to International Oil Buyers" was $65.73435 a barrel; IP provides no explanation or clarification for this price differentials or aware of it at all??

The report provides no information or data on DFI but refers to 18 page report, so who supposed to do the needed reconciliation comparative to SOMO or IOBs data!!??

The Report says "The revenues of crude oil exports in both the federal Iraq and the Kurdistan region are considered material revenues as their contribution to the total revenues of the extraction sector exceeds the materiality threshold of 1%." This is a manifestation of gross confusion and total misunderstanding, on part of the IP, of what "materiality threshold of 1%" is all about and what the purpose behind it.

The percentage of unpaid CIT by IOCs amounts to 19% of due CIT; this huge difference should have been investigated, specified and explained in details by the IP, but did not do it convincingly.

Total oil production was reported without making specific reference to the effect of the natural decline on base-line production particularly for the six oilfields contacted under first bid round. Ignoring this fact is erroneous and causes serious miscalculation especially with regards to remuneration fees and related CIT.

The "the value of internal service payments made by the MoF through SOMO to the North Oil Company to cover the cost of production that is exported" does not correspond to oil exported by this company compared to other NOCs such as Missan OC and ThiQar OC; IP provides no clarification or explanation!!

There are more important comments, but I think the above provides enough indication on the quality of the report.

IEITI Forthcoming Joint 2019/2020 Annual Report

Currently, IEITI is processing its combined annual report, i.e., for 2019 and 2020 in a single issue; the preliminary report (99 pages) was presented on September 2021 and the final report is scheduled for publication on March 2022.

The structure of the preliminary report is, in substance, similar to that for 2018, with one important difference or improvement, i.e., MSG remarks on 2019/20 report.

Item twelve of the preliminary report provide 44 different remarks made by MSG members; some of the remarks are broad and generic, while others are specific and to the point.

It remains to be seen whether and how IP addresses, these remarks as well as my notes mentioned in the previous part above, in its final joint report due in March 2022.

As there are only three months left to deadline for releasing the 2019/2020 annual report, it might be a farfetched hope for a well improved report.

Concluding remarks

  • By end March 2022 IEITI have had issued twelve annual reports; on the face of it this is impressive record. IEITI should have accumulated enough human and systemic professional capacity at its National Secretariat to have active, proactive and impacting contribution in preparing the annual reports and to ensure its quality control;
  • It is about time that IEITI and EITI (IS-Oslo) take a stock of the experience so far and revise the structure, contents, methodology and the process for future annual reports that should focus on recent issues and their future implications more than the repetition of a distant past.
  • Future reports should focus on providing detailed and verified data relating to the operational aspects of bid rounds field development in terms of reconciled costs (Capex and Opex), payments, remuneration fees, taxes-CIT among others more than repetition of their contracts terms that have been known since 2009/2010.
  • Comparative data for field manged by national efforts and those manged by IOCs should be provided in as much details as possible and reconciled accordingly.
  • The same applies to different SOMO activities according to a well-articulated matrix comprising different types of crude for different market configurations and related data reconciliation framework. Records of actual oil export price setting during the year should be provide instead of repeating SOMO's standard document.
  • Corruption has become very serious complex problem in the country, and much of it is in the extractive activities; yet not a single word on corruption was mentioned in IEITI Final Annual Report 2018 or in the preliminary report for 2018/2020 report. Future IEITI should provide sufficient cover on this issue.
  • All contracts signed under the bid rounds have mandatory obligations to undertake at least two Environmental Impact Assessments-EIAs. IEITI annual report should call upon MoO and related IOCs to undertake and publish these EIAs.
  • All contracts signed under the bid rounds have non-refundable contribution to TTS Fund which has a total annual allocation that exceeds $55 million. IEITI annual report should provide comprehensive reconciled data on the annual utilisation for such funding.
  • A "Validation" mission, as per EITI framework, is scheduled for July 2022; it could be an opportunity to address the necessity and feasibility to improve IEITI future annual reports as proposed here. Unless such change and improvement take place, future IEITI reports will be released unnoticed, with no real impacts and become unnecessary formality.

Click here to download the full report in pdf format.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Jiyad: IEITI Annual Reports Continue, but Changes are Needed first appeared on Iraq Business News.

Iraq Oil Revenue Forecasting Model — A Critical Assessment

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq Revenue Forecasting Model -- A Critical Assessment

INTRODUCTION

This review was prepared upon request from known international organization (XXX) regarding two documents prepared by a consultant (CCC) on Iraq Revenue Forecasting Model, and it comprises the following items: Background, which provides brief information on the deadline and the two documents; the Review Objective Criteria, which guides the assessment of the two documents by using six criterion; the Details of the Review comprises two parts corresponding to the two documents and finally the Review Assessment Matrix, which explains and calculate the final score rate for the two documents.

BACKGROUND

After a few email exchanges (XXX) posted two documents on 3 May 2021 and requested the peer review to be delivered by COB on 11 May. The first document entitled "EXPLANATORY NOTE OF IRAQ REVENUE FORECASTING MODEL" is in MS Word; hereinafter referred to as "EXPNOTE", while the other is in MS Excel Sheet; hereinafter referred to as "EXLSHEET".

The "EXLSHEET" comprises 22 Sheets and they differ in contents, length and size; they are referred to by their coded-names that appear in the bottom margin of the "EXLSHEET".

(XXX) email mentions, "The model is currently being reviewed by partners before being shared with the Iraq entity (EEE) and its stakeholders in the Ministry of Oil and international oil companies."

My assessment was delivered before the deadline and I suggested to share it with the consultant for further consideration, and requested permission to publish my assessment. (XXX) promised to share it with the consultant and asked me to wait for a couple of months before publishing it; it is today 14 December or more than seven months.

For ethical norms and considerations the names of the international organization (XXX), the consultant (CCC), the Iraq entity (EEE) and relevant entities (PPPPPPPPP) in Iraq are not disclosed.

Peer Review Objective Criteria

To conduct the peer review for the "EXPNOTE" and all 22 sheets in the "EXLSHEET" I formulated and was guided by the following criteria:

  1. The conformity and adherence of the two documents to an acceptable standard for consultancy service regarding topics related to upstream petroleum; such standard relates to style, format, substance and research and consulting service ethics;
  2. The qualitative aspects of the consultant methodology, strength of arguments, analysis consistency and coherence; the accuracy, validity, relevance of inputs, particularly used data; quality control of the computation, charts and contents of the "EXLSHEET";
  3. The "add-value/ knowledge impact" for the intended client, particularly the usefulness of the entire consulting assignment to relevant entities (PPPPPPPPP) in Iraq;
  4. The consultant work is basically relating to 11 oil projects, hence, the work and findings of the consultant was assessed according to the contractual provisions of the related signed contracts; and also since the above mentioned Iraqi entities and IOCs are the direct parties to these contracts.
  5. Also the consultant dwelled heavily on export price and revenues, thus the analysis and finding will be assessed comparative to SOMO's price setting mechanisms, markets configuration and marketing modalities. Such comparative assessment complies with verification and evidence-based consulting and research methodology;
  6. The test of reality vs. expectation. Experience with modelling and forecasting indicates that reality seldom coincides with expectation. Hence, the consultant' "forecasting the past" will be tested against actual, historical official data regarding oil production, oil export, oil prices and oil export revenues. The outcome of reality vs. expectation test has implications for assessing the usefulness and reliability of forecasting the future by the same proposed model.

DETAILS OF THE PEER REVIEW

Part one:

EXPLANATORY NOTE OF IRAQ REVENUE FORECASTING MODEL- "EXPNOTE"

The Following remarks are made after deep and thorough examination of "EXPNOTE" text:

  1. This document is by definition an explanatory note, but where is the main report for this assignment? Usually, consulting assignment of quantitative nature comprises a main report, annexes, explanatory note and references. Hence, something was missing and neither the explanatory note nor annexes, in this case the "EXLSHEET", replaces the main report!!. The consultant seems to apply "trust me" this is a model for forecasting Iraq's revenue even without specifying, at the outset, what type of revenue!!
  2. "EXPNOTE" says, "The model is built according to the FAST standard of financial modelling". But what FAST stand for, what are its standard of financial modelling and are the standard peculiar to upstream petroleum or for general purpose!! Does FAST has mathematical, statistical specific format or it is just a computation process using Excel facilities? Is there any reference to FAST and evidence supportive to its usefulness for upstream petroleum projects? Hence, the Model is not provided and FAST modelling is unknown; this is methodological flaw.
  3. One of the model two purposes is to "forecast the past"!!! This is both surprising and erroneous since detailed data on oil production, oil exports and oil production is available on monthly bases since mid-2007! so what is the need to forecast the past??; this not only manifests lack of information on the part of the consultant, but also seems the consultant had committed serious error of judgement, as might be interpreted to reflects arrogance, pompousness mentality thinking, "we know it better than you"!!!!!Further discussion on the validity, reliability and test of "forecast the past" is provided in Part Two below.
  4. "EXPNOTE" states, "although SOMO publishes export sales, these figures are before the recovery of costs and payment of fees to the operating companies". There are many flaws in such invalid statement: first; SOMO is oil marketing company while cost recovery and payment of fees to IOCs are the responsibility of other entities within the Ministry of Oil-MoO and they are paid in accordance with the related service contracts; second, SOMO export reports are monthly, while payment to IOCs are on quarterly base after auditing and verification of invoices presented in the previous quarter; third, most payment to IOCs are made in kind as per contract provision and oil lifting protocol that is elaborated in each oilfield related service contract (in Addendums two and four). It appears the consultant is not familiar with the technicalities and contractual provisions relating to SOMO' export reporting and MoO payment to IOCs;
  5. The consultant uses long and tedious calculations to "estimate production which is not exported." On this I have the following remarks: first, data on oil production and allocation between export and domestic demand has been available for years and they are published on monthly bases. Therefore, there is absolutely no need to estimate what is already available. Second, the approach of "factor the field-level synthesised estimates of production against recorded exports" is conceptually and methodologically incorrect and third, as we shall see and prove that the consultant computation and estimate of production not exported was totally wrong and based on inaccurate understanding (see item 11 in Part Two below). Hence, the consultant argument for "estimate production which is not exported" is not valid and misleading and the computation model is wrong. For example the consultant model estimates 32% of production in February 2021 was for domestic consumption, while actual formal data shows only 12.21% during same month, indicating a margin of error in the consultant model of 148.32%; unusual high error margin in testing the model estimation against actual reality. Therefore, all what is written in "Estimating Production: synthesised field-level production estimates" fail the test of accuracy, validity and relevance.
  6. In "Estimating Price", the consultant refers to "discounts for Iraqi crudes". Data and SOMO monthly price setting mechanism disapprove such assertion. SOMO uses different «price formulas" each has its own qualitative variables API, Sulphur content, destination and Marker crude; discounts and premiums are dependent on marketing conditions, in addition to special formula for Jordan, and almost two shipment a month, 2mb each, sold on spot platform that gives "extra price" compared to the usual "term contract" for that particular month. It appears the consultant knows very little about SOMOs oil price setting modalities. Further remarks will be provided later when comparing consultant price estimation to SOMO's export price (See items 3, 5, 9 and 10 in Part Two below)
  7. The model estimation reported under, "Current Results", are all wrong because the estimated export sales for 2020 were much higher than actual official export revenues (see further details on the Dashboard Sheet in in Part Two below). Again, the model estimation fails under the test of comparison with actual data: i.e., reality.
  8. The consultant argument regarding "Basra-Ceyhan differentials" is weak, vague. irrelevant and not convincing for the following reasons: first it is not specific whether the consultant argument is related to volume or value of export; second, due to pipeline problem Iraq export through Ceyhan have been very limited (according to final official export data for the first quarter this year 96.239% of Iraqi oil was exported from Basra, generating 96.341% of total oil export revenues); third, State Budget Law 2021 obliges KRG to deliver, at SOMO export price, 250000 per day. Hence the consultant is apparently unaware of these facts!!!
  9. The information and argument presented by the consultant regarding the "R-factor" are also inconsistent, misleading and inaccurate; first, the consultant says "details of the terms of the R-factor are not available": this is not true as articles addressing this issue and computation of its impact were available on the public domain since 2010!!. Second, disregarding R-factor reduces government take and thus, increases the disparity between actual government take and "net to the government" as called by the consultant; third, the reference to "Faihaa field" is misleading and disingenuous since the field was offered under BR4 (exploration blocks) and it is at very early stage of development and, thus, its contribution to total oil production is very insignificant to have an impact: in the meantime the consultant ignores other important sources of revenues (see next items 10, 11 and 12). Finally, the claim that the analysis "shows a potential margin of error of a maximum of 1.63%" is baseless and deceptive (see item 8 regarding "Analysis Sheet" in Part Two below)
  10. The assignment did not attempt to estimate government revenues from domestically consumed oil!! No reason was provided!! Why, then, the consultant used time and efforts to "synthesized production" when related data are already available on the public domain?? Finally why and in what way domestic revenues impact "Margins of Uncertainty" in the model computation??
  11. Both documents exclude oil production from field managed by National Effort, especially those not contracted to IOCs under the four bid rounds. Also they did not cover two oilfields offered under BR2. It is not clear why the consultant excludes these oilfields and did not say a word about them?? Ignoring oilfields managed by national efforts has significant role in underestimating government revenues and thus, such exclusion is serious flaw.
  12. Also both documents do not include production and export revenues for LPG, NGL, Naphtha and Fuel oil. Why these are out of the consultant scope is unclear, though data on these items is available on the public domain. Again, ignoring them is additional shortcoming of the two documents.
  13. Throughout the two documents data selection and referencing them raises further concerns. Professionally and methodologically it is vital to differentiate between convenient "selectivity" and "thoroughness". Briefly, when data are available on the public domain but are not used or referred to by the consultant that reflects serious professional weakness, unethical, and manifest lake of thoroughness; i.e., the consultant should have searched thoroughly for the related and relevant data. When data are available on the public domain but are not used by the consultant, instead the consultant "synthesised" or "forecast the past" based on wrong premises and inaccurate understanding of the basic issues, that resembles serious infringement of methodological, professional and research ethics. When the consultant present limited selective referencing to data (mostly in the "EXLSHEET" document) that only reflect convenience for the consultant. Moreover, when that selective referencing is not related to the computed item (e.g. WQ1 "EXLSHEET": Row 35 vs. Row 59) causes confusion for the intended client or user!!
  14. "EXPNOTE" asserts,"The model is designed to be updated". But all hundreds, if not thousands, cells in the "EXLSHEET" that contains computable values are codified pursuant to MS Excel program, e.g. all cells in WQ1 "EXLSHEET": Row 66 to Row 72. To update the model these cells should be changed and, thus, the intended client and user must have good and professional experience with MS Excel; this is highly unlikely. If the clients (e.g., PPPPPPPPP) have good and professional specialists with MS Excel, they could use their model, since there is nothing intrinsic about "EXPNOTE" and "EXLSHEET". For example the clients specialists can use the "Formulas" offered by MS Excel program and the good data they do have already; they could, then, arrive at more valuable, consistent, tested and acceptable results, much better than "EXPNOTE" and "EXLSHEET" offer!.
  15. All above mentioned remarks, shed serious doubt on the entire work of this consultant, and, hence, limits its value or add knowledge to the intended clients. This view is further enhanced by more remarks on the "EXLSHEET" as summarised in the following part two.

Part Two: Reviewing "EXLSHEET"

"EXLSHEET" comprises 22 Sheets and they differ in contents, length and size; they are  referred to by their coded-names that appear in the bottom margin of the "EXLSHEET" document.

By going through all of them prompted me to register large number of notes, remarks and questions; the more I read and check, the more I became concerned about the contents of the spreadsheets. Thorough and complete review and checking is daunting task and requires much longer time than (XXX) deadline permits. Hence, the following is very condensed peer review of "EXLSHEET".

1- Excel Sheet "SynthProd" provide a chart titled "Iraq: synthesized field production profile". The following remarks are made on this sheet: A- there is no "Missan" field; what is there (according to first bid round- BR1) three oilfields in Missan province that were contracted under one contract while they have different profiles and locations (the consultant provides no note on this and thus gives the impression as if it is one field); B- it ignores oilfields developed and managed by National Efforts"; C- it excludes two fields offered under BR2!!! D- as shall be discovered later (see item 11 in part two below) all such synthesized field production profiles were based on wrong premised computations, and this raises serious research and consulting ethical questions and standard.

2- Excel Sheet "RP- Brent". Many observations are register on this sheet: A- chart titles are missing; B- "Y & X" axis titles and their unites of measurement are missing; C- one chart hast two trend lines and equations without specifying which is which; D- R2 values for the two equations are very low, indicating weak statistical significance. E- Moreover, the table has no title, no unit of measurement and what "Y" and the other two columns represent???? F- These are simple trend-line equations that are computed instantly/automatically by Excel sheet, but the consultant provides absolutely no explanation or notes on the usefulness of these equations and used them regardless; G- the intended client and user have to wonder what these charts and table are about!! Hence, this is serious professional flaw and the sheet has zero value for the client!!

3- Excel Sheet "Brent vs. realised ". Questions on this sheet are: A- which "Brent" was it: dated, futures or spot ( such as the monthly EIA' STOE or S&P Platts or Argus etc.)?; B- what is the source for the data?; C- for "SOMO weighted realized price" what is/ are the used "weights", why and what is the source for the used "weights"?; D- how the "SOMO weighted realized price" is different from "SOMO published export prices"?; E- finally what about "Brent" was it also weighted, by what weight or no and why!!!

4- Excel Sheet "Production". Remarks on this sheet are: A- unit of measurement is missing; B- what is the consultant explanation of an illogical contradiction that SOMO exports were higher than the "Synthesized Production" prior to 01.01.2012, as this shed serious doubt on the consultant calculation??; C- what is the consultant explanation of the odd event as per 01.01.2015 when SOMO Export up while EIA production down compared with previous year??; D- also the consultant fails to explain why  the "Synthesized Production" was higher than EIA production during 2014!!

All that reflect the mechanical manner in preparing the synthesized production without considering well-known major events that impacted Iraq' production and export!!

5- Excel Sheet "Revenues" calls for the following remarks and questions: A- chart title is ambiguous: does it refer to "total" or "oil export" or "oil sector" revenues; B- the details of IMF and EITI references are missing; C-  was it IEITI or EITI ????; D- the consultant did not explain the pattern of all three data sets: why "EITI" data are higher than both IMF and SOMO during 2010-13, then it turns lower than both during 2014-16, then goes above both after 2016, when IEITI revenue data are provided by SOMO!! Can this be explained by the mixing up, by the consultant, of the usual differences between the "preliminary" and "final" SOMO's monthly data??!!

6- Excel Sheet "Time-Esc": this seems to be a templet Sheet for calculations. But comments and clarifications are missing, no definition of terms and acronyms are provided and some components such as discount rate, discount type, inflation rate and index are not used or referred to in other excel sheets; so what is the justification for having and computing them in abstract!! Ironically, some of these rates were computed up to 1 November 2025 (e.g., Rows: 61 and 62 on "inflation index" without specifying whether this applies to "cost recovery" or "oil price" or both; Rows: 71 and 72 on "Discounting rate" without specifying to which cash flow this applies)

The "Timing" rows (from day one of the month to last day) is repeated many times in this sheet and also in all other sheets: this format is totally unnecessary (it could be replaced easily by the name of the month) and, together with other components in this "Time-Esc" could overwhelm the user or the intended client with too many inputs, too much computations and extremely large number of codified cells.

This templet sheet manifests and could also explain the mechanical application of MS Excel by the consultant!!

7- Oilfield Excel Sheets. Most of the remarks mentioned above are generated from the Excel Sheets for the 11 covered oilfields. A comprehensive peer review of each of these sheets takes much longer time. But a quick checking reveals many flaws and shortcomings that shed serious doubt on the accuracy of the entire work.

For example Excel Sheet for Zubair' Row 136 it was written ""Rumaila daily production"; what Rumaila has to do with Zubair oil production!!!!???? Moreover, "daily production" and "incremental production" Rows: 136, 137 and 139 were assumed to be constant for two years: from 01.01.2020 to 31.12.2022; this is totally against a declared policy by the Ministry of Oil-MoO. The inserted data in Row 148 relates to "IOC Remuneration fee"; it is totally wrong; the consultant was not informed about the changes in the Zubair consortium composition!! Moreover, why the values change when both, "daily production" and "incremental production" were assumed constant!!?? Also what is the difference between "SOC payment to Treasury" (Row 162 which has "45%" of what? but no values inserted in the row) and "SOC Transfer to Treasury" (Row 163, which shows fluctuating values during the entire period despite constant "daily production" and "incremental production"!!! Finally, the consultant provides no further notes on the fiscal system for Zubair oilfields that reflects the situation as on 2020.

The case for Majnoon oilfield is even more disturbing. In addition to all remarks I made above regarding Zubair oilfield are also valid here, the consultant seems unaware that Majnoon oilfield has been relinquished since 2018 and is now developed under the national efforts. This means no cost recovery and remuneration fee to IOC and thus all calculations are invalid and have absolutely zero value. This manifests the mechanical use of MS Excel by the consultant without full, updated and correct understanding of the fiscal system of the upstream petroleum under Iraq' long term service contracts.

8- Excel Sheet "Analysis". This is the core sheet for the entire calculations, and it is the largest sheet with column number reaches (FJ) and 554 rows. Thus it deserves careful attention and requires much more time to go through it thoroughly, but based on the below remarks, this sheet causes much concern and raises too many questions and remarks.

The sheet begins with confusion: in Row 1 written "RUMAILA", but the remaining rows are not confined to Rumaila oilfield!!!.

All data for rows 10 to 20 are or could be wrong; they cannot be in "mbpd"!!!!!!????;

All oilfields offered under first bid round- BR1 were producing on 1.01.2010; therefore the data for 2010 for those oilfields are wrong because each of those fields has "baseline production", which the consultant excluded them;

Data for rows 10 to 20 are labeled "Historical production", while data for rows 38 to 49 are labeled "Synthesised production", but the data are exactly the same to the last digit!! So what is the difference between the two sets of data??? As this causes confusion and also generates and replication consequences on the entire work, calculation and the chart in the consultant Excel spreadsheet;

All data in row 62 are or could be wrong; they cannot be in "mbpd", and most likely the individual who prepared this Excel spreadsheet is not careful in selecting the "unit of measurement" or inconsistent in using defined acronyms and in using number format for Excel spreadsheet (i.e., a difference between "1066 and 1,066 since 1.066 is not permitted).

A major problem with this Excel Sheet "Analysis" is that it replicates or recycles all type of flaws that are identified in all the 22 Excel Sheets, particularly those related to specific oilfields, oil prices and oil production.

The magnitude of flaws, ambiguities, inaccuracies and absence of explanations in this core spread sheet manifest alarming poor quality control of the entire work under review!!

9- Oil price in Oilfield Excel Sheet. For example "Missan" data on oil "Price" of the related oilfield: rows 103, 104 and 105 and on "Fiscal Regime" (a misconception of revenues!!!! in row 110 (another confused data unit of measurement).

All oilfields covered by their related Excel Sheet have exactly the same oil prices; this "all fields same price" is absolutely not possible, and thus seriously wrong, since these oil fields produce crudes that are qualitatively different  in terms of gravity (API), Sulphur contents and other particulars. The implications of this wrong price estimation should cause serious concerns because the contractual deemed revenues-DR depends largely on the quality of the crude and DR decides the cost recovery. Moreover, DR is, again contractually, is measured at the "delivery point" on the boarder of the oilfield not at the export terminal. Hence, the consultant approach to use unified set of oil price for all oilfields and for the covered period was not only wrong but also leads to higher amount of cost recovery; this is very serious flaw with damaging implications.

10- Another flaw is related to Basra oil price: in Excel Sheet "Mth Inputs" Row 15 the consultant uses "Basra oil price" and in Row 27 uses "Basra light"; but both price sets are identical. From oil marketing this is also wrong and not possible. In reality Iraq markets three qualitatively different crudes from the southern exports outlet: Basra Light, Basra Medium and Basra Heavy, and each have different prices whether that through the usual "Term Contract" or through the monthly limited direct/spot sales.

Finally, the differentials between "Basra light" prices and "all fields same price" was very thin and in five months it was even negative, i.e., "Basra light" prices was lower than "all fields same price"; this almost impossible oil marketing scenario adds more doubt on the professional competence and quality of the consulting work.

11- All calculations relating to the "Incremental production", (Row 137) in the Excel Sheets for Halfaya, for Gharraf, WQ2, Badra and Majnoon (under BR2), Faihaa (BR4) and Ahdab (converted contract prior to BR1), are wrong since they contravene the related contracts, which has no incremental production. Moreover, the computation equations for the cells in the said row are wrong technically and geologically since it assumes a lasting initial production, i.e. no natural decline!!! As for Rumaila, WQ1, Zubair and the 3 Missan fields (under BR1) all are also wrong since they contravene the related contractual provisions; which has annual natural decline rate of the base-line (initial) production!!!

These wrong calculations lead, logically and practically, to underestimation of fields development efforts and their production, to wrong estimation of cost recovery and remuneration fee for all covered oilfields; what was premised on wrong understanding produces wrong results and, thus, should be disregarded.

12- The "Dashboard" Sheet contains selected charts from other sheets; thus all remarks made on these sheets are valid here. In other words, this "Dashboard" Sheet replicates all flaws, wrong calculations, misconceptions and inaccuracies (The reader is highly advised to see the comments made on Excel Sheets that are reproduced in this "Dashboard" Sheet).

In addition, the following remarks are made on this "Dashboard" Sheet: the "table" referred to in G6 was not provided!!; "Brent Futures Price Scenario" was not explained; the table (on Rows18 to 34) has no unit of measurement; the estimated export sales for 2020 is much higher than actual export oil revenues officially announced by SOMO/MoO by 22.4%. When estimation against actual (historical) data results in such margin of error, that margin of error could be even higher in forecasting the future!!!

Moreover, the cells in Rows 51 to 55 look mysterious with absolutely no explanation or clarifications:

Finally, as was the case with "Analysis" sheet, "Dashboard" sheet replicates or recycles all type of flaws that are identified on the reproduced charts.

13- Operating cost was not mentioned in the two documents "EXPNOTE" and "EXLSHEET". Not a single row in any of the field' related sheets mentions the operating cost for oil produced in the related field. The consultant provides no explanation for excluding this significant cost item from estimating government revenues.

Ignoring operating cost is a major and additional flaw that reduces further the soundness and usefulness of "EXPNOTE" and "EXLSHEET".

14- All Excel sheets and their components could overwhelm (intimidate) the user or the intended client with too many inputs, too much repetition, too much computations and extremely large number of codified cells. One cannot speculate whether that was intentional or due to professional deficiency on the part of the consultant; but, it is highly likely that the current version of "EXPNOTE" and "EXLSHEET" has very limited value, if any, to the user or the intended clients in Iraq.

The Review Assessment Matrix

This final part intends to summarise the result of assessing both documents, "EXPNOTE" and "EXLSHEET" that were presented by the consultant. The following matrix was premised on the six objective criteria mentioned earlier and the evaluation score for each criterion.

The score ranges from (1), which means "bad", through (3), which means "acceptable but not satisfactory" to (5), which means "very good".

The six criteria have equall values, and each score was decided in the light of the above details in this peer review:

Total score under the six criteria ranges from total minimum 6 to total maximum 30 and final score rate (%) is the total gained score to maximum score:

Score rate under 50% means unfavourable assessment of the two documents, which means rejecting the consultant work and should not share it with the user or the intended clients;

Score rate at 50% means the work is acceptable but should be revised to address satisfactorily all what the peer review says before sharing it with the user or the intended clients;

Finally, score over 50% means accepting consultant work and recommends sharing it with the intended user or the intended clients.

Criteria/ Score Matrix

 

Peer Review Objective Criteria/ Score 1 2 3 4 5
Conformity with acceptable standard for consultancy service   2      
The qualitative aspects of the consultant methodology   2      
The "add-value/ knowledge impact" for the intended client   2      
The contractual provisions relating to the 11 projects 1        
SOMO's price setting mechanisms and marketing modalities. 1        
The test of reality vs. expectation 1        
Total Score 3 6 0 0 0
Final Score Rate ((3+6)/30)=30%

The final score rate is 30%, which corresponds to 1.5 on the scale from 1 to 5.

Regretfully, this overall low score indicates that the standard, quality and usefulness of the consultant work are much less than acceptable level.

In an extensive communication with well-respected oil professional and two times oil minister, I learned that the Ministry of Oil has good Ashtar program, which seems to be by far more superior and well-functioning than this "EXLSHEET"; with the presence of Ashtar, the consultancy and its two documents, "EXPNOTE" and "EXLSHEET", become redundant for the clients in Iraq.

 

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Iraq Oil Revenue Forecasting Model -- A Critical Assessment first appeared on Iraq Business News.

Iraq Petroleum Sector Chronicle

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The Iraqi economy structure is lopsided with heavy dependency on export of natural raw material, i.e., crude oil. The modest unbalanced growth that was accumulated by the end of 1970s began eroding and all economic accomplishments had washed-away, gradually, since then. Four decades of wars, sever sanctions, political tyranny and America-led occupation pushed the country into the brinks of a failed state.

The post occupation sectarian political sharing system, known in Iraq al-muhasasa, brought the most devastating manifestation of "resource curse" in the form of formalized legalized high level corruption, or Kleptocracy. When upstream petroleum became, once again but more urgently, the only sector capable for funding annual state budget for social welfare, reconstruction and development, it became the target for the corruptors, the Kleptocrats and domestic politics abuse.

Also, under the then prevailed political order, upstream petroleum redevelopment and development were sought through active and substantive participation of the international oil companies- IOCs; this brings to the fore of debate the complex issues of the political economy of such participation.

The essence of the international political economy of petroleum relationship between the IOCs and a developing economy, e.g., Iraq, is the relative comparative strength of both parties to maximize their interest through any formalized relationship; this is premised on two basic issues: sovereignty and petroleum rent.

Sovereignty relates to ownership of petroleum (both reserves and production) or claim of title on them on one side and the decision making structure and mechanism of that relationship on the other.

Distribution of petroleum (resource) rent is decided formally through the type and terms of the contracting modality on one side and, empirically, through actual management of such contracting modality on the other. "Government take" is the clearest manifestation of rent distribution; the higher is the government take the better it is for the host country, but what matters, in the final analysis, is the actual distribution more than the formal and contractual. This highlights the importance of the effective and efficient contract management, at all levels, during the entire life-cycle of the related contract.

Needless to say that host government and IOCs petroleum relationship are not, always, exclusive to them only, as the subject matter has other geopolitical and geostrategic considerations that go beyond the two parties; this implies the comparative strength of the host government on one side and the IOCs together with the geopolitics of their home-country government on the other has a lot to impact the petroleum relationship and their contractual modalities. More often than not geopolitical pressure and leverage are used to promote, enhance or even guarantee the interest of the IOCs through different ways and means and, when competition is transparent and tense the intervention becomes more intrusive an coercive. Those who failed winning in competitive bidding say that outcome reflects the dark side of transparency!!

One year after the invasion, Iraq pursued in 2004, what seems analytically and proven factually, a Grand Opining Big Push Policy in its petroleum sector by offering IOCs and foreign investors unprecedented opportunities to having access to and expansion in, particularly, upstream petroleum sub-sector.

Between 2004 to end 2008, the Ministry of Oil- MoO concluded over 40 memoranda of understanding/cooperation (MoU/Cs) with IOCs from 23 countries, with overwhelming dominance of the US (9); Japan and Norway (4 each); China, UAE, UK and Canada (2 each) and one company from each of other 16 countries.

For IOCs, MoU/Cs represent invaluable direct contact with Iraqi staff and professionals at all layers of responsibility and provide them access to most archives and database relating to upstream petroleum; that helped IOCs exploring where and what they could do to chart their way towards business in Iraq's upstream petroleum and beyond.

These MoU/Cs contributed in formulating and development of a model contract, and by the time they were terminated MoO succeeded, through direct government-to-government talks (with China), in converting Al-ahdab oilfield from production sharing to service contract.

The first bid round, for producing (brown) oilfields, was held end June 2009, followed by the second bid round for discovered but not commercially developed (green) fields on December 2009 and a third one for free-gas fields in October 2010.

120 IOCs participated in the qualification process for the bid rounds, 55 from 27 countries were qualified: Japan (9); USA (7); Russia (5); China and UK (4 each); Australia, India and Italy (2 each), and 19 other countries with one company each.

The outcome of the three bid rounds and Al-ahdab are: 14 oilfields contracted to 15 IOCs from 12 countries; total contracted/ targeted plateau production was 12.3mbd and their total proven reserves ca. 67 billion barrels (58% of the country's proven reserves at that time). Three gas fields were contracted to 3 IOCs from 3 countries with total plateau production of 820 mcfd and proven reserves of 11.2tcf.

Moreover, the period prior to end 2010 witnessed developments relating to other important issues particularly the proposed federal oil and gas law-FOGL and INOC Law; promulgated private investment in refinery law and proposing many new modern refineries for foreign investors; conclude HoA that led, latter, to establishing Basra Gas Company joint venture with Royal Shell and Mitsubishi among others

Also during those years, the upstream petroleum in the country was a magnet of attention by the occupying countries, the IOCs, international legal and consulting firms and business and  media sources and alike; the number, frequency and substance of what was published internationally on Iraq is a manifestation of that attention. That could be explained by or attributed to a "Newness factor" as the country was reopened for the outside world after almost half a century of restricted access; to the "Invasion factor" that made accessing the country easy after 2003 occupation since the invasion was "all about oil"; to the "Business factor" for IOCs and petroleum service companies to have a share in exploiting the vastness of petroleum in the country; the last frontiers for least cost petroleum. Much of the attention and preference of the occupying forces, IOCs and pro-IOCs entities was for Production Sharing Agreements/Contracts-PSA/C.

On the other side, most Iraqi oil professionals and experts inside the country, particularly from the South Oil Company, and those residing outside the country demonstrated vibrant engagement and strong keenness by calling, individually or collectively, for protecting the country petroleum wealth through sovereign national efforts and opposing any form of PSA/C; they premised their stand on still valid important laws and the 2005 Constitution.

Obviously, the course of events prior to end 2010 highlights different pathways for upstream petroleum contracting modalities; long term service contract emerged as the preferable choice.

One of the International Compact with Iraq-ICI offspring's was the formalization, for the first time in modern Iraq, of transparency principles and working modalities in Iraq petroleum sector. On 10 February 2010, Extractive Industries Transparency Initiative (EITI) Board accepted Iraq as an EITI Candidate country; a new component in the governance of national upstream petroleum began in earnest with continuity and promising expectations, but time will tell!

Not surprisingly therefore that the period ended by December 2010 witnessed the most concerted efforts and vigorous debate among Iraqis relating to what could have been very significant milestones in the development of Iraq petroleum sector. Hence, the choice of end-2010 is the appropriate demarcation time-frame for this volume.

Over the last twenty years I have been compiling various, but related and relevant, documents, reports, studies, data and statistics and, accordingly, I have now very large, well organised, structured thematically and updated regularly, at least weekly, Database. Moreover, I developed and maintained relatively large network of contacts comprising senior government officials at different levels, parliamentarians, professionals, scholars, research institutions, academics, civil society organisation and media among others; such networking proved to be invaluable source of relevant insights, confidential materials and views from "inside the box".

My Database includes separate annual reports, exclusively, on the oil sector the first covers 2010 and earlier years and the latest is for 2021; these annual reports are the core of the archival efforts comprising well referenced, accurate, and verifiable data and sources. While archiving each annual report I read, commented and make different remarks on each item included in each annual report. Contents of parts two and three of this book are extracted from the annual report for 2010 and earlier years, but without incorporating my comments and remarks made on them then; I do not want to influence the readers' understanding of these items with my own views.

Also, my Database comprises significant statistical data and time-series on different aspects of petroleum sector, which I compile, regularly, from formal and credible sources, both Iraqi and non-Iraqi.

In the same way I followed closely the related development in the country and had my own contributions through various research work, analyses, publications, presentations, consulting assignments and commentaries among others.

I found it opportune to launch major research and publication project aiming at documenting, professionally and objectively, the development of the petroleum sector in the country by presenting different informed thoughts, views and insights that impacted the debate, policies and course of events.

The project comprises many volumes and begins with this recently published book, the details of which are summarized as follows:

Book title: Iraq Petroleum Sector Chronicle

Book Sub-title: Grand Opening for Big Push Strategy, Volume 1, 2010 & earlier

Author: Ahmed Mousa Jiyad

Publisher: Lambert Scientific Publication

ISBN-13: 978-620-4-20851-0; ISBN-10:6204208519; EAN:9786204208510

Pages: 434

Price: 98.90 € (Euro)

My prime purpose for preparing this book is to make it convenient reference for those interested in Iraqi petroleum sector, to understand the complexity of related issues and the discourse that prevailed in 2010 and positions taken by different parties; what, when by whom and, probably, why!!

This book is "Volume 1" and I intend, hopefully, to publishing further volumes covering years 2011 onward, since I have done already the basic research and have the needed documents and statistics in my Database. 

The book provides different perspectives on Iraqi petroleum issues that prevailed during the period covered by the book: my own, other Iraqis, international views and statistics; it was structured according to these perspectives respectively in its four parts. Hence, the book is premised on "evidence-based research" that was thoroughly done, mostly during 2010 but also covers a couple of earlier years.

For those years prior to 2011, as was the case since then and as mentioned above, I compiled and documented my own Database, the oil annual reports and numerous thematic, i.e., issue specific, folders.

Part one of the book comprises a selection of my own essays and research work.

Each of my "Essays.." has its own methodology, structure, assumptions, analysis, discussion and consulted references; information on each essay was provide, when and where it was published and the web-link to access it, if that is permissible by the related websites.

Part two of the book comprises views of and positions taken by some selected well-known Iraqi oil professionals, senior government officials and others aiming at presenting a balance of wide spectrum of different, and sometimes opposing, views positions and affiliations; these are presented in a form of own articles, interviews and collective statements. They reflect the richness and diversity of opinion that shaped the discourse among Iraqis at that time and, consequently, enriched the value of this book. Official views, expressed, through detailed interviews and statements, by senior government officials and decision makers reflect the political vision and economic aspiration of the dominant political parties, groups, religious/ politicized individuals and different associations and gatherings of professionals, notably oil experts and professionals inside and outside the country.

Part three comprises outside foreign and international standpoints and contributions to the debate about Iraq's petroleum and its prospect; a large number of items compiled from many and different external sources includes reports, studies, articles and media reporting among others, most if not  all, were written by non-Iraqis.

This part adds the third perspective of the book; how the outside world looked to Iraqi petroleum matters, what was their preoccupation, how did they understand or failed to understand, analyse, debate the issues and foresee the implications. It is really amazing to revisit the then prevailed insights and wisdom!!

Part four provides the statistical perspective through many annexes which are extracted from my Database; these include the most important statistical data (without further statistical analysis) pertaining to petroleum sector for 2010. The purpose is to supplement the expressed views with the "material evidence" in the form of data and statistics.

I would like to make the following remarks and caveats

Methodologically, the book is chronicle/archival of some of what was written, debated and published in 2010 and, a few belongs to, earlier years. Hence all items included in parts one, two and three are reproduced "as is/was", i.e., exactly as they were published in 2010, except the necessary editing to unify the text of the book to comply with publisher guidelines and requirements.

Therefore, it is vital to emphasise that the book is NOT about 2010 written from 2021 perspectives or in retrospective; rather it is on 2010 as was written in 2010 or earlier.

Each and every item included in parts two and three of the book has its source, the web-link, date of publication and the date I accessed it and compiled it in my Database. Sources, for the tables of part four of the book, are also provided. This is vital for verification, acknowledgement of copy right and helpful for further research on Iraqi petroleum.

A note of caution is due regarding websites availability; some websites do not exists anymore, some are changed to other identification, others are not accessible, for whatever reason, and some require subscription or fee for access.

Intentionally and for logistical reasons, I excluded items written in Arabic.

The book is a fruition of almost two decades of constant follow-up, research, direct involvement, networking and archiving. I encountered too many challenges during the course of those years, but with patient and determination I managed to overcome them; this book is the testimony for perseverance!

I would like to sincerely and wholeheartedly thank Tariq Shafiq for his kind "Preface" of the book; much appreciated Akhi Abu Ehsan.

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Iraq Petroleum Sector Chronicle first appeared on Iraq Business News.

Analyzing and Understanding Petroleum Fiscal Systems

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

ORCID identifier is: https://orcid.org/0000-0002-0946-9898

Upstream petroleum (Oil, Gas and Condensates) sector occupies very critical position and, accordingly, has influential impacts on the national economies of Iraq, some Middle East and North America- MENA countries, as well as many other developing countries that are endowed with such natural resources.

This importance is manifested through many significant economic parameters at macro-economy level, including balance of payments, trade balance, State budget (covering both investment and recurrent allocations), current account, it's share in GDP among others. Foreign exchange and revenues generated through this sector are the main fiscal determinants for financing socio-economic development plans.

Moreover, ownership of petroleum resources is, mostly, vested to the people through legal instruments such as constitutions.

The development of petroleum resources requires, in most cases, different forms of cooperation with and the  involvement of the international oil companies-IOCs through variety of  legal means and instruments such as contracts, agreements, memoranda of cooperation or understanding, protocols and alike. The involvement of IOCs (regardless of their 'home country' and associated geostrategic and geopolitical implications) is thus regulated and, accordingly, impacted by different components of the "Fiscal System" that are highlighted in or premised on many host-country national laws, regulations, directives among others and then translated into specific provisions, i.e., articles, and inserted into and comprised in these binding documents, mostly named contracts or agreements, with an IOC or a consortium of IOCs.

Analysing and professionally understanding upstream petroleum fiscal systems is a prerequisite qualification for all those who are involved directly in the development of petroleum resources in any country, particularly the related authorities and entities. Also, the comparative assessments of different fiscal systems is critically vital for national decision makers to be conversant with prior to deciding which system and what components of that system serve better their national aspirations in developing the upstream petroleum.

As a matter of practical and implementation purpose, understanding upstream petroleum fiscal system, of a concluded contract or agreement, is not and should not be confined only to those who are involved directly; reasonable familiarity with the components of the fiscal system of the concluded contracts is surely needed for many more others of officials at different branches of government as well as experts, research and consulting centres, academics, media, civil society organisation, economists, petroleum professionals and political leaders among others.

There is a wide range of reference books, publications, models and specialised consulting firms alike that cover variety of upstream petroleum fiscal regimes used in the global upstream petroleum industry.

Among the most important and relevant references is the book reviewed here.*

This is an excellent book, well written, carefully structured, articulate in debating the issues objectively- pros and cons, and follows good and constant methodology for each chapter; it is, therefore, a valuable addition to the library and knowledge of petroleum resource development and helps in formulating prudent management of these natural resources.

The book comprises three parts (not four, p. 13) and between them they have a combined total of sixteen chapters, in addition to Glossary and Bibliography. Part one, the shortest among the three and includes the first two chapters, presents the topics for the book, explains some terminology used, introduces fiscal systems in terms of what functions they have, their different forms and the process of licensing petroleum and outlines the structure of the book.

This part refers to the distinctions that sometimes made regarding the categories of fiscal systems such as concessionary, royalty/tax and contract-based systems and reviews four broad alternatives forms of petroleum licensing; these are:  Concessions (also called leases, licenses or extraction permits); Production sharing agreements/ contracts-PSA/C; Service agreements/ contracts  (including risk service contracts) and other agreements/contracts (mostly tax-based).

The second part addresses various Fiscal Instruments, i.e., the core and main pillars of petroleum fiscal system, and has chapters 3 to and including chapter 11.

Each chapter follows the same methodology: it begins with Definition and purpose, followed by thorough review and elaborated discussion of the topics covered in that chapter, a summary and ends with notes. The nine chapters of this part provide insights on and cover all important fiscal instruments by different governing modalities in upstream petroleum contracts and agreements. Fiscal instruments and issues covered in this part include: Levy on production (Royalty, severance tax, and revenue sharing); Production sharing; Remuneration for service;  Bonuses, lease sales and area fees; Privileged state participation; Tax on corporate income and distributed profits; Petroleum resource taxes; Taxes related to inputs and externalities; Business obligations in the national interests.

A significant and very helpful sub-section on the "Economic characteristics...." of the above mentioned instruments enriches the quality and usefulness of the book and expands the debates around these fiscal instruments. Also, this part addresses, rather eloquently and at length, with quantitative comparative analysis four main "trigger parameters" for "sharing of profit petroleum" or for fee payment that are in use in different contracts.

By this way the authors facilitate the understanding of the applications of these trigger parameters in the latter chapters of part three. These four triggers are: Rate of Return (ROR); R-Factor; Daily Rate of Production (DROP) and Cumulative Production (CP).

Examples on related contractual provisions drawn from many different countries are used or referred to throughout this part.

This part of the book is a must-read for those involved in upstream petroleum development through involving IOCs in such development, particularly professionals, ministry officials, legislating authorities and executive decision makers among others.

The third part focuses on Applications and comprises chapters 13 to 16. It aims at providing integrated perspective on the implication and implementation of the fiscal systems and their instruments. It begins with issues relating to fiscal valuation, particularly those connected to international tax issues then addresses some economic characteristics of petroleum operations and links fiscal analysis to some important economic features of the business.

Important feature of this part is the review of computer modelling, providing helpful insights on some available models, and uses its own fiscal model, Petrosharing, which was developed to support the analysis in this book. The last chapter proposes a step-by-step framework or a roadmap to design petroleum fiscal system, premised on the fiscal instruments that are discussed throughout the book.

This part presents many charts, uses simulations and modeling, and discuses thoroughly critical issues and development scenarios using data drawn from, mostly, Norwegian upstream fields.

The Glossary lists explanation of the main terms and concepts mentioned in the book and the book has Bibliography but has no Index, brief bios and photos of the authors are provided twice.

The authors' academic and professional backgrounds, an economist and legal profession, stand probably behind the impressive quality of this unique book as manifested by the depth and objectivity when analysing various economic and legal matters.

The book helps, to a great extent, in making a clear distinction between petroleum fiscal systems (and their different instruments on one side) and other macro-economy issues such as revenue management, oil policy and national development plans or programmes (on the other) to mention a few. Issues that are, more often than not, mixed up by commentators and result in confusion, unnecessarily, and spread inaccurate interpretation (this is much evidenced through debating such issues in Iraq over the last ten years). A contract relates to a specific oilfield project falls within the sphere of micro-economics analysis, while oil policy or revenue management and utilization and national development are of macro-economic nature. But surely, many fiscal instruments (such as taxation, state partner share, type of contract among others) are of macro-nationwide applications and implications, and thus, have direct bearings on upstream petroleum projects. Hence, there are dual attributions of or organic linkages between three levels of analysis; micro, sector-wide and macro level, which entails very careful and proper understanding and distinction.

The essence of and why there is petroleum fiscal systems, according to the authors, is sharing the resource rent between the host country and the resource firms, i.e., IOCs. But, the book asserts, "Calculating the resource rent is not straightforward, and is rarely done explicitly. It is an economic term discussed on a conceptual level, seldom found in Excel spreadsheets." (P. 4) and "rarely calculated as a precise value." (P. 457). Yet, there are, throughout the book, numerous examples on "resource rent tax" that are applied by many countries and jurisdictions. When a tax, which is important and significant petroleum fiscal instrument, is premised on or justified by the resource rent, then it is an empirical and material manifestation of a quantified/ quantifiable resource rent. Moreover, the "Project economics" spreadsheet (Excel or others) comprises a "precise value" of the resource rent tax as highlighted in Table 14.2, (P. 348). Is there some inconsistency here!

There is a strong link between resource rent and sovereignty, particularly in most developing countries. But the book refers twice to sovereignty: with regards to "Stabilization clauses" (P. 43) and a citation on the, "[R]enewed interest in such [risk service] agreements since the 1990s, largely due to national concerns with sovereignty over their petroleum." (P. 125).  The book, surprisingly, did not discuss or highlight the issue of state permanent sovereignty over its natural (in this case) petroleum, which is significant nation's right issue and has been recognized under international law for decades.[1]

Also, there is a sense of generalization in considering sharing resource rent between host country and the resource firms under all petroleum fiscal systems, but this is not necessarily the case. If "remuneration fee" is included in production cost, as it should be, then the whole resource rent is acquired by the host country under service contracts, such as the one adopted by Iraq' federal ministry of oil, and this is vital feature of this type of petroleum fiscal system.

The issue of "gold plating", the tendency that the contractor will be economically motivated to spend money unnecessarily,(P. 134) and thus "benefitting,..., due to distortions caused by the fiscal regime, (p. 405), attracted good attention by the authors, as evidenced by the frequency of the term in the book. It was discussed, at depth using its Petrosharing Model, with respect to "Saving index" (Pp. 380-90), with regards to the issue of "Neutrality" of fiscal system (Pp. 393-405 ) and with regard to Iraq, among others.

When it comes to service contracts adopted by Iraq, the book focus on "gold plating" relies on two references relating to Rumaila oilfield: Ghandi and Lin Lowell (2016) (p. 134) and Van Meurs (2009) (p. 136). Both studies give the impression that "gold plating" is peculiar to and intrinsic of service contracts; it is not. Moreover, both studies seems to premise their analysis on a "draft" model contract not on a "signed" contract; Rumaila is a brown oilfield that has been producing since mid-1950s and, thus, it is unreasonable to offer its re-habilitation under production sharing contract, as suggested by the two studies; the authors of the two studies seemed unaware of the measure to combat "gold plating" that were introduced in service contracts for the second bid round, due to a learning-curve, and finally, economic efficiency and cost effectiveness are, practically, impacted by both the "text" of the contract and the "monitoring and management" of the contact through various decision-making chain from the bottom at the field' joint management committee up to Energy Committee at the Council of Ministers.

That said, there are growing number of high profiled cases indicating to serious fraud and corruption in the Iraqi petroleum upstream projects, the impact of which could very well dwarf "gold plating" effects associated with Service contracts. Similarly, corruption in the KRG' production sharing contracts has been even more detrimental.

This brings to the discussion the importance and impacts of vital political economy factors and geopolitical considerations on these projects, since petroleum fiscal system is formulated upon or functions within the environment dictated by these factors and considerations.

The book uses the term "resource firms" instead of the widely used term IOCs; the authors' argument for adopting this term are not very convincing (Pp. 6/7) and they only add one more term to the existing ones: IOCs, Oil Majors; Big Oil; transnationals; multinationals.

Also the book mentions Middle East Gulf-MEG (P. 308; P. 416), probably referring to the known Arabian Gulf or Persian Gulf (depending where one stands) but hardly MEG!!

A few typing errors and sometimes numbers do not add up corresponding to what the narratives lead to; this could be due to either typing errors or to rounding effects. Some charts, particularly in part three are not clear due to scanning.

To sum up, this is invaluable highly informative and thus recommended book for oil professionals, contracts formulation and negotiation, and for authorities entrusted with upstream petroleum development. Moreover, from my own experience, this book is excellent source for designing and delivering human capacity development activities such as workshops and training on petroleum fiscal systems.

 

* Petroleum Fiscal Systems,

Erik T. Jarlsby and Eduardo G. Pereira (2019)

Publisher: PennWell Corporation. Oklahoma, USA,

ISBN: 978-1-59370-480-3 (hbc); 471 pages

Price: $101.15

 

My edited review article of the above book was published on:  Journal of Contemporary Iraq & the Arab World, Volume 14, Number 3, 1 September 2020, pp. 261-265(5)

[1] Brownlie, Ian (1995), Basic Documents in International Law, Clarendon Press, Oxford, UK, 4th Edition, Part Five.

 

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq's Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad's biography here.

The post Analyzing and Understanding Petroleum Fiscal Systems first appeared on Iraq Business News.