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Context of 'November 2005: Report: PSAs Would Cost Iraq ‘Hundreds of Billions of Dollars’ in Lost Revenue'

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The State Department’s Oil and Energy Working Group, part of the Future of Iraq project, completes its formal policy recommendations for Iraq’s post-Saddam Hussein oil policy. The group comes out in strong favor of an oil policy that would rely on production sharing agreements to manage the relationship between Iraq and oil companies. It states: “Key attractions of production sharing agreements to private oil companies are that although the reserves are owned by the state, accounting procedures permit the companies to book the reserves in their accounts, but, other things being equal, the most important feature from the perspective of private oil companies is that the government take is defined in the terms of the [PSA] and the oil companies are therefore protected under a PSA from future adverse legislation.” The group further specifies that the terms of any PSAs signed with Iraq must be attractive to foreign capital. “PSAs can induce many billions of dollars of foreign direct investment into Iraq, but only with the right terms, conditions, regulatory framework, laws, oil industry structure and perceived attitude to foreign participation.” The Financial Times notes, “Production-sharing deals allow oil companies a favourable profit margin and, unlike royalty schemes, insulate them from losses incurred when the oil price drops. For years, big oil companies have been fighting for such agreements without success in countries such as Kuwait and Saudi Arabia.” [US Department of State, 4/2003; Financial Times, 4/7/2003; Muttitt, 2005]

Entity Tags: US Department of State

Timeline Tags: Events Leading to Iraq Invasion, Iraq under US Occupation

The International Tax & Investment Centre (ITIC), a corporate lobby group that advocates for pro-business investment and tax reform, issues a major report titled Petroleum and Iraq’s Future: Fiscal Options and Challenges, expressing the view that Iraq’s relationships with oil companies should be managed through the use of production sharing agreements (PSAs). The paper calls PSAs the “simplest and most attractive regulatory… framework.” It says this view is supported by “international experience and regional preferences,” though critics of PSAs will note that PSAs are not in fact popular among the major oil producing countries of the Middle East. “It is difficult to overstate how radical a departure PSAs would be from normal practice, both in Iraq and in other comparable countries of the region,” says Greg Muttitt of PLATFORM, a British oil industry watchdog group. “Iraq’s oil industry has been in public hands since 1972; prior to that the rights to develop oil in 99.5 percent of the country had also been publicly held since 1961. In Iraq’s neighbors Kuwait, Iran, and Saudi Arabia, foreign control over oil development is ruled out by constitution or by national law. These countries together with Iraq are the world’s top four countries in terms of oil reserves, with 51 percent of the world total between them.” The ITIC report also argues that foreign investment in Iraq’s oil sector will help “kick start” Iraq’s economy and free up funds for other programs. [Muttitt, 2005]

Entity Tags: International Tax and Investment Centre

Timeline Tags: Iraq under US Occupation

At a conference with oil companies in Beirut, the British ambassador in Baghdad gives the Iraqi finance minister a report (see Autumn 2004) authored by the International Tax and Investment Centre, a Washington-based oil industry lobby. The report, which contains recommendations for a new Iraqi oil policy, expresses the view that Iraq’s relationships with oil companies should be governed through the use of production sharing agreements (PSAs). [Observer, 3/4/2007]

Timeline Tags: Iraq under US Occupation

A report authored by Greg Muttitt of PLATFORM concludes that Iraq would not benefit from an oil policy based on production sharing agreements (PSAs). According to Muttitt, the PSAs would cost Iraq “hundreds of billions of dollars in potential revenue,” while oil company profits would see annual rates of return “ranging from 42 percent to 62 percent for a small field, or 98 percent to 162 percent for a large field.” Muttitt’s study also warns that PSAs would result in Iraqis forfeiting control of their oil industry to foreign oil companies. For example, Iraq would lose its ability to control the depletion rate of its own oil resources. “As an oil-dependent country, the depletion rate is absolutely key to Iraq’s development strategy, but would be largely out of the government’s control,” Muttitt notes. Furthermore, PSAs, which typically have fixed terms of between 25 and 40 years, often include “stabilization clauses” that grant oil companies immunity from all future laws, regulations, and government policies. If Iraq were to sign such PSAs, future Iraqi governments would be unable to change tax rates or laws regulating labor standards, workplace safety, or the environment. PSA agreements also tend to put the host government at a disadvantage when there is a dispute with the contracted oil company. Most PSAs stipulate that disputes must be resolved in international arbitration tribunals where they are generally presided over by corporate lawyers and trade negotiators who will only consider narrow commercial issues without regard to Iraqi public interest. Muttitt’s report argues that Iraq has several options for developing its oil industry that would be far more beneficial to Iraq than relying on PSAs. One option would be for Iraq to hire specialist companies under short-term technical service contracts to provide expertise only when native expertise is lacking. There is no reason, Muttitt notes, for Iraq to give oil companies full control over the industry when Iraq has a highly-skilled oil sector workforce that is fully capable of managing the country’s oil production. All that’s needed, he says, is for them to receive training on the latest technologies. Until that is achieved, Iraq would be adequately served with a policy based on short-term technical service contracts. Muttitt also argues that Iraq has several options for acquiring the needed capital to jump start the oil sector. Foreign investment is neither the only, nor the most attractive solution for Iraq. He argues that using Iraqi money or borrowing funds would save Iraq billions of dollars in the long term. [Muttitt, 2005]

Entity Tags: Greg Muttitt

Timeline Tags: Iraq under US Occupation

July 2006: Draft of Iraq Oil Law Completed

A draft for a new Iraq oil law is completed. The proposed law was drawn up by three Iraqis—Tariq Shafiq, Farouk al-Qassem, and Thamir al-Ghadban—who have been working on it for three months. Shafiq is the director of the oil consultant firm Petrolog & Associates and was the founding director of Iraq’s National Oil Company in 1964. Ghadban recently served as the country’s oil minister (see June 2004). [United Press International, 5/2/2007] One provision in the draft law lists production sharing agreements (PSAs) as one type of contract that could be used to govern private sector involvement in the development of Iraq’s oil sector. Under PSAs, oil companies would claim up to 75 percent of all profits until they have recovered initial drilling costs, after which point they would collect about 20 percent. These terms are more favorable to investors than typical PSAs, which usually give about 40 percent to the company before costs are recovered and only 10 percent afterwards. Even when the price of oil was as low as $25 per barrel, the lower paying PSAs were profitable for companies. Critics say that the oil companies want to negotiate and sign the PSAs with Iraq before the country is stabilized so they can argue that the political risk of doing business in Iraq warrants higher profit shares. But then they would wait until after the situation has improved before moving in. Iraq would be the first Middle Eastern country with large oil reserves to use PSAs. Other countries have avoided PSAs because they are widely thought to give more control to companies than governments. James Paul of the Global Policy Forum will tell the Independent: “The US and [Britain] have been pressing hard on this. It’s pretty clear that this is one of their main goals in Iraq.” The Iraqi authorities, he says, are “a government under occupation, and it is highly influenced by that. The US has a lot of leverage… Iraq is in no condition right now to go ahead and do this.” Critics also suggest the companies’ shares of profits should be lower than typical PSAs, if anything, since Iraq’s oil is so accessible and cheap to extract. Paul explains: “It is relatively easy to get the oil in Iraq. It is nowhere near as complicated as the North Sea. There are super giant fields that are completely mapped, [and] there is absolutely no exploration cost and no risk. So the argument that these agreements are needed to hedge risk is specious.” [Independent, 1/7/2007] Immediately after this draft is completed, it is shared with the US government and oil companies (see July 2006). In September it will be reviewed by the International Monetary Fund (see September 2006). Iraqi lawmakers will not see the document until early 2007. The provision mentioning PSAs will be axed from the final draft due to Iraqi opposition (see February 15, 2007).

Entity Tags: Thamir al-Ghadban, Farouk al-Qassem, Tariq Shafiq

Timeline Tags: Iraq under US Occupation

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