Michel Abu Najm
Paris, Asharq Al-Awsat-Iraqi Oil Minister Dr. Hussein Shahrastani emphasized that the federal government of Iraq wants complete transparency in dealing with foreign oil companies, which will be treated on an equal footing. He admitted that the Iraqi petroleum sector is in need of investment to the tune of 50 billion dollars in the next five or six years, and that the money is not available locally, which means that foreign companies' assistance will be needed. The Iraqi oil minister criticized the government of the Kurdistan region for concluding contracts with foreign companies and blamed them for operating in Iraq without the approval of central government. He said that the Kurdistan government is refusing to surrender the oil it produces to the Iraqi government, but he left the door open for settling the situation of foreign companies which made agreements with the Kurdish government, if those companies agreed to central government's demand to become subject to federal Iraqi laws.
Shahrastani's statements were made at an exclusive interview with Asharq Al-Awsat during his visit with an Iraqi delegation to Paris, to activate the 'Joint French-Iraqi economic committee.'
The following is the text of the interview:
[Asharq Al-Awsat] What is the purpose of your visit and that of the delegation accompanying you to Paris?
[Shahrastani] We are here to activate the joint French-Iraqi economic committee, which remained idle after the fall of the former regime. You may recall that there was close cooperation between France and Iraq for many decades in commerce, economics and other fields. In the past years this cooperation came to a standstill and bilateral relations waned. But after President Sarkozy's visit to Baghdad last month, both parties expressed the wish to activate the joint economic committee and upgrade political, economic and cultural cooperation between the two countries. Thus, I am heading a delegation representing ten ministries, to explore the horizons of mutual cooperation with the French. And there will be many more meetings with French officials and representatives of French oil companies.
[Asharq Al-Awsat] What impact did the fall in oil price have on your 'petroleum plans', given that the Iraqi budget depends 90 per cent on oil revenue?
[Shahrastani] It is clear that the present oil prices are low, unrewarding and unconvincing, not only from the point of view of oil producing countries, but also from the point of view of the consumers. The world is going through an economic crisis -the worst in 80 years, which has affected the demand for oil, and has pushed the price down. For instance, the present demand for oil in the US market is one million barrels less than it was for the same period last year. But this is a temporary crisis, after which demand will increase. It should be stated that the world would not be able to find alternatives to oil and gas. The alternative resources would at best cover 20 per cent by the year 2030, or perhaps 2050.
It is therefore in the interests of both producers and consumers that oil prices go up in order to provide the oil producing countries with the finance necessary for investment, in order to increase production and respond to market needs when demand on oil increases anew. Present day prices in some countries are not covering the production cost, let apart future investment.
I would like to note that some oilfields have stopped production, which means that world production will decrease; and if the present economic crisis continues, the world will face a severe crisis, especially as developing oilfields usually takes years. In our view, the price of oil should not go below $70 a barrel, if it were to convince the investors to spend tens of billions in the petroleum sector.
[Asharq Al-Awsat] What are your plans for increasing production in Iraq?
[Shahrastani] Our production at present is 2.5 million barrels per day. Our ten-year plan (2008-2017) is to increase production to six million barrels per day. On a previous occasion we issued permits for six huge oilfields and two gas fields that would lead to an increase in production by 1.5 million barrels per day. A second batch of permits was issued around the end of last year, which we expect to add another two million barrels per day, and thus make a total planned production of six million barrels per day.
[Asharq Al-Awsat] But where would you get the necessary investment to develop these oilfields?
[Shahrastani] We need an investment of 50 billion dollars over the next five or six years. This money is not available locally. Moreover, we need finance for the reconstruction process and for services such as housing, education, health, infrastructure, etc. That is why we are going to the international oil companies -all of which have expressed interest in investing in the Iraqi petroleum industry.
In order to facilitate negotiations with these companies we prepared a 'standard contract' which we proposed to them. This contract abolishes the principle of partnership in production and replaces it with a 'production services contract', according to which the foreign company would receive a fixed sum of money for every barrel of oil it produces from an oilfield allocated to it to develop and produce from, regardless of the ups and downs of oil prices. This way, Iraq would be purchasing services from oil companies and paying for them, no more or less. We have so far 35 foreign companies that will be competing for tenders.
[Asharq Al-Awsat] How was the 'standard contract' received by those companies?
[Shahrastani] They all expressed their will to compete on the basis of the 'standard services contract'. It should be noted that many countries are adopting this system in their attempt to avoid partnership in production.
[Asharq Al-Awsat] But how would you sign contracts with foreign companies while the Iraqi Petroleum Law has not yet been adopted by the Iraqi Parliament, and moreover there is the problem with the government of the Kurdistan region?
[Shahrastani] According to Article 111 of the Iraqi constitution, the oil and gas of Iraq is the property of the people of Iraq. Therefore, no section of the Iraqi people should act in the name of the whole; the Iraqi federal government is the only representative of Iraq. Consequently, any disposal of Iraqi oil and gas from any region of Iraq, without the consent of the central government, is unacceptable.
[Asharq Al-Awsat] But the government of the Kurdistan region is signing contracts with foreign companies and does not seem to care about this constitutional principle.
[Shahrastani] Yes they did sign contracts, but our position was clear, that these contracts are not binding on the Iraqi government, and no foreign company has the right to operate in Iraq on the basis of contracts that have not been approved by the government of Iraq. According to the Iraqi laws in force, only the Iraqi ministry of petroleum has the right to sign contracts on behalf of Iraq. Accordingly, any contracts signed by other parties will not be binding on Iraq. To the foreign companies which signed such contracts, I say you bear the responsibility of your action.
[Asharq Al-Awsat] Even though these companies are present in Iraq?
[Shahrastani] A company may drill or develop an oil well or construct pipes and storage facilities, but the oil produced [according to the contract signed by the Kurdistan government without the approval of the federal government], cannot be exported or disposed of. Our view is that it should be surrendered to the Iraqi government to be exported through proper channels.
[Asharq Al-Awsat] Does this mean that the contracts signed by the government of the Kurdistan region are merely theoretical?
[Shahrastani] So far, there are activities and drilling operations taking place, but no oil has been produced from these oil wells. If any were produced, it might be sold in the internal market or smuggled abroad; but it cannot be exported except through the proper channels owned by the Iraqi government.
[Asharq Al-Awsat] Does the Kurdish government accept this approach?
[Shahrastani] There is difference of opinion, as there are discussions between the federal government and representatives of the government of the region of Kurdistan. We have reached an understanding to the effect that the revenue from the oil they produce goes to the central government in Baghdad, which in turn will distribute the revenue through the general state budget.
[Asharq Al-Awsat] Do you have a set date for implementing this agreement?
[Shahrastani] Work is continuing to connect the oil pipes -through which the oil produced as a result of contracts signed by the Kurdish government is pumped -with the Iraqi network; but the government of the Kurdish region is still objecting to this on the grounds that the oil companies which developed these oilfields should be rewarded and compensated. If we regard this logic to be correct, it follows that the Kurdish government should submit the contracts it signed with foreign companies to government scrutiny to determine whether these contracts provide for complete Iraqi authority over its natural oil wealth, and whether the companies' profits as a result of these contracts were reasonable. In particular we want to make sure that the foreign companies are not partners in oil production but are merely offering production services for which they will be paid.
I would like to say here that we may agree to a modification of these contracts, as we agreed to modify contracts concluded by the former regime with Chinese companies. Our view is that all contracts concluded between the date of the fall of Saddam's regime and the date of issuance of the draft petroleum and gas law in February 2007 can be reviewed and transformed into 'production services' contracts, after making sure that Iraqi interests are protected.
And by the way, I would like to point out that the contracts signed by the government of the Kurdistan region were with fourth or fifth grade companies, have been concluded without competition and transparency, and have not been presented to the federal government or even the Kurdish people. Consequently, they are secret contracts in contravention of Iraqi laws and regulations, and naturally raise the suspicion of the Iraqi people as well as the Kurdish people.
Our position is clear; it says that any contract concluded without competition and transparency is unacceptable and contrary to the laws and regulations in force, and the concerned companies would not be allowed to operate on Iraqi soil; and if they do, they bear the responsibility for their actions.
[Asharq Al-Awsat] The French oil company 'Total' has been interested in Iraqi oil contracts for decades, what are Total's plans in Iraq and what may it get from you?
[Shahrastani] Gone are the days when the Iraqi government used to negotiate with a certain company. This used to be the case in the past, in the days of Saddam Hussein, for political reasons. Now the companies have to compete through transparent tenders. We open the tenders publicly and the choice is made on a transparent basis. Some companies, and I am not talking about 'Total', prefer to talk with politicians behind closed doors so as to get some privileges.
As the man responsible for the petroleum sector in Iraq, I would like to explain unequivocally that this will not happen in Iraq; companies wishing to compete have to submit their tenders, and they have all welcomed this Iraqi procedure. And by the way, Iraq possesses huge oil reserves, and there are opportunities for many companies. We are not going to deal in the way the government of the Kurdish region has conducted itself.
[Asharq Al-Awsat] Is 'Total' receptive to the idea of 'service contracts'?
[Shahrastani] Yes they are; they have no objection. A month ago we met with them and tens of other oil companies at a conference in Istanbul. Some of them made remarks, some of which were correct. Among the correct remarks there were some relating to dual taxation and the need for Iraq to have a law dealing with this aspect.
[Asharq Al-Awsat] When will the first 'production service contract' be signed?
[Shahrastani] With respect to the first batch of licenses, contracts may be signed by the middle of this year; with respect to the second batch of licenses, they may be signed before the end of this year. With regard to the first batch of licenses, 35 companies out of 120 applicants are qualified to tender.
We are now receiving applications from companies wishing to be considered for 'tendering' for the second batch of licenses and we are going to announce shortly the names of companies that we regard as qualified to tender.
[Asharq Al-Awsat] How badly are the low oil prices reflecting on your economy and government services?
[Shahrastani] Iraq depends 90 per cent on its oil revenue. Consequently, the low oil prices affected us badly. In the budget of 2009 we counted on an average price of 50 dollars a barrel; but as you know, OPEC decided at its meeting last December in Algeria, to reduce production by 4.2 million barrels a day, to stop oil prices deteriorating. At the Vienna meeting more than a week ago, we stressed the importance of abiding by what has been agreed, as there was only 80 per cent adherence, which means that it is still possible to withdraw 800,000 barrels a day from the markets. Once that is achieved, there will be a balance between offer and demand, and prices will start to rise again. OPEC has given the member states two months to observe the situation and we will meet again in May 2009 to assess the situation and to decide whether there would be need for an increase in production. If prices do not go up, we will insist once again on another reduction of oil production.
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