The First Licensing Round Gets off the Ground: The Politics of Oil in Iraq
By Reidar Visser ( www.historiae.org)
28 June 2009
On 29 and 30 June, major international oil companies are expected in Baghdad for the “first licensing round”, where they will submit bids for 20-year technical service contracts for some of Iraq’s biggest existing oil fields (including West Qurna, Rumaila and Zubair in the Basra area, as well as Kirkuk and Bai Hassan in Tamim governorate) and gas fields in Diyala and Anbar. The awards will be announced shortly after the IOCs have presented their bids.
The awards procedure itself has been designed to be an auction that can be immune against the criticism about corruption and lack of transparency that often accompany no-bid contracts.
The oil majors participating have been prequalified and will submit bids indicating simply what sort of rise in production levels they can offer and at what price per barrel. The Iraqis will then, on the bases of purely mathematical criteria, identify those companies that present the best bids.
In isolation, at least, it looks good: The IOCs will compete on few and readily-understandable variables directly related to price and output; Iraq will select those IOCs that can provide the best services for Iraq.
Also the very nature of the deals on offer should in principle serve to shelter the licensing round from criticism. For, with the exception of the two gas fields, the contracts pertain to already-producing “brownfields”, and the IOCs will be paid fees for their work instead of acquiring oil shares of the kind associated with the more lucrative “production sharing agreements” (PSAs).
For the oil companies, this is like investing in dilapidated real estate with only limited options for making changes to the overall direction of the project – and also with the significant risk of unpleasant surprises (such as technological problems) that comes with investment in old and dated installations.
Iraq, for its part, can triumphantly say that it has avoided the politically controversial PSAs, for now at least, while at the same time enhancing the prospect for a much-needed boost of Iraqi oil production, which has been at substandard levels for most of the post-2003 period.
Still, it has to be added that the reason many IOCs bother to take part in the contest for these somewhat rusty fields at all is the need to position themselves ahead of possible bilateral negotiations with Iraq for other fields as well as a second licensing round (possibly to be finalised towards the end of 2009, but more likely later) that could offer unexplored “greenfields” with greater potential for serious gains on investments. Here, the PSA debate is likely to resurface.
These positive aspects notwithstanding, resistance towards the deals is now becoming stronger in Iraq. Interestingly, much of the opposition is quite similar to that which transpired earlier concerning the PSA concept: The lack of national Iraqi control, and the scale of sudden foreign involvement in the country’s oil sector.
Even if the service contracts in theory should offer the Iraqi government more influence than PSAs, many Iraqi oil experts are concerned that such a huge quantity of oil is offered for such long-lasting contracts (20 years) and with relatively few bidders (only 35 were pre-qualified, some have dropped out, and there is suspicion that others may have agreed anti-competitive measures).
The process will take place all at once, and, perhaps most importantly, at a time when no meaningful steps have been taken to reconstitute a national Iraqi oil company. It is feared that even though each individual contract may appear comparatively innocuous, their cumulative effect and the sudden emergence of a high number of IOCs on the Iraqi scene could mean that a fragmentation of national Iraqi oil policy becomes the net result.
What has happened here on the Iraqi side relates to politics.
The first licensing round is the brainchild of the oil minister, Husayn al-Shahristani, an independent member of the Shiite-dominated United Iraqi Alliance (UIA) who is thought to have good relations with the Grand Ayatollah Ali al-Sistani.
For the past year or so, Shahristani and his independent bloc of UIA members (which also includes figures like Khalid al-Atiyya, the deputy parliamentary speaker) have been important allies for Prime Minister Nuri al-Maliki in his endeavour to push through a centralist agenda in Iraq, which has also involved challenging key partners in the Maliki government that favour a federal or even confederal state structure for Iraq (such as the two biggest Kurdish parties, KDP and PUK, as well as the only decentralist Shiite party, the Islamic Supreme Council of Iraq or ISCI).
When it comes to oil, this struggle has been reflected in the fierce battle over the oil law and particularly the issue of central versus regional control of the signing of contracts with foreign oil companies, where Shahristani has been the protagonist of the central government view against strong Kurdish opposition.
Indeed, the very menu on offer in the first licensing round seems to reflect Shahristani’s desire to centralise control of Iraq’s oil industry in Baghdad as much as possible and thereby emerge as a nationalist, with key fields in the south and the north included alongside gas fields in two Sunni-dominated regions. (Whilst Kirkuk oil is not disputed as such due to the “already-existing” status of the relevant fields and hence the clear constitutional role of the central government in administering them, the singling out of two oil contracts covering the area near this city seems symbolic in the context of persistent Kurdish demands for administrative control of the area.)
In line with this, on 18 June, in the specific context of the licensing round, the Iraqi oil ministry revealed its interpretation of centre–periphery relations in the non-federated parts of Iraq in unabashedly centralist terms: To a request by the Kurdish-dominated provincial leadership in Kirkuk to be consulted with regard to the prospective contracts affecting the Kirkuk area, Asim Jihad, the ministry spokesman commented, “We welcome the comments and point of views from any affected party precisely because it is the goal of the ministry to preserve the higher national interest and put it above any narrow and particularistic interests.”
Or, in plain English, the oil ministry would be delighted to receive a statement of the grievances of the Kirkuk provincial government in order that their concerns can be immediately shelved, utterly ignored and entirely subordinated to the ministry’s own plans.
In theory, then, the logical course for Shahristani would have been to ensure strong, centralised and national control of the oil sector, with an Iraqi national oil company and its Iraqi subsidiaries in the lead, and with international companies only as secondary players – perhaps avoiding the major IOCs altogether and having smaller companies doing service work such as drilling and maintenance.
In fact, a plan along such lines appeared to be in the making in early 2008 in the shape of no-bid service contracts with a series of foreign companies (albeit major ones). However, this scheme was abandoned for reasons that still seem unclear, but at least partly are thought to relate to Shahristani’s preference for a more transparent process.
Another reason for the absence of a stronger Iraqi role in the current policy could be that Shahristani, himself a nuclear scientist with no particular background in the oil sector, has from the very start been on a collision course with many of the existing entities in Iraq’s oil sector, not least the powerful South Oil Company (SOC) which historically handled all the fields in the south of the country.
The SOC and the trade unions are traditionally the fiefs of southerners from Basra and the far south who often express a distaste for bureaucrats from the oil-deficient centre of Iraq telling them what to do, and who, confusingly perhaps, and in a somewhat uneasy coexistence with local regionalist tendencies, on many occasions assert their particularisms in a language that is just as centralist and nationalist as that emanating from Baghdad.
Shahristani’s way of handling this issue has been to attack the SOC by trying to remove influential local bosses (in particular Jabbar Luyabi), breaking up the SOC by establishing new local companies (Maysan; Dhi Qar has also been under discussion), and marginalising it by bringing in foreign hands (most conspicuously in the case of the contract with Shell for gas flaring in the Basra governorate).
To the SOC, the avalanche of foreign contracts implied by the first licensing round could be yet another manifestation of this kind of attack by Shahristani, as the company is offered a continued but probably more fragmented role.
At the same time, though, opposition from the other end of the scale – decentralisation demands by the Kurds – is preventing Shahristani from making progress on re-establishing the Iraqi national oil company under tight ministry control because the Kurds prefer any centralised entity to be governed by political appointees on a future national oil and gas council and not by ministry officials.
Hence, when it comes to the first licensing round, through confronting the SOC while at the same time refraining from getting an Iraqi national oil company back on its feet, Shahristani has actually moved quite far away from the centralist ideals that form the core of the political programme of the “all-Iraq” Shiite Islamists among the Daawa and the UIA independents.
Instead, on this issue he now resembles an economic liberalist and even a de facto decentraliser. His moves have been done mostly in the name of transparency, but it seems likely that his concerns about the SOC getting too strong may have influenced his decisions too, directly or indirectly. Still, it should be added that there are other voices in the oil ministry who agree with him simply because of the need to kick-start the Iraqi economy, and it is notable that the northern counterpart of the SOC – the North Oil Company which handles fields such as Kirkuk – in this case appears to be somewhat less politicised, more supportive of the bid round, and in some cases has actually acted as a bridge between the central government and Kurdish interests.
By Reidar Visser ( www.historiae.org)
28 June 2009
On 29 and 30 June, major international oil companies are expected in Baghdad for the “first licensing round”, where they will submit bids for 20-year technical service contracts for some of Iraq’s biggest existing oil fields (including West Qurna, Rumaila and Zubair in the Basra area, as well as Kirkuk and Bai Hassan in Tamim governorate) and gas fields in Diyala and Anbar. The awards will be announced shortly after the IOCs have presented their bids.
The awards procedure itself has been designed to be an auction that can be immune against the criticism about corruption and lack of transparency that often accompany no-bid contracts.
The oil majors participating have been prequalified and will submit bids indicating simply what sort of rise in production levels they can offer and at what price per barrel. The Iraqis will then, on the bases of purely mathematical criteria, identify those companies that present the best bids.
In isolation, at least, it looks good: The IOCs will compete on few and readily-understandable variables directly related to price and output; Iraq will select those IOCs that can provide the best services for Iraq.
Also the very nature of the deals on offer should in principle serve to shelter the licensing round from criticism. For, with the exception of the two gas fields, the contracts pertain to already-producing “brownfields”, and the IOCs will be paid fees for their work instead of acquiring oil shares of the kind associated with the more lucrative “production sharing agreements” (PSAs).
For the oil companies, this is like investing in dilapidated real estate with only limited options for making changes to the overall direction of the project – and also with the significant risk of unpleasant surprises (such as technological problems) that comes with investment in old and dated installations.
Iraq, for its part, can triumphantly say that it has avoided the politically controversial PSAs, for now at least, while at the same time enhancing the prospect for a much-needed boost of Iraqi oil production, which has been at substandard levels for most of the post-2003 period.
Still, it has to be added that the reason many IOCs bother to take part in the contest for these somewhat rusty fields at all is the need to position themselves ahead of possible bilateral negotiations with Iraq for other fields as well as a second licensing round (possibly to be finalised towards the end of 2009, but more likely later) that could offer unexplored “greenfields” with greater potential for serious gains on investments. Here, the PSA debate is likely to resurface.
These positive aspects notwithstanding, resistance towards the deals is now becoming stronger in Iraq. Interestingly, much of the opposition is quite similar to that which transpired earlier concerning the PSA concept: The lack of national Iraqi control, and the scale of sudden foreign involvement in the country’s oil sector.
Even if the service contracts in theory should offer the Iraqi government more influence than PSAs, many Iraqi oil experts are concerned that such a huge quantity of oil is offered for such long-lasting contracts (20 years) and with relatively few bidders (only 35 were pre-qualified, some have dropped out, and there is suspicion that others may have agreed anti-competitive measures).
The process will take place all at once, and, perhaps most importantly, at a time when no meaningful steps have been taken to reconstitute a national Iraqi oil company. It is feared that even though each individual contract may appear comparatively innocuous, their cumulative effect and the sudden emergence of a high number of IOCs on the Iraqi scene could mean that a fragmentation of national Iraqi oil policy becomes the net result.
What has happened here on the Iraqi side relates to politics.
The first licensing round is the brainchild of the oil minister, Husayn al-Shahristani, an independent member of the Shiite-dominated United Iraqi Alliance (UIA) who is thought to have good relations with the Grand Ayatollah Ali al-Sistani.
For the past year or so, Shahristani and his independent bloc of UIA members (which also includes figures like Khalid al-Atiyya, the deputy parliamentary speaker) have been important allies for Prime Minister Nuri al-Maliki in his endeavour to push through a centralist agenda in Iraq, which has also involved challenging key partners in the Maliki government that favour a federal or even confederal state structure for Iraq (such as the two biggest Kurdish parties, KDP and PUK, as well as the only decentralist Shiite party, the Islamic Supreme Council of Iraq or ISCI).
When it comes to oil, this struggle has been reflected in the fierce battle over the oil law and particularly the issue of central versus regional control of the signing of contracts with foreign oil companies, where Shahristani has been the protagonist of the central government view against strong Kurdish opposition.
Indeed, the very menu on offer in the first licensing round seems to reflect Shahristani’s desire to centralise control of Iraq’s oil industry in Baghdad as much as possible and thereby emerge as a nationalist, with key fields in the south and the north included alongside gas fields in two Sunni-dominated regions. (Whilst Kirkuk oil is not disputed as such due to the “already-existing” status of the relevant fields and hence the clear constitutional role of the central government in administering them, the singling out of two oil contracts covering the area near this city seems symbolic in the context of persistent Kurdish demands for administrative control of the area.)
In line with this, on 18 June, in the specific context of the licensing round, the Iraqi oil ministry revealed its interpretation of centre–periphery relations in the non-federated parts of Iraq in unabashedly centralist terms: To a request by the Kurdish-dominated provincial leadership in Kirkuk to be consulted with regard to the prospective contracts affecting the Kirkuk area, Asim Jihad, the ministry spokesman commented, “We welcome the comments and point of views from any affected party precisely because it is the goal of the ministry to preserve the higher national interest and put it above any narrow and particularistic interests.”
Or, in plain English, the oil ministry would be delighted to receive a statement of the grievances of the Kirkuk provincial government in order that their concerns can be immediately shelved, utterly ignored and entirely subordinated to the ministry’s own plans.
In theory, then, the logical course for Shahristani would have been to ensure strong, centralised and national control of the oil sector, with an Iraqi national oil company and its Iraqi subsidiaries in the lead, and with international companies only as secondary players – perhaps avoiding the major IOCs altogether and having smaller companies doing service work such as drilling and maintenance.
In fact, a plan along such lines appeared to be in the making in early 2008 in the shape of no-bid service contracts with a series of foreign companies (albeit major ones). However, this scheme was abandoned for reasons that still seem unclear, but at least partly are thought to relate to Shahristani’s preference for a more transparent process.
Another reason for the absence of a stronger Iraqi role in the current policy could be that Shahristani, himself a nuclear scientist with no particular background in the oil sector, has from the very start been on a collision course with many of the existing entities in Iraq’s oil sector, not least the powerful South Oil Company (SOC) which historically handled all the fields in the south of the country.
The SOC and the trade unions are traditionally the fiefs of southerners from Basra and the far south who often express a distaste for bureaucrats from the oil-deficient centre of Iraq telling them what to do, and who, confusingly perhaps, and in a somewhat uneasy coexistence with local regionalist tendencies, on many occasions assert their particularisms in a language that is just as centralist and nationalist as that emanating from Baghdad.
Shahristani’s way of handling this issue has been to attack the SOC by trying to remove influential local bosses (in particular Jabbar Luyabi), breaking up the SOC by establishing new local companies (Maysan; Dhi Qar has also been under discussion), and marginalising it by bringing in foreign hands (most conspicuously in the case of the contract with Shell for gas flaring in the Basra governorate).
To the SOC, the avalanche of foreign contracts implied by the first licensing round could be yet another manifestation of this kind of attack by Shahristani, as the company is offered a continued but probably more fragmented role.
At the same time, though, opposition from the other end of the scale – decentralisation demands by the Kurds – is preventing Shahristani from making progress on re-establishing the Iraqi national oil company under tight ministry control because the Kurds prefer any centralised entity to be governed by political appointees on a future national oil and gas council and not by ministry officials.
Hence, when it comes to the first licensing round, through confronting the SOC while at the same time refraining from getting an Iraqi national oil company back on its feet, Shahristani has actually moved quite far away from the centralist ideals that form the core of the political programme of the “all-Iraq” Shiite Islamists among the Daawa and the UIA independents.
Instead, on this issue he now resembles an economic liberalist and even a de facto decentraliser. His moves have been done mostly in the name of transparency, but it seems likely that his concerns about the SOC getting too strong may have influenced his decisions too, directly or indirectly. Still, it should be added that there are other voices in the oil ministry who agree with him simply because of the need to kick-start the Iraqi economy, and it is notable that the northern counterpart of the SOC – the North Oil Company which handles fields such as Kirkuk – in this case appears to be somewhat less politicised, more supportive of the bid round, and in some cases has actually acted as a bridge between the central government and Kurdish interests.