Iraq: Whose oil?
The start of drilling activity by a Norwegian oil firm in the Kurdish area of Iraq has highlighted the sensitivities surrounding the development of Iraq's vast but underexploited oil reserves. At issue are the extent of the rights of Iraq's regions to determine oil policy and the models to be applied for the involvement of foreign oil firms in Iraq's upstream oil sector.
Norway's DNO is operating on the basis of a production-sharing agreement (PSA) signed with the Kurdistan regional government in June 2004, with no formal reference to the central Iraqi government. The Norwegian firm said at the end of November that it had spudded its first well, which will be drilled to a depth of 3,000 metres over some 60 days in an area identified as containing three prospective reservoir zones.
DNO is one of a handful of relatively small international oil companies actively pursuing opportunities in Iraq. It is the first to start actual drilling since the overthrow of the Saddam Hussein regime. Major oil companies have remained on the sidelines because of the security threats in Iraq and in light of the absence of a central government in a position to take long-term decisions on investments. Although there is little sign of any improvement in security, the election scheduled for December 15th will open the way for the formation of a government to be created according to the newly approved permanent constitution. One of the central tasks of that government will be to determine policy towards the oil sector.
The constitution lays out a broad framework for sharing the wealth generated by Iraq's existing oilfields between the central government and the regions, including a mechanism for compensating areas that were deprived of their fair share under the previous regime. It also calls for the regions and the federal government to work jointly on a new oil strategy "in a way that achieves the highest benefit to the Iraqi people using the most advanced techniques of the market principles and encourages investment".
Rip-off?
According to a recent study issued by Platform, an independent watchdog monitoring the activities of oil companies, the new Iraqi government is danger of being pushed into agreeing disadvantageous terms for the development the new oilfields, under pressure from Western governments and oil majors. The study suggests that officials in the Ministry of Oil are anxious to proceed as fast as possible--even in advance of the passage of a new petroleum law--to sign PSAs for some 20 undeveloped fields which are known to contain substantial reserves. (The operation and development of existing fields is likely to be kept in government hands.) The study argues forcefully that the PSA model would result in Iraq giving up too much control over its oil strategy, while allowing the foreign operators to reap massive profits. It suggests that Iraq would do better to consider other models that limit the profits of the foreign operator and do not cede the same degree of sovereignty--for example the Iranian buy-back model (a variant of which was elaborated by the Saddam Hussein regime), Algeria's risk service contract or the operating service agreement that will be applied to Kuwait's northern oilfields.
The study is based in the premise that a hard core of Iraq politicians, under influence and pressure from the US and the UK, are resolved to lock their country into a PSA model that would be impossible to alter for several decades. The principal argument for such a model is that it would result in the quickest and most effective development of the fields in question, while freeing the government to spend the bulk of its current oil revenues on the non-oil economy. The study maintains that any benefits for Iraq would be short term, at best.
However, a wholesale adoption of the PSA model is not the most obvious way forward for Iraq, and it is doubtful whether any group of politicians is in a strong enough position to impose it. According to the International Energy Agency the costs of bringing Iraq's major undeveloped fields are likely to be lower than almost anywhere else in the world. It would therefore make little sense for Iraq to offer foreign companies the kind of terms normally attached to more speculative exploration efforts or to technologically demanding operations. It would be difficult to secure parliamentary approval for PSAs covering such fields if the terms were to appear too generous for the foreign operators. The PSA model could yet be applied in Iraq, but most likely in frontier areas where oil has yet to be discovered.
SOURCE: ViewsWire Middle East
Norway's DNO is operating on the basis of a production-sharing agreement (PSA) signed with the Kurdistan regional government in June 2004, with no formal reference to the central Iraqi government. The Norwegian firm said at the end of November that it had spudded its first well, which will be drilled to a depth of 3,000 metres over some 60 days in an area identified as containing three prospective reservoir zones.
DNO is one of a handful of relatively small international oil companies actively pursuing opportunities in Iraq. It is the first to start actual drilling since the overthrow of the Saddam Hussein regime. Major oil companies have remained on the sidelines because of the security threats in Iraq and in light of the absence of a central government in a position to take long-term decisions on investments. Although there is little sign of any improvement in security, the election scheduled for December 15th will open the way for the formation of a government to be created according to the newly approved permanent constitution. One of the central tasks of that government will be to determine policy towards the oil sector.
The constitution lays out a broad framework for sharing the wealth generated by Iraq's existing oilfields between the central government and the regions, including a mechanism for compensating areas that were deprived of their fair share under the previous regime. It also calls for the regions and the federal government to work jointly on a new oil strategy "in a way that achieves the highest benefit to the Iraqi people using the most advanced techniques of the market principles and encourages investment".
Rip-off?
According to a recent study issued by Platform, an independent watchdog monitoring the activities of oil companies, the new Iraqi government is danger of being pushed into agreeing disadvantageous terms for the development the new oilfields, under pressure from Western governments and oil majors. The study suggests that officials in the Ministry of Oil are anxious to proceed as fast as possible--even in advance of the passage of a new petroleum law--to sign PSAs for some 20 undeveloped fields which are known to contain substantial reserves. (The operation and development of existing fields is likely to be kept in government hands.) The study argues forcefully that the PSA model would result in Iraq giving up too much control over its oil strategy, while allowing the foreign operators to reap massive profits. It suggests that Iraq would do better to consider other models that limit the profits of the foreign operator and do not cede the same degree of sovereignty--for example the Iranian buy-back model (a variant of which was elaborated by the Saddam Hussein regime), Algeria's risk service contract or the operating service agreement that will be applied to Kuwait's northern oilfields.
The study is based in the premise that a hard core of Iraq politicians, under influence and pressure from the US and the UK, are resolved to lock their country into a PSA model that would be impossible to alter for several decades. The principal argument for such a model is that it would result in the quickest and most effective development of the fields in question, while freeing the government to spend the bulk of its current oil revenues on the non-oil economy. The study maintains that any benefits for Iraq would be short term, at best.
However, a wholesale adoption of the PSA model is not the most obvious way forward for Iraq, and it is doubtful whether any group of politicians is in a strong enough position to impose it. According to the International Energy Agency the costs of bringing Iraq's major undeveloped fields are likely to be lower than almost anywhere else in the world. It would therefore make little sense for Iraq to offer foreign companies the kind of terms normally attached to more speculative exploration efforts or to technologically demanding operations. It would be difficult to secure parliamentary approval for PSAs covering such fields if the terms were to appear too generous for the foreign operators. The PSA model could yet be applied in Iraq, but most likely in frontier areas where oil has yet to be discovered.
SOURCE: ViewsWire Middle East
posted by Marko at 12/03/2005 08:35:00 AM
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