Abdul Karim Luaybi

Iraqi Oil Minister Abdul Karim Luaybi gives the latest on the draft Oil & Gas Law (OGL)  and the state of the dispute with Exxon Mobil over its signed contract with the Kurdistan Regional Government (KRG) in an interview with Iraq Oil Forum editor Ruba Husari in Baghdad.  (للنص العربي اضغط هنا)

Q: You were expected to meet with the KRG’s Minister of Natural Resources Ashti Hawrami to agree a draft Oil & Gas Law (OGL) – or Hydrocarbon Law – based on the 2007 draft, that is acceptable to both sides before the end of the year. Have you met?

A: No we have not. The issue goes beyond the OGL law. I expressed my point of view during the meetings with KRG’s PM Dr Barham Salih as well as with Dr Hawrami here in Baghdad, which is that the oil industry is different from all other industries and other sectors. There is a need to manage this industry with some centralization especially as far as planning for production and marketing is concerned. Everyone agrees on this in principle, but trying to implement it is problematic. For example, if someone decides to establish a cement factory in Basrah province, there is no need to coordinate with Dohuk province if the latter decides to have a cement factory as well. But it’s different in the oil sector. Based on that, it’s not acceptable that the Kurdistan region of Iraq continues to sign contracts to develop fields without the knowledge and approval of the central government which represents everyone. The federal government, like the federal oil ministry, does not represent just 15 provinces but all of Iraq including the Kurdistan region, as stated in the constitution. As the federal oil minister, I’m required to do planning for our production and exports and make a forecast for the state revenues at country level. This is not possible if the Kurdistan region acts alone. The political side of the issue, and who agrees what in political meetings, is not of my concern. My concern is only this. I need to be clear on what our production plans are, including our export plans and that these are included in the government program and in the federal budget law which is entirely dependent on the oil sector, including the Kurdistan region. This is my opinion and it was reflected in the draft OGL that was discussed in the energy committee and later was passed by the council of ministers (on Aug.25,2011) and sent to parliament with instructions that this draft annuls all others before it and that it should be the only draft up for discussion. The delegation from the Kurdistan region headed by Dr Salih discussed other important issues and not just the OGL issue. The technical committees will require further meetings to agree on the principles in order to move all these issues forward at the same time and to reach final conclusions on all provided there is a common will to solve them those issues.

Q: So you don’t expect an agreement by both sides on a draft by the end of the year as previously announced?

A: I don’t think this is feasible because it’s not just a case for the oil ministry and the ministry of natural resources (in KRG). The OGL needs to be discussed in parliament and there has to be consensus in parliament itself among all political parties to reach an agreed draft. So even if the two ministries do not meet to agree a draft, it can be done through the parliamentary committees. The oil and energy committee in parliament can organize sessions with people from the government and concerned ministries, as well as with experts from outside government as they have done in the past to discuss the draft. Having said that, I’m ready to meet minister Hawrami any time though no meetings are planned at the moment. As for parliament, I’m not aware that they have started discussing the last draft of the law agreed by the council of ministers.

Q: The draft agreed by the council of ministers is not acceptable to the Kurds, do you insist on it?

A: I’m of the opinion – and this is also the federal ministry’s opinion since I have pooled the opinions of many in the ministry and as you know it has a very diversified representation – that there are basic principles that will never be subject to compromise. I summarize them in two points: the first is that all oil sector plans and contracts approvals have to be done centrally; and the second is that all marketing has to be done centrally. Those two points are crucial while everything else is subject to discussion and amendment. For me personally, those two points are a red line. This is not only limited to the Kurdistan region but it concerns Iraq as a whole. I’ve already expressed this view in the council of ministers and in parliament. I said to both that this law can either lead to the preservation of Iraq as a whole or it can lead to its splitting into small states.

Q: What’s your view on the contracts already signed by the KRG? Can you reach an agreement on what should be their fate?

A: I told our Kurdish compatriots we can talk about agreements as much as you wish but what is more important to me is the principle. When I was asked to present federal plans for the 2012-2014 period several months ago, I sent many letters to the KRG ministry asking for information and data about their production plans and we even invited them to participate in the ministry’s planning meetings where those federal plans are discussed, but I did not get any response. As long as the Kurdistan region continues along those lines, it’s very difficult for us to agree (on their contracts). It is not acceptable – and I’m talking here as an Iraqi citizen not as oil minister – that the Kurds sign contracts that award every single inch of the Kurdistan region of Iraq, without the participation of the inhabitants of the 15 other provinces in the decision. Then, a federal law is approved where they do participate in all decisions that concern oil fields in the rest of Iraq. No Iraqi, Kurd or Arab, will accept that. So in the final resort, it’s up to the Kurdistan region to decide whether it has made a strategic decision to stay part of Iraq or it has made up its mind to establish its independent state. If the latter is their choice, I do acknowledge they have every right to that. But they have to be clear with us: is it their choice to establish an independent state now?

Q: The Kurdistan region committed according to the 2011 federal budget law to export a minimum of 100,000 b/d during 2011 based on an interim agreement that includes payments to be made by the ministry of finance to the KRG. Have they exported that volume?

A: It’s true they committed to that minimum and they said at the time they could increase it to 200,000 b/d by year end, but what they have pumped is below what they had committed. They also received two payments totaling almost $500 million. There are delays in the auditing of the oil expenditures causing delays in payments. This is not the Kurdistan region’s problem but it’s one we are faced with at federal level because the audit bureau has a different procedure for auditing than the one we follow. They insist on auditing the smallest expenditure. We suggested they move on to a more general auditing procedure for the oil expenditures using a software we are using in the oil ministry and which gives us an acceptable comparison of the petroleum costs. We also suggested we have enough experience to estimate costs based on the number of wells drilled and their depths, and surface facilities and their specifications. This should speed up the auditing of oil field expenditures in the Kurdistan region. However, the process is still slow.

Q: How long can you sustain this interim agreement for export and payments?

A: It’s a matter that needs to be sorted as a whole in all its dimensions. I was very frank with our compatriots in Kurdistan region when I said we cannot continue with this situation where the KRG continues to sign contracts for blocks and so on. The issue is not just signing contracts and it’s not just what you produce. The biggest challenge is going to be about marketing. How are we going to be able to market the millions of barrels we plan to produce. We still have more than 75 undeveloped fields in Iraq for which we can conclude contracts within a month or two. But this is not the way to go. In fact, we had to freeze development plans for some fields because exporting and marketing is an issue. There are challenges whether with the infrastructure or the marketing which we have to examine very carefully.

Q: You announced that Exxon Mobil has breached its contract and the law by signing contracts for six blocks with the KRG. Which law has the company breached?

A: There are two main articles in the Constitution, Art.111 and Art.112 that deal with oil matters and those two articles are listed under the section concerning the competencies of the federal government. Art. 112 in particular stipulates that the federal government shall manage oil and gas extracted from present fields. It also stipulates that the federal government, with the producing regional and governorate governments, shall establish the strategic policies for the development of oil and gas. This means that no region or governorate can sign contracts unilaterally. Exxon Mobil knows this and understands it better even than myself, the oil minister.

Q: Where did they breach the contract they signed for West Qurna-1?

A: In the letter we sent to Exxon we explained in details the articles of the contract where the company undertook to respect the Iraqi law including the directives issued by the oil ministry. The directives state that companies which sign contracts with any other authority – and this includes any province, not just the Kurdistan region – than the central government will be blacklisted.

Q: What would be the fate of the WQ-1 contract now?

A: That depends on Exxon’s final position. They are required to decide on a final position. Our position is clear. No company, whether Exxon or any other, would be allowed to breach our constitution and current laws and directives. Those were put in place not in order to punish a region or a province but it is state policy and the interest of all parties requires a certain degree of centralization.

Q: Kurdistan region President Massoud Barzani was quoted saying that PM Nouri al-Maliki was informed of the Exxon contract and gave his approval before it was signed. Is that true?

A: No, this is not true. A letter was sent to the PM that I was made aware of, stating that the region will be negotiating with international companies and they will be signing contracts and it stated that the government will be informed of the details. We heard at the time that they were talking with several companies, but we were not informed about the contract. That was all.

Q: Why do you think Exxon has been silent so far?

A: I think because they are in trouble.

Q: Is the ministry too facing a dilemma too because it cannot allow work on WQ-1 to be interrupted?

A: No, we have no issue at all whether Exxon decides to pull out of WQ-1 field development contract or to stay. If it decides to pull out, it will be the biggest loser. The entire Kurdistan region oil is nothing compared to WQ oil field. If it decides to withdraw from the field, we have several alternatives (to develop it). It is the reputation of Exxon that is in the balance now because until now it has insisted on this transparency in its dealings with us, including on such issues as procurement instructions regardless of how small the amounts are. They have strict and complex rules. So the question we ask is how could a company that insists on such transparency sign a contract in this way?

Q: Is freezing their contract with the KRG until the central government and the KRG agree on the fate of all the contracts signed with the Kurdistan region, an option?

A: No, that’s not acceptable. They have to choose either to continue work here, which we have no issue with, or to work in the Kurdistan region. They have got themselves into trouble and they have to find the way out. In my opinion, they were misled by those who advised them about the situation (between Baghdad and the KRG).

Q: How would a possible withdrawal by Exxon from the WQ-1 contract affect the water injection project or the Common Seawater Supply Facility (CSSF)?

A: It will not have any impact. Exxon was chosen to act on behalf of a group of companies and we don’t see a problem with any of those companies taking up that role. The project will go on whether Exxon is operator of WQ-1 or not.

Q: Wouldn’t it cause some delays at least if you were to choose another company to lead the project?

A: The contract for the project has not been signed yet because the two parties had to make further amendments to it but the preliminary work is ongoing. I don’t expect any delays even if the lead operator is replaced. I personally had a different view from that of the companies regarding this project but I had to respect their wish because it concerns them primarily. My view was that going down that road of conducting a pre-FEED (front-end engineering and design) and then a FEED would take a long time based on our experience in the refining sector. Using an international consultant to do the whole project from A to Z, in the same way we have done with the export capacity expansion project in the south, would have been an ideal solution because we do lack experience here in Iraq. I’m still of that view and have been telling the companies involved that it’s still feasible to do that if they so chose.

Q: The draft 2012 federal budget law is based on an oil production forecast of 3.4 million b/d next year. Is it doable?

A: Yes of course it is. We do not have a problem with production but the bottlenecks are with the surface facilities and the export infrastructure. At the moment, we have to cut production every three days because we have a surplus of crude production of about 4.5-5 million barrel a month which we cannot export. During the first 11 months of the year, we managed to export an average of 2.170 million b/d which is very close to the 2.2 million b/d we committed to in the 2011 federal budget law. Had the Kurdistan region delivered on their commitment, we would have delivered 100% of the plan. Next year the accelerated export expansion project will enter into effect using the first new SPMs (single-point mooring) starting from January. We will gradually build up an average export of 2.6 million b/d for the year including 175,000 b/d from the Kurdistan region. We have introduced an article in the federal budget law that stipulates that any province that fails to deliver on this commitment will bear the responsibility.

Q: Are you still looking into the possibility to review the targeted plateau in the contracts signed in the first two bid rounds?

A: Yes but it requires a bit of time and further study and I expect things will be clearer by next year. I also hope the companies themselves will contribute their own ideas. The issue here is one of markets and the amount of increase in global demand. It is true that the era of big oil discoveries is finished but producing countries still have considerable production capacities and they still have plans to increase their output. So for us the issue becomes how to export the additional millions of barrels we will be producing taking into consideration those factors.

Q: Would that entail renegotiating the contracts already signed?

A: Well, at the end of the day, we cannot impose anything on the contractors that may cause them loss. On the contrary, as much as we seek to increase our revenues, we also want to make sure the contractor gets all the profits and incentives stipulated in the contracts. But the marketing issue is also one that is equally of concern to the contractors. There is another important issue here which has to do with building surface facilities worth hundreds of millions of dollars for a plateau that is supposed to last just seven years. By reducing the plateau we can use those facilities longer. We are not talking here about cutting plateau targets by millions of barrels but rather small percentages. In addition to the economic reason related to marketing, there is also a technical reason that has to do with the reservoirs. Once the companies complete the reservoirs studies and they complete the full processing and interpretation of the 3-D seismic currently underway, we will have a clear geological and reservoir model for each field included in the final development plans for those fields. This is in fact what happened also with al-Ahdab oil field development since the contract stipulated a plateau of 115,000 b/d but now we are envisaging 160,000 b/d based on the completed reservoirs study. So the issue is not increase or decreasing plateau but it depends on reservoirs first, in addition to the economic consideration.