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International expert finds KRG oil contracts “in the national interests”, “far superior” for Iraq than model contract proposed by Baghdad federal oil ministry

MON, 30 JUN 2008 13:08 | KRG Cabinet

Click here for the Arabic version of this press release

Federal Ministry of Oil model “would be disastrous for Iraq”; would lose trillions of dollars for Iraqi people

Erbil, Kurdistan – Iraq (KRG.org) - The Kurdistan Regional Government of Iraq (KRG) today announced the publication of a fact-finding report by the internationally renowned expert on petroleum fiscal regimes, Dr Pedro van Meurs, which finds that the Production Sharing Contract model currently applied by the KRG (KRG-PSCs) is immensely better for Iraq’s national interests than the Risk Service Contracts (EDP-RSCs) that have been proposed by the Ministry of Oil (MOO) in Baghdad.

In his report 'Comparative analysis of Ministry of Oil and Kurdistan fiscal terms as applied to the Kurdistan Region', prepared for leading international law firm Clifford Chance at the request of the KRG, Dr van Meurs warns, “If profitability to the investors is not aligned with the goals of the government, very significant losses can occur to the value of government revenues”.

The report further concludes, “There is therefore no doubt that applying the EDP-RSC concept [proposed by the MOO], instead of the KRG-PSCs, to the Kurdistan Region would be disastrous for Iraq, and would be a real tragedy if the MOO proposed model would be applied for the rest of Iraq.”

The report finds, “Under the KRG-PSC, the investor and the host government are fully aligned on all economic issues”, and “the performance of international oil companies under the KRG-PSC will be far superior than under the EDP-RSC [as proposed by the Baghdad MOO]”, and that the KRG contracts “would be considered in the national interests by many host governments because it does provide the framework for an optimal level of production and recovery of oil and gas from the reservoirs while creating a high value of government revenues.”

Further, Dr van Meurs’ study finds that the proposed service contract model of the Federal Ministry of Oil (EDP-RSC) “completely misaligns the interests of the investor and the host government in terms of cost efficiency”, pointing out that under the proposed model “a poor development plan and high costs result in a reward of high profits for the investor”, and concluding, “by fundamentally misaligning the interests of the investor and the host government and actually strongly encouraging investors to incur and declare higher costs, the EDP-RSC contract [proposed by the MOO] exposes Iraq to considerable risks of lower government revenues than would otherwise be obtainable.”

Dr van Meurs estimates that if the MOO’s proposed model were followed instead of the current KRG-PSCs , the present value economic losses to Iraq from the Kurdistan Region’s oil potential alone would be up to 450 billion US dollars assuming 30 billion barrels of new oil potential at a 100 dollars per barrel.

The report also finds that the Oil Ministry’s proposed approach “results in a complete give away of the national resource wealth under low price conditions and high costs”, and “could result in major losses in government revenues and oil production.”

On the Technical Services Agreements (TSAs) currently being proposed as a stop-gap measure by the Ministry of Oil but widely criticised recently, the van Muers report points out that these contracts have already been tried in Kuwait for more than a decade with no positive results:

“It should be realised that under Technical Services Agreements, the international oil companies are merely consultants.” It points out that “IOCs do not really have an incentive to give good advice. They receive the same consulting fees regardless of the results of the field production.”

KRG’s reaction to the report findings

KRG Prime Minister Mr Nechirvan Barzani said, “The KRG is proud of its achievements in adhering to the Iraqi Constitution and encouraging investment to increase Iraq’s reserves and oil production for the benefit of all the people of Iraq. We are committed to transparently accounting for and sharing all oil revenues generated in the Kurdistan Region with all Iraqis as required by the Constitution." He added, “In the rest of Iraq we have lost out on the immense opportunities of current high oil prices, and it would be a real shame if the Federal Oil Ministry pursues plans that will surely damage Iraq's interests even more if implemented”. He added, “Iraqis would never forgive a colossal potential loss to the country under policies being proposed by the Federal Ministry of Oil in Baghdad”.

The Prime Minister then reached out to his colleagues in Baghdad and said “We call upon all our allies and friends, political leaders, the Energy Committee and indeed the members of Parliament in Baghdad to lose no further valuable time in properly developing the long-neglected petroleum sector of Iraq, and to respect Iraq’s Constitution.”

Dr Ashti Hawrami, the KRG Minister for Natural Resources, who is currently at the World Petroleum Conference in Madrid, said, “The legal standing of the current KRG model, as adopted under the Oil and Gas Law of the Kurdistan Region, has previously been confirmed by Professor James Crawford SC as being in full conformity with the Constitution of Iraq, and now in this new comprehensive report, Dr van Meurs confirms that the KRG has also acted responsibly by adopting a contractual model that adheres to the tried and tested international economic standards, which in contrast to the MOO model would maximise returns for Iraq”.

He added, “This report vindicates the correctness of all our actions, and it exposes the poorly-structured contractual models of the Ministry of Oil in Baghdad”. He then stated, “Any informed economist/oilman can easily workout from Dr van Meurs’ report that MOO’s contractual models would lead to colossal losses for Iraq, and these losses would run into trillions of dollars over the next 20 years”.

The KRG Natural Resources Minister went on to say, “As has been widely reported, Iraq has potential additional oil reserves of around 250 billion barrels, awaiting investment to be discovered and produced, and at today’s oil prices MOO’s model would result in a loss to Iraq and the Iraqi people of a staggering 5 to 6 trillion dollars”. Dr van Meurs’ report should become a real marker for the ongoing oil law debate in Baghdad, and it is my earnest hope that everyone concerned should focus on this vitally important matter for the future of all of us as Iraqis, to make sure that the Federal Ministry of Oil acts responsibly and not be permitted to sign-up to any TSAs or to any other outdated contractual models”.

He also sent a word of advice to the IOCs: “They should not entertain contracts offered by MOO without a competitive bidding process, as these are not in Iraq’s best interests. Iraq does not need more time-wasting desktop, remote studies from outside the country; but real investments by companies on the ground in Iraq, with proven competence and the incentive to optimise our resources to realise the much-needed economic benefit for all Iraqis. This is the successful approach the KRG is following and will continue to follow, as required by Iraq’s Constitution, and we hope that the MOO will now change its policies and adopts similar investor-friendly contractual models to maximise returns for Iraq.”

The full van Meurs Report can be downloaded here

Additional information and contacts

For other related general publications by Dr van Meurs see 'Government Take and Petroleum Fiscal Regimes' and 'Maximising the Value of Government Revenues'.

For more information, please contact Khaled.Salih(at)krg.org