Iraq Oil Report
Sunday, 16 August 2009
UN watchdog over Iraq’s oil revenue says Iraq can take over the job, but worries ministries are lagging in necessary safeguards.
BAGHDAD – At the end of this year an all-Iraqi body should take on the responsibility of ensuring the oil revenues are collected and accounted for properly, according to the U.N.-mandated group now serving the auditing role.
Iraq relies on oil revenues – currently safeguarded at the Federal Reserve Bank of New York – for 95 percent of state income. It earned nearly $62 billion last year and $20 billion so far this year.
The job of the Committee of Financial Experts (COFE) and the Board of Supreme Audit (BSA), Iraq’s bureaucratic duo to replace the U.N. watchdog, will not be easy. According to the just published year 2008 audit, Iraq lacks necessary controls to account for all the oil produced and ensure the receipts match up, let alone make it to the bank.
The International Advisory and Monitoring Board (IAMB) – created May 2003 to both protect Iraqi oil revenues from internal graft and attachment by creditors, among other purposes – in a newly released statement from its semi-annual July meeting said this is the year it is no longer needed.
In its statement, the IAMB said it “recognizes the competence and capabilities of the COFE, aided by the Board of Supreme Audit,” and has specifically told Iraqi Prime Minister Nouri al-Maliki it supports the transfer of oversight responsibilities. Set to expire Dec. 31, 2005, the IAMB’s mandate was extended annually because Iraq was not ready.
“The IAMB also urged COFE to continue working expeditiously in supporting the necessary steps for the early passing through parliament of laws and regulations concerning organization structures, job descriptions and internal control systems,” the statement continued, “and development of a time-bound action plan, endorsed by the Council of Ministers, to implement a comprehensive oil measuring system.”
Neither Parliament action nor oil metering are quick tasks. The legislative body, in recess until mid-September, has to first address legislation to organize January national elections and next year’s budget, let alone hyper-political oil-related bills necessary to modernize the oil sector.
“The IAMB recommended in March 2004 the expeditious installation of a comprehensive oil metering system in Iraq and in accordance with standard oil industry practices,” according to the audit by KPMG, which said as of Dec. 31, 2008 the system to fully account for every barrel of oil produced, piped, refined or exported was just over a third complete. “Some metering has been installed at oil terminals, but there continues to be no metering in the oil fields.” The audit noted “meetings on high levels” are taking place to complete the metering system.
The audit said the Iraqi government and ministries lacked in key accountability areas. It especially tracked the ministries of oil and finance, charged with earning and allocating revenues.
The Ministry of Finance, the audit found, lacked modern revenue tracking techniques and technology, thus monthly revenue totals “contain errors relating to the ending balances of treasury bills and cash and cash equivalents.”
Meanwhile the check-ups on the Ministry of Oil offered troubling examples:
• The North Oil Co. in 2008 burned 1.4 million barrels of oil condensates because it had no way to sell it; damaged fields by re-injecting 605,000 barrels of oil; and cannot account for 698,000 barrels of oil believed stolen.
• The Ministry’s records are more than 6 million barrels less than what the South Oil Co. claims to have produced.
• The State Oil Marketing Organization (SOMO), tasked with selling all oil and fuel and importing fuel, has kept sold heavy fuel oil worth nearly $3 billion but deposited the proceeds into an Iraqi bank instead of the U.N.-mandated bank. It’s also late in reporting final 2008 balances, so the KPMG audit is not yet complete. And while it was fined $24.4 million for delinquent carrier loading, SOMO has yet to collect $26.2 million from Shell after the oil company switched tanker destinations (which affect the selling price) and $9.1 million from Jordan for discounted oil sales.
Every barrel of oil is supposed to be accounted for and all oil revenues are to be deposited into the Development Fund for Iraq (DFI), the U.N. account in New York. The IAMB in July for the first time questioned how Iraq would account for oil produced and sold from the Tawke and Taq Taq fields in Iraq’s Kurdistan region. After a year of trickling into the domestic market, on June 1 the two fields started feeding the northern export pipeline. The central government calls illegal the Kurdistan Regional Government’s oil deals with foreign companies and, despite reaching an agreement for the two fields’ exports, the two sides have not come to an agreement on how the foreign companies would be compensated.
Following the fall of Saddam Hussein, who controlled every aspect of the oil sector to enhance his income, despite sanctions intended to prevent such abuse, the United Nations moved quickly to route Iraqi revenues to an external account. The threat of corruption was both real and realized – by Iraqi and non-Iraqis alike – and the account and subsequent oversight body was to keep watch. The U.N. also realized those who funded the former dictator’s bloody reign – from international corporations to individual countries – would call in their tab. So the DFI was created with both U.N. and U.S. protection. Five percent of revenues is set aside for reparations to Kuwait and other victims of Saddam.
Now Iraq is trying to remove itself from the remaining shackles of U.N. sanctions and take more control over its revenue and expenditures. It still must navigate the U.N. Security Council restrictions, find an agreement with Kuwait, and keep creditors at bay, all while fixing the internal financial problems threatening the resources needed for long-term reconstruction.
“We recommend the Government of Iraq to consider what action is required to ensure the continuity of the immunity over the petroleum and petroleum products,” the audit said.
Comment--Windreader1
Note the key word in the first highlighted paragraph is "should" take over at end of year. Does not state that they will. The DFI fund is currently under Chapter VII, Resolution 1859.
Second highlighted paragraph also does not indicate that the lifting of Chapter VII is an accomplished fact.
Sunday, 16 August 2009
UN watchdog over Iraq’s oil revenue says Iraq can take over the job, but worries ministries are lagging in necessary safeguards.
BAGHDAD – At the end of this year an all-Iraqi body should take on the responsibility of ensuring the oil revenues are collected and accounted for properly, according to the U.N.-mandated group now serving the auditing role.
Iraq relies on oil revenues – currently safeguarded at the Federal Reserve Bank of New York – for 95 percent of state income. It earned nearly $62 billion last year and $20 billion so far this year.
The job of the Committee of Financial Experts (COFE) and the Board of Supreme Audit (BSA), Iraq’s bureaucratic duo to replace the U.N. watchdog, will not be easy. According to the just published year 2008 audit, Iraq lacks necessary controls to account for all the oil produced and ensure the receipts match up, let alone make it to the bank.
The International Advisory and Monitoring Board (IAMB) – created May 2003 to both protect Iraqi oil revenues from internal graft and attachment by creditors, among other purposes – in a newly released statement from its semi-annual July meeting said this is the year it is no longer needed.
In its statement, the IAMB said it “recognizes the competence and capabilities of the COFE, aided by the Board of Supreme Audit,” and has specifically told Iraqi Prime Minister Nouri al-Maliki it supports the transfer of oversight responsibilities. Set to expire Dec. 31, 2005, the IAMB’s mandate was extended annually because Iraq was not ready.
“The IAMB also urged COFE to continue working expeditiously in supporting the necessary steps for the early passing through parliament of laws and regulations concerning organization structures, job descriptions and internal control systems,” the statement continued, “and development of a time-bound action plan, endorsed by the Council of Ministers, to implement a comprehensive oil measuring system.”
Neither Parliament action nor oil metering are quick tasks. The legislative body, in recess until mid-September, has to first address legislation to organize January national elections and next year’s budget, let alone hyper-political oil-related bills necessary to modernize the oil sector.
“The IAMB recommended in March 2004 the expeditious installation of a comprehensive oil metering system in Iraq and in accordance with standard oil industry practices,” according to the audit by KPMG, which said as of Dec. 31, 2008 the system to fully account for every barrel of oil produced, piped, refined or exported was just over a third complete. “Some metering has been installed at oil terminals, but there continues to be no metering in the oil fields.” The audit noted “meetings on high levels” are taking place to complete the metering system.
The audit said the Iraqi government and ministries lacked in key accountability areas. It especially tracked the ministries of oil and finance, charged with earning and allocating revenues.
The Ministry of Finance, the audit found, lacked modern revenue tracking techniques and technology, thus monthly revenue totals “contain errors relating to the ending balances of treasury bills and cash and cash equivalents.”
Meanwhile the check-ups on the Ministry of Oil offered troubling examples:
• The North Oil Co. in 2008 burned 1.4 million barrels of oil condensates because it had no way to sell it; damaged fields by re-injecting 605,000 barrels of oil; and cannot account for 698,000 barrels of oil believed stolen.
• The Ministry’s records are more than 6 million barrels less than what the South Oil Co. claims to have produced.
• The State Oil Marketing Organization (SOMO), tasked with selling all oil and fuel and importing fuel, has kept sold heavy fuel oil worth nearly $3 billion but deposited the proceeds into an Iraqi bank instead of the U.N.-mandated bank. It’s also late in reporting final 2008 balances, so the KPMG audit is not yet complete. And while it was fined $24.4 million for delinquent carrier loading, SOMO has yet to collect $26.2 million from Shell after the oil company switched tanker destinations (which affect the selling price) and $9.1 million from Jordan for discounted oil sales.
Every barrel of oil is supposed to be accounted for and all oil revenues are to be deposited into the Development Fund for Iraq (DFI), the U.N. account in New York. The IAMB in July for the first time questioned how Iraq would account for oil produced and sold from the Tawke and Taq Taq fields in Iraq’s Kurdistan region. After a year of trickling into the domestic market, on June 1 the two fields started feeding the northern export pipeline. The central government calls illegal the Kurdistan Regional Government’s oil deals with foreign companies and, despite reaching an agreement for the two fields’ exports, the two sides have not come to an agreement on how the foreign companies would be compensated.
Following the fall of Saddam Hussein, who controlled every aspect of the oil sector to enhance his income, despite sanctions intended to prevent such abuse, the United Nations moved quickly to route Iraqi revenues to an external account. The threat of corruption was both real and realized – by Iraqi and non-Iraqis alike – and the account and subsequent oversight body was to keep watch. The U.N. also realized those who funded the former dictator’s bloody reign – from international corporations to individual countries – would call in their tab. So the DFI was created with both U.N. and U.S. protection. Five percent of revenues is set aside for reparations to Kuwait and other victims of Saddam.
Now Iraq is trying to remove itself from the remaining shackles of U.N. sanctions and take more control over its revenue and expenditures. It still must navigate the U.N. Security Council restrictions, find an agreement with Kuwait, and keep creditors at bay, all while fixing the internal financial problems threatening the resources needed for long-term reconstruction.
“We recommend the Government of Iraq to consider what action is required to ensure the continuity of the immunity over the petroleum and petroleum products,” the audit said.
Comment--Windreader1
Note the key word in the first highlighted paragraph is "should" take over at end of year. Does not state that they will. The DFI fund is currently under Chapter VII, Resolution 1859.
Second highlighted paragraph also does not indicate that the lifting of Chapter VII is an accomplished fact.