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21st October 2018 in Construction & Engineering In Iraq By Ahmed Mousa Jiyad. Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News. Petroleum Policy Proposal for the New Government: Contents, Justifications and Indicators Petroleum (oil & gas) sector remains, in the next four years as it has been in previous eight decades, the basic pillar for the Iraqi economy. Thus, it is preferable, if not imperative and mandatory, that the next government presents coherent, well-defined policy, with clear objectives and effective means that demonstrates it serves the national interest. Based on such a policy, the government will be monitored, evaluated and hold accountable periodically according to indicators that are measurable, comparable and verifiable. This essay aims to present a proposal for why and how the new Iraqi government should have a well-defined petroleum policy document-PPD and what such document comprises; a proposal that helps in monitoring, analysing and evaluating actions and activities of the new government in the sector-wide petroleum. The essay covers the most important and vital issues that PPD should cover: Structure and governance of the petroleum policy; its main components and indicators (the longest and detailed part in the proposal); Federal Oil and Gas Law; National Oil Company Law; Relation with KRG; Transparency retreat in the oil sector; Corruption problems in the sector; Oil smuggling; Organic linkage between petroleum policy and the general economic and development policy of the government; and finally Futile duplication of the past. Also the essay emphasises the important role that Iraqi petroleum experts and specialists in undertaking independent, professional and timely monitoring, analysing and evaluating of the PPD at all its phases. The preparation of this proposal is based on continuous follow-up and use of official information, indicators and standards in the international oil industry. Emphasis was given to practical operational aspects; evidence-based approach not unrealistic assumptions or theoretical abstractions; and starting from the notion that petroleum policy constitutes an obligation to be implemented by the new government, not a guiding document or formality requirements to approve the new cabinet. First: Petroleum Policy: structure and governing framework None of the previous governments had or submitted specific Petroleum Policy Document-PPD; this time it must be different. So far, there seems to be a “new” political equation: the prime minister designate requested, and granted, a free-hand in forming his cabinet; in return, he will be responsible for presenting and executing his “government programme”. Both, the cabinet and the programme are subject to parliamentary approval. Hence, the government will, and should, be under scrutiny and accountable for executing the approved programme and, accordingly, its commitments regarding petroleum (oil and gas) would constitute its petroleum policy. It is preferable that petroleum policy be presented as a separate document- PPD in its own right (or what is usually called a White Paper) or within the government program. It may be referred to in the government program but then outlined in details later in a specific document; Since the government program (prepared by the executive branch) is subject to the approval of the legislature (i.e. the parliament), then PPD must be subject to the same approval process and requirements; The PPD should cover the activities of the three basic sub-sectors of the petroleum sector: The first includes exploration, development and production activities for oil and gas (Upstream); the second includes activities related to storage and tank farms, pipelines, pumping stations and export facilities (Midstream); the third covers crude oil refineries, gas industries and petrochemical (Downstream). It should be noted, though, that petrochemical industry falls within downstream sub-sector, but in Iraq it falls within the functions and mandate of the Ministry of Industry and Minerals-MIM not the Ministry of Oil-MoO. PPD should have sets of important measures and quantitative indicators or thresholds that are measurable and verifiable covering all the activities of the oil sub-sectors mentioned above in addition to descriptive indicators. This effectively means: First, identify and quantify the baseline-indicators at the beginning of PPD implementation (e.g. first December 2018 or January 2019); Second, targets indicators (estimated at three levels: minimum, possible and ambitious) that the government is committed to achieve on an annual basis; Third, financial, human, institutional and legal requirements needed for realization of these goals; Fourth, potential challenges and risk mitigation categorized on the basis of their likelihood of occurrence (high, likely and unlikely) and their impacts (very effective, moderate, not effective). Since the government will be hold accountable before the parliament for implementing its oil policy, this requires that both authorities should have active role and a specific task for “following-up and monitoring” the implementation of PPD at least once a year. In performing this role, the Energy Committee in the General Secretariat of the Council of Ministers is responsible for “follow-up” the implementation of the oil policy by the MoO, while Oil and Energy Committee in Parliament has the task of “monitoring/ oversight” the implementation of the Government/MoO’ PPD. Monitoring and follow-up reports be presented, discussed and published periodically as a binding and agreed-upon coordination action between the two authorities; different from the parliamentary controversial practices known as “summons”. The policy is to be reviewed and evaluated on the base of the indicators and thresholds already detailed in the PPD and the above-mentioned “follow-up and monitoring” reports. In case of significant failure or deviation (compared with the minimum values of the adopted indicators), this might justify or recommend a call for vote of no-confidence measures against the entire government or dismissal of the Minister of Oil. Second: Components, Contents and Indicators of PPD It is possible, but actually necessary and practical, to determine the most important parts of the PPD in each of the three sub-sectors of the petroleum sector; these are discussed now. Exploration, Development and Production (Upstream sub-sector) In this sub-sector, PPD includes the following: Enact voluntary moratorium on developing any new oilfield except for the border fields (as discussed below) at least during the term of the new government. Similarly, no producing, discovered but not commercially developed or newly discovered oilfield be award to IOCs during the next four years. The premises for such moratorium are: According to MoO’ official data and information, Iraq’s oil production reached 4.460 million barrels per day (mbd) during August 2018 and the production capacity could exceed 5 mbd at the end of this year and could reach 8 mbd by 2025; As the new government is limited by four years, it can add 1.5 mbd more and thus should focus efforts to arriving at about 6.5 mbd by or before the end of its constitutional term; Oilfields contracted during first and second bid rounds can achieve the required increase, especially the final stages of development to reach plateau production in the contracts of those fields begins or completed during the term of the government; There is no indication that international oil market, OPEC market share and Iraq quota within OPEC compel Iraq to have production capacity beyond 6.5 mbd during the next four years; In the event that a rate above 6.5 mbd is needed, the development activities of these oilfields could be “accelerated” within the limits of 8 mbd first and then reinstate the contracted plateau production targets fully or partially as recent information indicates to such eventuality; Earmark any development of oilfields, not contracted before August 2016 and those discovered to date or in the future, exclusively by the National Effort-NE, but with the support of known service companies when necessary and through conventional services contracts, i.e., not through contracting IOCs or licensing rounds. The justifications for this restriction and focus on the national efforts are: Most important oilfields classified as big, giant and supper giant have been already awarded to IOCs to the extent that almost 50% of Iraq (excluding KRG) proven oil reserves are now contracted to IOCs; National effort activities are crucial pillars for the development of human, institutional, knowledge and organizational capacities in this vital sub-sector of the Iraqi oil industry. Iraqi workers and staff are the backbone for executing national effort activities. Thus, expanding national effort activities could first, contribute, modestly at the start though, in address unemployment problem among young people technically qualified as evidenced by the demonstrations in southern provinces since last July; second, expedite the development of “Iraqi human capital” by extensive training to address skills and human capacity gaps; As claimed by the Ministry of Oil (though without providing credible and verifiable evidence) the cost of development through national effort is much less compared to those carried out by the IOCs; Certainly, “decision-making” is exclusively Iraqi under the national effort, while it requires “unanimity by Joint Management Committee-GMC”, which include IOCs, in each field under licensing rounds; Location, work procedures and activities of the national effort are local, while IOCs offices are located outside Iraq. Thus, this undermines their transparency and, thus, requires extra efforts, by the Iraqi authorities, to verify the credibility and accuracy of costs claimed by IOCs. Available evidences suggest that has been a source of contentions and disagreements between MoO and IOCs, which had its bearings on the projects themselves. Focus on and give priority to end Associated Gas Flaring Latest statistical information, for August 2018, from MoO indicates 60.4% of total produced associated gas was flared in the southern provinces (Basra, Maysan and Dhi Qar). As for all Iraq (excluding Kurdistan), it exceeds 56%. Since associated gas flaring represents a blatant waste of an important economic resource in addition to the enormous environmental damage at the time Iraq imports gas from Iran, oil policy of the new government must include and ensure the follows: Compel IOCs contracted under second bid round to fully comply with their contractual obligations, particularly paragraphs relating exclusively to the maximum benefit from associated gas; No exemption of any of these companies from their contractual obligations through contracting gas matters, by MoO, to other companies outside the consortium that was originally contracted to develop these oilfields (case in point is what happened recently regarding gas in Gharraf oilfield); Such action by MoO is highly questionable on legal and cost premises. Relieving related IOCs from their contractual obligation to treat associated gas means giving further concessions and represents a costly overstepping on Iraqi interest. And by offering that task to another company under totally different contract with, most probably, terms favourable to the new companies would only exacerbates further losses for Iraq. Such eventuality becomes highly probable since these new contracts were negotiated and concluded behind closed doors and their texts have not been disclosed publically and transparently. But if gas treatment were taken without the consent of the originally contracted IOCs, that could constitute a breach of contract by the MoO, which could compel the concerned contracted party i.e., IOCs to invoke the international arbitration clause that may result in substantive claim for compensation that Iraq has to pay, if warded by ICC in Paris. Full implementation of the instructions by the General Secretariat of the Council of Ministers on this subject as codified in Recommendation No. 51 of 2018 relating to the work-plan on the requirements of the World Bank loan in this area; Determine reduction threshold of associated gas flaring commensurate with the need to expedite the implementation of Iraq obligations under the World Bank initiative known as “Zero routine gas flaring by 2030”; Commitment of the government, especially the ministries of oil and electricity, to provide gas required to generate electricity in specific quantities and timelines (preferably on monthly base) Sovereign Border Fields-SBF’ development has special importance and sensitive because of the possibility for joint development through “Unitization” approach with the neighbouring countries, particularly Kuwait and Iran. International experience tells, unitization modality has many advantages in developing these fields attributing to many rationales, economic and operational considerations and prudent management of oil reservoirs. In anticipation of high probability of adopting unitization with neighbouring countries, oil policy document should include the following: Any activity relating to the development of these fields should be limited to the national effort exclusively until a unitization development agreement is reached with the concerned State i.e., Iran and Kuwait; In the case the concerned State accelerates the development of the border field unilaterally then Iraqi side should give priority to the development of the Iraqi side of that field; The Iraqi government takes the initiative in urging the neighbouring countries (especially Iran and Kuwait for the time-being) to finalize all necessary agreements for the commencement of important border fields’ actual development through the widely practiced internationally of unitization agreements. The last (fifth) bid round. After a comprehensive evaluation of the contracts and results of this round by a group of well-known Iraqi oil experts, they concluded that these contracts serve the interests of foreign oil companies at the expense of the Iraqi national interest. That also contravenes the principle of achieving “the highest benefit to the Iraqi people” enshrined in the Constitution. For the above reasons, the current government has not ratified any of these contracts and the next government should; Do not approve these contracts and returns them back to the MoO unratified; Since most of the contracts of this round relate to border fields and exploration blocks, then their development has to be considered through unitization approach. The government refrains from and prohibits negotiating with foreign companies and concluding agreements and contracts with them behind closed doors without transparency and without disclosing the text of these contracts. Also the next government should not ratify any of these contracts which were not ratified before October 2, 2018. |
