The mega-oil deals signed and pledged in Iraq in last week have been major news, marking another step by the oil majors back into a country that liberated itself from the “robbery and exhaustion practiced by the monopolistic oil companies” in 1972. But the full consequences of the agreements have been hard to untangle.
BP and Chinese CNPC last week signed the full contract to develop the Rumaila field, which was awarded to the consortium in July. Rumaila is a supergiant field, with 17-25 billion barrels of recoverable reserves – 3 times Azerbaijan’s total. BP’s contract pledges to increase Rumaila’s oil production from under one million barrels per day to 2.85 million. On 4th November, Exxon and Shell were awarded the right to develop West Qurna-1, proposing to raise extraction from 270,000 barrels a day to 2.35 million. Eni will similarly increase Zubair’s production from 200,000 barrels.
Iraqi Oil Minister Hussein Shahristani has been claiming victory in the negotiation battle, presenting an image of having withstood oil company demands (and US government pressure) for better terms. In July, Baghdad insisted that $2 was the maximum it would pay as a “remuneration fee” per barrel of crude extracted. Apart from BP/CNPC, all the oil companies walked away, grumbling that they deserve higher profits. Now they’re back, signing what appear to be the same contracts. E.g. Exxon/Shell’s fee for West Qurna-1 is for $1.90 per barrel.
However, there are various reports indicating that the terms were sweetened to tempt the oil companies back. Referring to Eni’s deal for Zubair, Carola Hoyos writes on the FT blog :
“Privately, oil executives say Iraq sweetened other fiscal terms that brought the entire project’s economics to about half way between the minimum Eni was willing to bid and the maximum $2 Baghdad was willing to pay during the June auction, in which every western oil company except BP walked away complaining about Iraq’s unrealistic terms. In June Eni was willing to accept no less than $4.80 a barrel. The new terms make the deal equivalent to the Iraqis paying about $3.80, one executive said.
Others claim that the oil companies had misunderstood the 35% corporate tax rate – that it only applies to the fee paid per barrel, not to net profits, thus improving their rates of return.
Either way, a recent interview with BP Chief Executive Tony Hayward in Petroleum Intelligence Weekly indicates that the oil companies will still be taking major profits from Iraq’s oil:
“Q. You’ve made a very bold move with the Rumaila contract in Iraq. Why did you go so low and isn’t the margin so small that it’s almost immaterial to you as a company?
A. It’s a 65 billion barrel oil-in-place field, the third or fourth largest in the world, of which 12 billion bbl have been recovered and we estimate there’s probably 20 billion bbl to be recovered — the range is probably 17 billion-25 billion bbl. Over the last five years we’ve worked with the South Oil Co. (SOC) exclusively, providing technical support to the field, so we know a lot about the reservoir. That’s the first thing — we understand the rocks. We are confident that the returns from this investment will be compatible with other opportunities in our portfolio. That means a 15%-20% return. […]
Q. A return of 15%-20% even with this fee-based structure of $2 per barrel?
A. Yes. It’s material because it’s a small margin times very many barrels. We are going to take the field from around 1 million barrels per day to nearly 3 million b/d, so 2 million b/d will be incremental production and that adds up to a lot — it’s material for BP.”
The interviewer was surprised at Hayward’s response, as a 10-12% rate of return provides comfortable profit levels. So 15-20% is not what you’d expect given the repeated complaints from Western oil companies and governments that Iraq wasn’t giving them fair terms. Furthermore, it reveals the greed behind the previous demands for $4 fees per barrel or Production Sharing Agreements and the lies spun in arguing that these were the minimum terms possible.
Interestingly, Hayward also points to something else important – that BP have been “providing technical support to the field, so we know a lot about the reservoir”. Greg Muttitt of PLATFORM warned about this in 2005, that Shell and BP were providing “technical assistance” for various fields to get access to all the geological data. By “understanding the rocks”, the companies are able to make a well-targeted pitch for the development licence and beat off competition.
However, the real clincher on why BP will be able to make such high profits is in Haywards’s next statement:
“The field is already in production. As you get cost recovery immediately you never have to make very large investments, so even to go from 1 million to nearly 3 million b/d the amount of capital we have to expose at any one moment is not very great as we’re getting our money back as production grows.”
Iraq’s oil, especially in mega-fields like Rumaila, is cheap and easy to get out of the ground. You don’t need to invest much to begin receiving large revenues in return. The current comparatively low level of output from these fields is due to the legacy of war and sanctions, which means that boosting production is simple. Former Oil Minister Esam Chalabibelieves that
“During the first months, BP and CNPC will not do much work, because they have to raise output in Rumaila by 10% in three years and that is an easy job for them. The first phase of the Rumaila contract does not need a lot of cash or much effort. South Oil Company did a good job recently, but BP and CNPC will collect the fruits.”
BP and CNPC are only committed to spending $300mn in the first 33 months, a small amount for oil majors and a very comfortable length of time in which to guarantee the production increase.
Hayward also inadvertently refers to an issue that has caused much opposition in Iraq:
”Now, people don’t really understand the contract and we haven’t sought to explain it because we haven’t signed it yet. When we have concluded it we will explain it to the investment community.
Hayward is focused on the investment community – BP’s true stakeholders. But it doesn’t seem to occur to him that the Iraqi people might want to understand a contract that governs 20% of Iraq’s proven reserves. With oil making up 95% of Iraqi government revenues, Rumaila alone could be responsible for one fifth of government income.
The lack of full transparency around the terms of the contract, including revenues and who controls development, undermine accountability of the Iraqi government and the ability of civil society to challenge problems with the contracts. This has led to opposition within Parliament, with MPs insisting that oil contracts require Parliamentary oversight. Noor Adin al-Hadyi, an opposition member of the Parliament’s oil and gas committee, said the committee could decide to take the issue to court to ask that the contracts be cancelled.
This licence round previously caame under major criticism from both the oil workers’ union and the management of the South Oil Company. The Iraqi Oil Ministry went as far as firing Fayadh al-Naama, head of the South Oil Company, in late July for opposing the current contracts.
As neither BP nor the Iraqi government have sought to explain the terms of the deal, it has been particularly difficult to assess the impacts on management and control over Iraq’s oil industry. Iraqi oil analyst Munir Chalabi has raised particular concerns over how the contract creates “field operating divisions” (FODs), which exist as legal entities and give BP/CNPC a major role in “their decision-making, control, management, development and operation of all the giant fields.” Chalabi feels that these FODs would also would “mean the fragmentation” Iraq’s North Oil Company and South Oil Company, which currently produce Iraq’s total of 2.4 million barrels per day. Having operated Iraq’s oil & gas fields through 30 years of sanctions and war and built up enormous experience, “their role will be reduced to no more than sub-holding companies for the giant oil fields, and limited in their management to distant and marginal fields.” The contracts undermine the national oil companies, creating greater pressures towards privatization, threatening a situation where Iraq is no longer able to produce its oil autonomously.
These fears about the carving up of the Iraqi oil companies appear to be confirmed by a further comment by Hayward:
“The model we have agreed with the Iraqis is to carve out of SOC [South Oil Company], which currently operates the field, the operating part for Rumaila. We are going to create a Rumaila operating company which will be principally Iraqi staff into which we are going to put BP technical specialists, much as we did in TNK-BP. So, sprinkle BP and CNPC technical specialists and then have the leadership populated between BP, CNPC and Iraq. It means we get an enormous amount of leverage from not having many people there. So we don’t have to deploy hundreds of people to Iraq. The model is exactly what we did with TNK-BP, particularly what we have done at Samotlor.”
So BP will maintain “an enormous amount of leverage”, while removing Rumaila from the existing Iraqi national oil companies. The state will only retain a minority 25% stake in the Rumaila operating company, down from an originally proposed 51%, leading to further marginalisation.
Hayward’s unfortunate example of TNK-BP formally operates as a private company pursuing corporate interests (of BP and its Russian oligarch shareholders), without regard for Russian public interests or needs. The arguments between BP and its rivals over control of TNK-BP can in large part be traced to the Russian shareholder’s unhappiness with the level of leverage available to London.
Hayward’s comment indicates that BP sees this model as a recipe for success. Increased leverage for BP means reduced leverage for Iraqi national oil companies, the Iraqi state, Iraqi workers and the Iraqi public.
The fact that these contracts are not Production Sharing Agreements is a testament to the successful campaigning and resistance on the part of the Iraqi oil workers and the international solidarity behind them.
However, in their current form, BP and Shell’s new deals signal a major threat to Iraq’s future ability to control extraction of its natural resources.