Adjustment of the Mindset: IOCs and Iraq’s
Petroleum Sector
Ahmed Mousa Jiyad
Adjustment of the Mindset:
IOCs and Iraq’s Petroleum Sector
Ahmed Mousa Jiyad
Many, as early as the evening of first bid round
on June 30th 2009, had asked the intriguing
question: how is it possible that IOCs (BP/CNPC)
could slash their Remuneration Fee by such a
substantive margin? On that evening a colleague,
senior Iraqi oil professional and politician,
asked me that same question. I communicated my
answer to him and to my other colleagues through
my mailing list, then post it on Iraq Oil Report
of the UPI.
http://www.iraqoilreport.com/the-biz/one-oil-field-awarded-many-questions-remain-1863/
Now a days we have seen
almost all IOCs are doing the same especially
after the initial contracts for Zubair and West
Qurna-1 oilfields have been singed recently. The
purpose of this brief article is to shed further
light with focus on fiscal regiem and the
remmuneration fees in order to find an answer to
the above question and provide an explanation,
hopfully a convincing one, in addition to what I
have written recently in MEES (2nd Nov 2009)
I- The IOCs’ attitude and response.
IOCs attitude and response has been moving in a
rather distinct though not clearly demarcated
phases from scepticism to consent, in apparent
crack of the dominant mindset that affects their
attitude and behaviour.
Pre and on the eve of the first bid event on
30th June, IOCs expressed scepticism and
questioned the feasibility and wisdom of such
action for petroleum upstream sector. "There's
always been a risk this won't lead to anything
-- but we're still going to go ahead," said an
oil company executive.
Nevertheless, all qualified IOCs participated in
the biding process by attending various meetings
and workshops, and thus managed to extract
important concessions from MoO, that renders the
related contracts in contravention with the
Iraq’s best interest as previously analysed by
this author when assessing the related Model
Contracts pertinent to the bid round.
Having secured critical concessions from MoO,
the 22 IOCs who took part in bidding event made
their offers with apparent one common feature:
all their PPTs and RFs were higher, with a
varying degrees, than those offered by MoO.
While the offered higher PPTs were, though
puzzling, welcomed as good news for MoO, the
higher RFs were rejected. MoO requested that
IOCs reconsider and resubmit their offers and
accept the ministry’s RFs. Except BP/CNPC offer
for Rumaila oilfield, the remaining IOCs
declined to make any meaningful reduction in
their RF in order to stroke a deal. They moved,
therefore, from scepticism to rejection. In the
immediate aftermath of the bid ceremony IOCs,
their lobbyist, and media including the
petroleum-related among them began concerted
campaign of cretinism on MoO accusing the latter
for been unreasonable by dictating tough
conditions, and complaining about (and also
criticizing) the Chinese oil companies for only
being state-supported, were able to cut the deal
with BP. Most petroleum commentators considered
the event as failure, fiasco, dud, etc and thus
put the blame squarely on the ministry’s RF.
“Oil industry executives and analysts described
this [$2/b] as a shockingly low price, given the
political and legal uncertainties of doing
business in Iraq.” Acordingly Iraq was asked to
“be prepared to soften some of its terms.”
This phase of blaming game lasted for a while,
then signals of serious reflection began to
emerge saying that IOCs should not leave Iraqi
oil to be dominated by China, and thus began
revising their economics and assumption,
probably arriving at an apparent conclusion: if
BP/CNPC can do it so could we. "That fear of
competition [from the Chinese or the other
national oil corporations] has led to the
conclusion that the risks of staying out of Iraq
are greater than the risks of going into Iraq."
This was coupled with renewed recognition of the
strategic importance of Iraq’s upstream
petroleum and what this represents in terms of
lucrative business opportunities. “Very few such
places are open to foreign participation,
regardless of the terms that oil companies are
willing to accept”
Such reflection and revision have led them to
come along the original position of the MoO and
finally conceded to its proposal. Hence four
IOCs- BP, CNPC, ConocoPhillips and Lukoil, have
moved from scepticism to acquiescence, and this
had set the motion of the domino effects on
other IOCs.
The question now is: has this to do with the
“shokingly low” Remuneration Fee? Apparently,
the answer should be NO since they have conceded
to such RF. I assum the IOCs have red the
“Model” contract properly and carefuly, and
understood those articles and provisions
directly and indirectly related to the RF, and
thus have bearings on the return on investment.
Much of the talk and commenteries focused on “$2
per barrel as the remuneration fee-$2/b”. Yet
the model contract provide much more clearer
profile of the fiscal regiem pertinant to the
RF, as disccused next.
II-The Fiscal Variables of Remuneration Fess
Remunerations Fee-RF is the main determinant of
the IOCs direct return on investment. A thorough
examination of the fiscal regime in the Iraqi
“Model Contracts” would indicate that the
Remuneration Fee Formula has six important
variables that are effective in determining the
final direct revenues to the IOCs from their
involvement in these fields. Significant
indirect benefits, such as long term secured
access to oil resource, the possibility for
further business opportunities, establishment of
strategic alliances and partnerships etc, are
not considered here.
The six variables are: the RF itself, the
R-Factor, the share of the “State-Partner”, the
Corporate Income Tax-CIT, the “Participation
Interest-PI” of the IOCs within the related
consortium, and finally the contracted Base-Line
Production level.
Remuneration Fee-RF is the fee paid to the
contractor for the incremental production above
the baseline initial production rate as defined
in the related contract and stipulated and
calculated in the clauses therein. Each oilfield
has its RF that was (or will be) agreed upon
through the bidding process. For the first bid
round a three oil fields are analysed in the
following table.
The R-Factor is the ratio of cumulative Cash
Receipts to cumulative Expenditures in the
conduct of Petroleum Operations as defined in
the related contracts. Unlike the RF, which vary
depending on the oilfields, the R-Factor is
unified and fixed for all oilfields under
considerations. The R-Factor is a sliding-scale
method according to which the value of the RF
declines as cumulative cash receipts increases
as a function of the incremental oil production.
In other words with increasing profitability of
the IOCs the RF per barrel declines, starting
from the maximum value of RF, as stated in the
agreed bid, and the minimum value is 30 percent
of it.
The third factor is the share- the participation
interest, of the “State partner” within the
contractor-IOCs. The “State partner” has a
participation interest of 25% in each of these
oilfields. This means that one quarter of the RF
will be earmarked for the Iraqi “State partner”.
The fourth factor is the Corporate Income
Tax-CIT. The proposed law suggests increasing
the CIT from 15% to 35 % is still with the
Parliament for consideration and if approved it
will be enacted. Depending on the actual wording
of the law and whether the RF only will be
income taxable or it will cover other revenue
items. For our analysis it is assumed that the
35% CIT applies to the RF only.
The “Participation Interest-PI” of each IOC
within the related consortium is established at
the time of the bid, and can also be adjusted
later on but subject to the approval of the
Iraqi side, as was the case with BP/CNPC for
Rumaila oilfield.
Finally, the contracted Base-Line Production-BLP
is important factor for deciding the aggregate
of remuneration fee paid by Iraq. IOCs make
their bid and calculation taken into
consideration the Initial Production Rate-IPR
provided to them by the ministry. But since
these are brown fields and probably good amount
of capital had been invested in them, thus
production rate at the time of signing the
contract could be higher than the IPR.
Naturally, the Iraqi side tends to tilt towards
the rate at or close to the date of contract
signing, while the IOCs could stick to the IPR.
Good negotiation efforts are needed to reach
consensus on the BLP. At the subsequent periods
the Contract provides specific formula to
calculate the BLP on quarterly basis.
The combined effects of the “State partner” and
the Corporate Income Tax-CIT, since both are
fixed percentages, would divide the RF between
Iraq and the IOCs by 51.25% and 48.75%
respectively. The share of the IOCs is
distributed among the parties to each consortium
in accordance with their respective
participation rates.
The following table provides summary of the
calculations for the spectrum of possible RF
related to the three major oilfields: Rumaila,
Zubair and West Qurna1. What the IOCs get in
terms of RF ranges from a maximum of 97.5 c/b to
a minimum 29.25 c/b for Rumaila and the Zubair
oilfields, and from 92.63 c/b to 27.79 c/b for
West Qurna 1 oilfield. The actual RF gained by
each IOC from the taxed remuneration fess (TRF)
is dependent upon its participation interest as
co-contractor in the consortium.
|
R-Factor value
|
0>1.0
100%RF |
1.0>1.25
80%RF |
1.25>1.5
60%RF |
1.5>2.0
50%RF |
2.0<
30%RF |
Rumaila Oilfield, RF=$2/b
IOCs share of RF
(48.75%) ($/b)
BP (38% TRF) ($/b)
CNPC (37% TRF)
($/b) |
0.975
0.494
0.481 |
0.78
0.3952
0.3848 |
0.585
0.2964
0.2886 |
0.4875
0.247
0.2405 |
0.2925
0.1482
0.1443 |
West
Qurna 1, RF=$1,9/b
IOCs share of RF
(48.75%) ($/b)
ExxonMobil (60% TRF)
($/b)
Shell (15% TRF) ($/b)
Lukoil (50% TRF) ($/b)
ConocoPhilips(25%
TRF) ($/b) |
0.92625
0.741
0.18525
0.6175
0.30875 |
0.741
0.5928
0.1482
0.494
0.247 |
0.55575
0.4446
0.11115
0.3705
0.18525 |
0.463125
0.3705
0.092625
0.30875
0.154375 |
0.277875
0.2223
0.055575
0.18525
0.092625 |
Zubair Oilfield, RF=$2/b
IOCs share of RF
(48.75%) ($/b)
ENI (?% TRF)
($/b)
Oxy (?% TRF) ($/b)
Kogas (?% TRF) ($/b)
(?)(?% TRF) ($/b) |
0.975
?
?
?
? |
0.78 |
0.585 |
0.4875 |
0.2925 |
As the above calculation demonstrates, IOCs
remuneration fee is measured in cent rather than
in dollars, and Iraq gets-back 51.25% of the
remuneration fees it has paid for every
additional barrel of oil over-and above the
contractually fixed base-line initial production
of the related oilfield.
III- Possible explanations
My own reading into the matter would let me to
suggest the following explanation:
1-The loss of staying out is much more than the
risk of coming in. Almost all IOCs have realise
that the longer they stay outside Iraqi upstream
petroleum the less good opportunities are left
for them. The first comers get the best and more
lucrative business opportunity, and thus have
better opportunity to gain strong footholds in
the petroleum sector for further contracts;
2-Oilfields offered during the first bid round
are “brown -fields” with relatively known
history and accumulated data especially for the
IOCs that work on them previously. Brown
oilfields require “special-case” assessment with
regards to risk and return on investment. The
typical “business risk” is very low, and is the
“initial” investment requirements.
Contractually, IOCs begin to generate earning at
relatively early stage of involvement, and thus
the need to earmark substantive investment is
very minimal. For this type of oilfields the
“recycling of earnings” (earn-reinvest-earn, an
so on) is the most probable financing approach.
For these reasons the return on “initial”
investment is relatively high, and the talk
about double digit billions of forthcoming
investment is fallacious and deceptive.
3-The original position of the IOCs with regards
to the Remuneration Fees was either deliberately
inflated or it was based on economic model and
analysis that are less relevant to Iraqi brown
oilfields or there was some serious errors of
judgement, calculation or assumptions. When the
BP/CNPC accepted the reduction in their
Remuneration Fees, this had prompted others to
re-examine their economics to see how is it
possible for BP/CNPC to succeed, and how they
can do the same. This in fact became so
appealing after the BP Chief Executive Tony
Hayward made it clear that the BP/CNPC Rumaila
deal secures 15%-20% return on investment. This
rate is very high and rewarding indeed.
4-From many statements expressed lately by some
IOCs indicate that better understanding of the
contract provisions and further explanation to
cost-related articles have led them to revise
their economics and thus reduce their
Remuneration Fees and made the deal deliver an
acceptable return-on-investment.
5-Some IOCs seems to have adopted what I could
call tactical “correlation of bidding”. With
this I mean IOCs assess their chances of wining
on particular oilfield and act accordingly.
Examples are ENI drive to win the Zubair
oilfields and dropping Nassirya when it became
clear to ENI that the Japanese are the
frontrunner for the latter oilfields. Had ENI
did not move on the Zubiar they would lose on
both oilfields. Lukoil/ ConocoPhilips is the
other example. Lukoil has rather strong “legal”
claim on West Qurna2 oilfield, which is included
in 2nd bid round. By reducing their Remuneration
Fee for West Qurna 1 and increase their PPT to
level comparable to that offered by Exxon/Shell,
enhances their chances to win the West Qurna 1.
They further could make good concession to Iraq
if they win both West Qurna 1 and 2 and develop
the two fields within one major contract.
Similarly is the case with Exxon/Shell. This
consortium could utilise Shell presence in
southern Iraq if and when the deal regarding gas
joint venture comes into fruition. This gas
joint venture could provide invaluable
“cost-related-externalities” that could
contribute to reduce the cost of West Qurna 1.
This type of correlation of biding is akin to
the BP/CNPC in the first bid round.
VI- Conclusion and Implication
From the above, there is no doubt in my mind
that this “Iraqi oil rush” by all IOCs was
motivated, as well as explained, by two
fundamental rationales: high return on
investment and secured access to invaluable oil
supplies, and both rational have very important
strategic significance.
Iraq should consider this fact for its second
bid round, if, as it seems to be, the country is
determined to continue with this round.
Mr Jiyad is an independent development
consultant and scholar. 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@online.no).
Date of submission to Iraq Oil Report/UPI: 5th
November 2009
_____________________________________