The Kurdistan Regional Government’s minister of natural resources, Ashti Hawrami, spoke to Ruba Husari in Erbil late July on the latest developments in Kurdistan’s upstream and downstream sector, the smuggling controversy, differences with Baghdad over crude exports and the fate of the federal hydrocarbon law.
Q. What’s the status of the different contracts signed so far with the KRG and how is work progressing on the ground?
A. We have 40 companies working in exploration and production, and a large number of service providers to go with that. They all have their individual contracts, and minimum obligations under production sharing contracts that they signed. There are 10-12 oil rigs in operation at the moment. There are 4-5 seismic crews active in the region; some of the contractors have moved on from initial 2-D seismic to 3-D seismic acquisitions, which is new in Iraq. In some cases, drilling has reached depths of 4,000-5,000 meters. Seven to eight new fields have been discovered, 3 of which are regarded to be world standard. We know from the testing and logging results that these are substantial discoveries. Some are still under evaluation, they still need to drill second or third wells. In the process, oil with gravity as high as 50° API to as low as 20° API is being discovered. There is a substantial heavy oil belt throughout Kurdistan which through our enhanced recovery program will add substantial value. Gas and gas condensate have been found in areas that were not expected to have gas, such as in the Dohuk region. So all of that adds credence to the notion that substantial volumes of gas, both free gas and associated gas, will be available in the Kurdistan region for export. The hydrocarbon law was passed by the Kurdistan Regional parliament in Sept. 2007. Until then, three contracts had been signed. We reviewed them and got them in line with the constitution. Then other investors came in and now we have companies from 17-18 countries in Kurdistan. In 2008, work started on the refineries, and now Kurdistan is a different place. We divided up the area of Kurdistan into small parcels or blocs. This attracted medium-sized and smaller players rather than the oil majors, for which the critical mass wasn’t there.
Q. You mentioned gas discoveries, is there a plan to export gas and how would you do it?
A. Initially, the gas will be used internally for the consumption of the Iraqi people, but eventually it has to hit the international market to monetize it. We are looking seriously at a gas pipeline project to eventually link up to the Nabucco pipeline. We believe Kurdistan’s gas exports have to start before access to the Nabucco pipeline is available, to some of our neighbors who might need the gas. We’re not producing gas for export now. We’re producing about 200 MMcf/d for our power plants, which are now delivering about 20 hours/day of power to the 3 major cities in the Kurdistan region. We used to get 3-4 hours/day of electricity about three or four years ago. More power will be required because of the gradual expansion of the industrial base, economic development and greater prosperity, which means consumption will be increasing. So we envisage demand to double but for now we have made a big mark.
Q. What’s the state of the refining sector in Kurdistan?
A. Iraq embarked in 2003-2004 on a number of small refineries, which were more kind of topping plants of 20,000 b/d. Two of them were located in Kurdistan in Bazyan and Erbil. The Erbil refinery, which is called Kalak refinery, is currently operated by KAR Group. Two years ago Baghdad decided not to fund it and completely abandoned its completion. We decided to privatize it, and to get private investment in very quickly. It’s operating at 20,000 b/d now but it will go up to 40,000 b/d next month. Eventually it will go up to 70,000 b/d to 80,000 b/d. Iraq never produced 92 or 95 octane gasoline. We will produce it for the first time. We will also produce enough jet fuel to cover internal needs. Jet fuel now comes from Baghdad or is imported expensively. Similarly, we don’t have any benzene in the region; we import it and mix it with naphtha just like the rest of Iraq. The Kalak refinery will convert most of the naphtha into benzene. Its twin in Suleimaniya, the Bazyan refinery, which also has a design capacity of 20,000 b/d but is operating at 14,000-15,000 b/d. In the future it will go up to 40,000 b/d. The planned Taqtaq refinery capacity is 60,000 b/d, but it’s still on paper. The design is being executed by Ventech in Houston and is almost finished. The three refineries between them when completed will give us a total refining capacity of 150,000-180,000 b/d.
Q. You are still producing a lot of fuel oil, where does it go?
A. The design of the topping plants was not made by us but by Baghdad, so we do have surplus fuel oil since it’s about 30%-40% of our output. But we do need diesel for our power plants and we need benzene. So the options we have with the surplus fuel oil is either to throw it away, or burn it, or re-inject it into wells. We’re not going to do any of that. So what is the solution? We could shut down the power plants, but then we would need billions of dollars to buy fuel (diesel) to burn as a replacement, and we don’t have that sort of funding. So the fuel oil is sold at a public auction to private companies, and then exported in a normal regulatory way. The money we get from that process is enough to cover the processing cost of the refineries – because they are private – and to pay the DNOs of this world their production costs.
Q. Do you count the many topping plants you have in Kurdistan as part of the total refining capacity?
A. The topping plants are now reaching their sell-by date. They go back to the late 1990’s and early 2000’s. They have nothing to do with the policy of the KRG. They were licensed by the ministry of industry here or in Baghdad, and some were just brought in because that was the norm then. There was a need, so you brought in equipment across the border, set it up, hoped to find some oil supply to process and then you sold the products. You have to put this in the context of the situation at the time in Kurdistan and Iraq. Some of the topping plants are in Mosul, some are in Kirkuk and some are dotted around in the three provinces in Kurdistan. About half have licenses but having a license does not commit us to supply them oil to process.
Q. But they were supplied with crude directly from the operators at one point.
A. At the time we authorized DNO and others to sell them oil in order to generate some cash to drill. But that was always until we got our refineries working. Now that they’re working, we don’t need that and particularly when they have some payments for their exports, then DNO won’t need the cash.
Q. Since exports are halted at the moment, crude is still finding its way to the topping plants, and maybe elsewhere as well.
A. At the moment it’s just a temporary arrangement. We can’t just shut them down because we have thousands of people depending on those 50 or 70 topping plants. It’s not politically easy just to close them down. So we have been working on the presumption that we had a need for some of their production. Now we have the refineries coming online so the government’s need for their products is becoming almost negligible. Secondly, the oil companies had a need for some exit for their oil in order to make some money to put back in the fields to drill more wells. Thirdly, if we didn’t do this, some of these topping plants would be still functioning using smuggled oil from other parts of Iraq. The operators have a right under their contract to sell their oil [to these topping plants] with our approval. It was always a short term arrangement subject to a monthly renewal. We looked at it from the point of view that if the pipeline authorization went ahead and the operators got paid, they would not sell to topping plants even if we asked them because they would get more money from exports.
Q. How much does crude produced sell for locally and who decides the price?
A. It’s basically dictated by the product price that goes into the market and out, primarily the fuel oil. It’s the spot price of fuel oil in the Dubai market for example, minus the cost of transportation. So if the spot market price is about $500 per ton, then the netback price is $300 per ton. There is also customs and excise that you pay on the way, and the distance is 1,500 km to transport it, it’s an expensive trucking cost. Companies have to make a few bucks so it’s typically about $150-$200 per tons differential to cover all their costs and leave them with some profit margin. Effectively they will give you a notional price of $300-$350 /ton. There are some processing fees in the topping plants, though not a lot. So you can work out the price of a ton of crude oil. It varies every month and no one wants to sell crude cheap because the contractors are independent from us, they decide whether to sell it for $300 or $400.
Q. Do they have to align it to the price of the smuggled crude?
A. Smuggled crude doesn’t come to Kurdistan now. Because you have to go chase back to Kirkuk or elsewhere and within this price range, it’s very difficult. I think in the past it was largely engineered by the terrorism acts by attacking pipelines.
Q. So there’s no competition between smuggled crude and local crudes pricewise?
A. What happens outside Kurdistan, I don’t know. In Kurdistan we have enough security to prevent any crude oil coming in.
Q. How much crude is being produced at the moment?
A. It varies. We shut down the topping plants for example for 4 months to study the environmental impact and to find out why they are really there and who is behind them. Then we decided to get the export process going and we were talking to Baghdad about the crude oil starting and getting paid for it. When you can export you can then actually have a good reason to stop the topping plants.
Q. So how much is being produced in Kurdistan and sent to the topping plants?
A. If you go and ask Iraq how much is being produced around the country, then pro rata it will be the same. As I said some of these are in Mosul or Kirkuk.
Q. What’s the production capacity at the wellhead?
A. At the wellhead we can produce 200,000 b/d between the two fields, Tawke and Taqtaq, but we cannot transport it all. To get it to the international market we need 6-9 months to build a pipeline. The wells can produce but the facilities are not all connected to the wells. Once we know we are going to export and get paid, then we can actually double the export. At the moment if we decide to export tomorrow, we can achieve 100,000 b/d. But if you ask us to go up to 200,000 b/d, I will say give us some time to tie in all the wells and build a pipeline from Taqtaq, otherwise we cannot do it. So to answer your question, it’s 100,000 b/d now and 200,000 b/d within a year for export.
Q. Since the refineries are private, do they pay for the crude?
A. We don’t sell the crude. We, the government, buy from DNO and Genel their share, in addition to our share. We deliver the crude to the refineries, we take the products and we pay them a fee. A typical fee is $15/bbl.
Q. Who decides that it’s $15/bbl? Is it by law?
A. It’s economic analysis based on negotiations. They pay the upfront investment, they build the processing capabilities, and we guarantee to utilize them.
Q. What products do you export to Iran? Is it regulated?
A. From all the refining operations we get diesel, some of the naphtha and fuel oil. The naphtha is mixed locally with imported benzene and by and large is used, but sometimes there is a surplus so it’s sold outside. The diesel we put into our power plants because we don’t have enough gas and some power plants lack a pipeline to bring in the gas. What we are left with is fuel oil. Income from naphtha and fuel oil covers the cost of crude oil that we buy from DNO or Genel Enerji, the cost of transportation to the refineries, and the cost of transportation of diesel to power plants. These products get auctioned, in the presence of KRG officials from ministries such as natural resources, finance, planning, and the council of ministers. The buyers are trucking companies who have storage inside and outside the country, and these are the same people who import products into Iraq for Somo. When we want to buy benzene, we say to the same people go and source benzene in Azerbaijan, for example, and bring it to Kurdistan or Iraq.
Q. Are they bringing the same products back into Iraq and reselling them to Somo?
A. They might bring it back into Iraq, that I don’t know, maybe. I don’t think they do and even so, not much. They could buy the naphtha and mix it on the border and sell it to Somo, I don’t know if they do that. Those companies have big storage tanks and storage facilities, typically in Bandar Abbas and elsewhere. These people have been trading for 30 years, it’s not new.
Q. How is the auction done?
A. At the auction normally we know the spot price for fuel oil, say $500/ton. Our expectation is that we know it takes $150 for transportation, and they have to make their margin, they have huge costs of customs and excise, so you roughly guess what the price should be. You start the auction till it stops, and the winner takes all. It’s public. The successful bidder has to complete the paperwork and has to pay for it in advance within a couple of days. If they don’t pay they get barred next time. So they pay, and if they don’t lift it, they lose it. We don’t mess about. The money goes to meet production, transport and refining costs. If there’s surplus, it goes to the finance ministry to a closed account, pending federal revenue sharing legislation. Remember we cannot sell all the products because some of it is being put into electricity.
Q. When did these auctions start?
A. Primarily when the refineries started operating, by the end of last year. Before that it was mainly topping plants.
Q. How much products have you exported since you started doing it in this regulated way?
A. This I can’t tell you and I wouldn’t. It’s not a lot anyway. It’s about one third of the crude oil ending as fuel oil. So it’s basically two thirds or a half getting lost in the process into the pipelines. It’s just a cost.
Q. You said you pay the contractors for their crude. How much have you paid them of their cost so far?
A. It’s on their website. They publish everything. They disclose everything. Our share is less than that because they get cost recovery up 60% of the oil.
Q. Have you been paying them some of their operating cost?
A. It’s all inclusive. Operating costs are accumulated in their books. According to contracts, cost is cost. According to the sharing in this temporary arrangement, they get 60% of what they produce and the government gets 40%.
Q. How much have DNO and Genel Enerji invested so far?
A. It would be in the order of half a billion each. But note that between the two fields, they can easily produce 200,000 b/d, and by contrast we have Ahdab oil field in the south, which can produce 100,000 b/d if they spend $3 billion on it, based on the contract that was given to the Chinese. This is more than twice the sum of the two fields and it’s giving Iraq only half the production. And note also that KRG started from exploration, and they started from a discovery.
Q. So out of a billion that they have invested, how much have they got back?
A. As of now, probably about $150 million so far between the two of them, over the last two years. It’s not a lot, because the period when we exported over 4 months last year, they didn’t get paid.
Q. Why is the revenue from these sales kept into a special account and not accounted for by the ministry of finance or under government control, as some of your MPs have been demanding?
A. If you read the constitution of Iraq, and articles 18 and 19 of the KRG law, we are obliged to segregate the accounts because at the end of the day we have to sit down with our friends in Baghdad and sort it out. This is partly revenue. Yes the refinery product may not be revenue but the crude oil is, at least our share of it. If I were sitting in Baghdad I would say that’s a revenue, and would therefore want to know how much it is. Whether it’s one dollar or one million dollars or ten million, it’s the principle that counts. The KRG cannot spend it because it’s not accounted for under any other mechanism that is agreed on. Therefore under our law, it says until such time that the process is agreed, you keep it in a segregated account to be shared according to the revenue sharing law. We play by our law and by the constitution and to the guys shouting give it to us to spend it, I would say it’s irresponsible to spend it. I say you can’t spend it, it’s not yours. Let us give it to Baghdad? Sorry we can’t give it to Baghdad because our law says when there is a revenue sharing law, you account for it. So you put it in a segregated account. It’s a government closed account.
Q. Shouldn’t all revenue from oil sales be subject to the DFI control and audit?
A. No because we are not exporting oil. DFI does not apply to fuel oil, only to crude oil exports. We’re not exporting. When we did export for four months, the money went to Somo. This is a normal sale of refined products, particularly fuel oil, low level types, and we’re not selling it to Iran or anybody else. We sell to private companies that buy it in Kurdistan. What they do with it is up to them.
Q. The closed account should still be audited somehow, is this being done and by who?
A. Of course it can be audited. We can account for the last dollar on everything. Our operations are pretty clear. We have nothing to hide, nothing to fear. When we started this process we knew from the beginning one day we would have to answer those questions. Therefore we prepared ourselves accordingly. If some people want to spend the money without responsibility, then I’m sorry we’re not allowing it because it’s not money that’s being earned for anybody to spend. It’s not big money. Under the law we are entitled to export crude oil. We can do it by trucking or by any means we can find, even independently by pipeline or otherwise. But we haven’t done that because we want to be part of an Iraq solution over all, and make it happen by cooperation with our friends in Baghdad. Until such time, we’re not going to export crude oil independently. The reason we are doing this trade that I’ve just described is because of necessity. If we don’t do that, we don’t have the power generation and, we don’t have the billion dollars extra to bring in expensive products to Kurdistan.
Q. By the same logic, you can export crude by trucks to Iran and put the money in the special segregated account.
A. Why should we do it?
Q. Why not?
A. Well first of all because it’s actually a messy business. It’s expensive because we would have to sell it cheap for about $30-40/bbl as opposed to $80/bbl. Why would we do that? Yes it does help the DNOs of the world a little bit, but actually KRG does not get one dollar out of it. It really does not make any sense for us and we’re not going to do it. It’s actually government policy not to follow that line.
Q. But it was done in the past when DNO started early production and it was known at the time that crude was being trucked to Iran
A. Absolutely not. It only went to the topping plants. Not a single drop from any company went outside of the country except when we exported by pipeline and we stopped it when we didn’t get paid for it.
Q. My understanding is that the framework for exporting crude by pipeline between you and Baghdad has been agreed including on the mechanism to pay the companies for their operating costs and that the sticking point is how to audit those costs? Is this right?
A. No, the sticking point is that there are no decision takers in Baghdad. What we agreed is a temporary measure that was not subject to negotiations and both KRG PM Barham Salih and Iraqi PM Nouri al-Maliki were very clear on it. This was a pragmatic approach at the time to create some good will; that oil flows, Iraq revenue gets a boost, the contractors receive some share of that revenue, temporarily towards their past cost, and once a new government is formed, a new atmosphere is created to continue dialogue and solve the issues according to the constitution and the laws and according to what we agree in the political negotiations. What we said is let’s not wait for that day, which might take another 6-9 months. So this pragmatic approach was our initiative in response to the statement at the time of PM Maliki. We followed up on that. To be fair it was supported by many people in Baghdad. When we came to the issue of how you pay the share of the contractor once we agreed how much they would pay the company out of the sales, we had to agree how they would pay it. They did not know how to do it. The ministry of oil knew up to a point to lift oil and meter it and all of that, but they don’t know how to pay because it’s not their job. It’s not what or how much. It should be very simple: let’s say the amount you lift is a million barrels; you sell it for 100 million dollars and you agree to pay 50 million to the contractor. The question is how do you pay it? Do you write a cheque? Wire transfer? Statement and verification? They could not come up with anything. So we wrote the procedure for them now: very simply, you have metering on the contractor as MOO (or NOC for example) and Somo; they all sign up on a regular basis to how much is being lifted. Somo knows how much they sold before. They submit the accounts to the ministry of finance, verify the Somo crude oil sales contracts whatever the participating contracts are, and that is the amount of money for that month. You have to pay half of it for example. Then there is the question of how you pay it? We said we are quite flexible just tell us how you are going to pay. Just confirm to us what you will do so we can start with exports.
Q. Someone still needs to audit those costs according to the contracts and decide whether it’s all operating costs or there are other costs involved.
A. The audit part is important but not to be mixed up with that process. In the case of DNO $500 million has been spent, it takes a year to arrive there. Even if they were wrong by a certain percentage, we will finish the audit well before you arrive at that payment amount. So, goodwill should start, you implement and you also verify and audit. This was what we recommended. If they want to verify the numbers first to the last dollar it will take them a year. To sit down for a year until they finish their audit is irresponsible. That was not the agreement. It was not the plan. So this is what’s actually going on.
Q. Is the fact that there is still no new government since the elections an obstacle to reaching an agreement?
A. I know I was quoted as saying there has to be a new government before we can decide. What I actually said is that the way things are going and the way decisions are made and the way they sign off on things, nobody is willing to sign because they don’t know what will be there.
Q. Once there is a new government do you expect to pick up where you stopped including on the issue of laws as well as the exports?
A. I’m actually expecting more than that. I believe this issue of oil and gas and the revenue sharing in particular, among other things, will be among the principal demands of this region to join any coalition government. We don’t want these issues to go on for years. This has to be settled now. Iraq needs a settlement, because we all need to boost our production. We need to be fair with each other, we need to have the sense of belonging to one country. We have our entitlement to the revenue of Iraq, and so does Mosul or anywhere else. So let’s have revenue sharing so we can stabilize the situation.
Q. Are you saying that the Kurds will not join any coalition government if these issues were not settled before hand?
A. I’m not a politician to say that, but my gut feeling, and my understanding, is that certain key issues are on top of the agenda of Kurdistan lists, and among those are revenue sharing, the status of the contracts, our rights to oil and gas, and article 140 (of the constitution). If those questions are not settled up front and agreed on, as a commitment, then we’re talking about another four years of stagnation. Iraq cannot afford to continue through that process for another four years. We need to agree and move on.
Q. Are you putting it as a condition for joining a government?
A. I’m not a negotiator to state a condition, but when you say these are my conditions for joining and it is on paper, then I assume it is a top priority to sign up to this.
Q. But you will not stay out of government just because this was not agreed?
A. You’ve got to ask my PM and other politicians who are part of the negotiations. From my point of view it is only logical that nobody wants to leave key issues to be agreed on later. Otherwise we are back into square one where we were four years ago.
Q. How do you see KRG’s oil sector fitting into the bigger Iraq picture, especially in terms of Iraqi production? You know it is expected to go up significantly and the market might not be able to absorb it all. Where do you think you fit in all this?
A. First of all, whatever we do is for all of Iraq. Revenue beyond any doubt belongs to all of Iraq. That’s our responsibility; to make sure revenue is gathered and put into the same account and shared and distributed according to the constitution of Iraq. There’s no question all we’re doing here could serve Iraq boosting the production and not benefit the region only. That’s the policy of the government.
Second, we believe we can contribute to Iraq’s real production boost by one million b/d in three or four years. That’s a real contribution that we can make, having started from point zero. You can count on that million b/d, but I’m not sure you can count on any addition that somebody else is talking about elsewhere to bring up production to 12 million b/d. That’s a dream. I wish it was true but it’s not possible. Also there is no infrastructure for Iraq to achieve that. So realistically I would say it would arrive at 5-6 million b/d. That would be a good number to target. But with that we would need to target the infrastructure immediately, particularly in the south and maybe build a short pipeline in Kurdistan. Otherwise we cannot achieve that target. In terms of balancing production, it should go by an internal quota according to the distribution of reserves. That’s why we need the federal oil and gas authority we all agreed to so that we can allocate production fairly to different regions, fields and areas according to their potential just like you have in Opec. Remember it’s not just contractors in Kurdistan to consider, you also have other contractors in the south and we have all these major companies coming in. You cannot just go and shut their fields down.
Q. So how do you coordinate production and production cuts?
A. It should be according to production capacity of that particular facility, and according to the reserves potential of that area. It’s a normal, technical, and logical thing. Within that policy, if we have to produce more, we will produce more and if we have to produce less, we will produce less. It should not be a one man show by someone sitting in Baghdad, or for that matter in Kurdistan. It should be a national interest for all of us to agree on that policy. If we have to produce just 6 million b/d, and assuming we can produce 8 million b/d, how do we distribute that cut back? It should be internally decided in accordance with the agreed allocation process and not just by issuing an order to go shut down Kurdistan or shut down a field Basrah. It should be logic exactly as works with Opec, so we will have a mini Opec internally.
Q. So you’re not going to say I will not shut down my production because I need the revenue more than you do?
A. But the revenue does not belong to us alone in the KRG but to all of Iraq.
Q. The law gives every producing governorate additional income based on production and refining – and this applies to you as well – so some might be protesting that they are being cut when they need the extra money.
A. Yes but no one has the right to take the money. The money has to go to a common account to be redistributed. You don’t get paid according to your production.
Q. Yes you do. That’s the law that was passed earlier this year and it was also in the last budget 2010.
A. Absolutely not. They get a budget based on population like everyone else.
Q. How do you interpret the law then?
A. Give me a break. This thing about 50 cents per barrel and the like is ridiculous. It’s a trivial amount. This is not a big thing. This should not be the main criteria.
Q. It could still become contentious.
A. There’s a different logic. Why would we in Kurdistan drill all our oil fields, or in Mosul or in Basrah, just because I get 2 dollars and then subsidize the rest of Iraq with the excess production. It doesn’t make sense. What we need is a genuine method that is fair and based on fundamentals. Production capacity, reserves, and infrastructure could all be criteria.
Q. Were you surprised that Baghdad signed up that many contracts at a time when you were describing them as failures?
A. Well the story goes like this: Iraq spent two to three years talking about technical service (support) agreements which were actually consulting jobs. We wasted so much time talking about someone giving you advice on how you produce 100,000 b/d, and I kept saying major companies are not consulting firms. At the end of the day, they found out the hard way that the oil companies were not interested. Then they went to the second tier of negotiations that miserably failed again. At the end, it was time for the end of government and parliament, and they panicked, so they rushed and signed a dozen contracts left and center without any real checks and balances. I’m still happy they signed some contracts, don’t get me wrong. It’s still better that Iraq made some movement somehow. But actually there is no legal cover to those contracts, because they neither go with the constitution which requires local authorities and others to be on board, nor did they go to parliament should you want to rely on the old law. That’s a problem I have with those contracts. So the contractors are smart people, they have legal counsel, they understand the constitution and they understand our laws. You can’t fool them. They are not going to put their precious big money there and that’s why they are now being called upon to hurry. They’re not going to hurry up. You can take a horse to the water, you can’t make it drink. The contracts have been signed, but the contractors are waiting for clarity: does my contract pay, does my contract stand the scrutiny of the next parliament, does it have legal cover? These are all hard questions and I’m quite certain after the formation of the government they will be asked. And we have to clarify them. I think the contractors deserve clarity in order to rush and spend their money. This is what I want.
Q. The legal issue is a different issue and I disagree with you about the companies sitting and waiting for the next government, because I see what they are doing in the fields and I see the tenders going out and money spent. My question was whether you were surprised to see the companies willing to sign up to those contracts and on these terms and that many of them?
A. I’m not surprised but I would say for a good number of them their flag is down. In the scale of things the contractor is committing 1% of what he’s supposed to do. This is nothing. Note that we sign contracts, before the guys start, you say I don’t like the bonus I signed, I want to change that, so double it please and I want it to be cost recoverable. Why not then ask them that from the beginning. So two months later you are going to renegotiate this contract, and he will run away.
Q. I think Baghdad understands and recognizes the principle of the sanctity of the contract and I expect this not to happen.
A. I hope so too. But I know the oil companies and I know how they work and how they do their economics and how they judge risk factors and fundamental legal framework risk is an issue. We here acted legally and we have the constitution and the law on our side and it doesn’t matter if someone else shouts it’s illegal. The companies look at the actual reality and they say to themselves in the long run this is not illegal this is fine. What they have done in Baghdad is basically a mish-mash of things, neither here nor there. We’re neither giving cover nor giving the support to ratify the contracts in a different way. And the biggest problem I have with the contracts is that none of the contracts encourages good practice. The interests of the oil companies are not aligned with the interest of the government. And when you have this nothing moves efficiently or fast enough.
Q. What do you think the companies’ interests are?
A. Well the way the contracts are made, you control everything and you are the one who makes decisions. So if you are that smart, why not do it yourself. This is the problem. We are working here in reverse. We are working with the companies together. The tragedy is that we could all dream of going to 2 million b/d in Rumaila, but can we do it without a good model? No, because that model does not give incentives to get to that number. If the incentive is not there and we only produce 1 million b/d, then 20 years later we leave that oil in the ground and some of it will be permanently lost. And the ultimate loser is who? It’s the government because we got 95% or 99% of the share of reserves. That’s what I call bad contract.
Q. What if they do get an additional 2 million b/d from Rumaila? You will be proven wrong.
A. I don’t want to prove anything. I think what we’ve done will speak for itself in three years time. People judge whether what we did is right and has produced the right results in comparison with elsewhere. Let the record be the judge, not by dogma or anything else.
Q. Do you think it’s acceptable to have two different fiscal regimes applying to different parts of Iraq at the time you say you consider yourself part of Iraq?
A. It’s not two different regimes, it’s different model contracts. Under our type of contract, which is modeled for exploration, nobody will go explore in Iraq without a model like ours. There’s no such parallel in history anywhere in the world. Go and ask oil companies, would you explore and not be paid? They will say I will do it, pay me all the costs, and when I find oil we get to an agreement. But in the meantime you pay me, I will not take all the risk. But if you do production sharing agreement, the contractor is willing to take all the risk, whether he finds oil or not. And that’s the model that is fine tuned for exploration and for small blocks such as we’re doing. And to be honest with you, for the small discoveries that Iraq has not thought about, this is the right model. For the giant fields I have no problem with service contracts. What they’re called, whether service agreement, or technical service agreement, or anything else, is not a problem. It’s the terms and the alignment of interests that matter.
Q. But now it’s a fact that there are two types of regimes or contracts that apply in Iraq, don’t you think there should be something in common among them? That the model should be unified?
A. It should go by the type of project. Exploration demands a certain type of contract; gas demands a different one; giant fields which have been discovered and which Iraq has spent millions of dollars to discover, require a different agreement. For example in Azerbaijan – when I was an advisor there with Penzoil and others – they went for a model which was akin to production sharing but that only applies on the incremental part, i.e. the government invested in the past so the baseline belongs to the government. You bring in your investment as the contractor and you get a share of the incremental production. All models are possible but the important thing is the alignment of interests. You get a return on your investment, government benefits from your skills and your money and when you get that balance right, it’s a win-win situation. What we have with these contracts of Baghdad now is a loss-loss. The contracts are not satisfactory, if the contractor doesn’t do a good job, the government loses as well.
Q. Some officials in Baghdad have been talking about eventually “unitizing” these contracts, do you think it’s possible?
A. We don’t have to, we can have 10 types of model contracts. I have no problem with that. If you can encourage the companies to come and explore for oil in Missan on a different model, I take my hat off to them, no problem. It’s not somebody’s model and we’ve all got to use it. We can always learn from other models.
Q. We have moved from 2007 when the first draft of the oil and gas law was approved by the Iraqi cabinet and today we find ourselves in 2010 with new realities on the ground. If that draft law was to be put on the table again, what do you think needs to be changed to make it adaptable to this new reality?
A. It doesn’t matter how far we came and what progress we made or haven’t made in other areas, the fundamental thing is we must adhere to the constitution. And then we could recognize within that what has been done and how we treat it. You always have to deal with the constitution. What is wrong with the draft we had is basically it has some gaps that were not agreed upon. So once you recognize the constitutional right, you frame everything under that – which is what we’ve done – and if it requires further ratification like the contracts of Baghdad, let’s do it. We should take a pragmatic approach to go through the constitution and implement it. But it should never be on a control basis, whereby someone in Baghdad says I have to decide. Well, that’s not what’s in the constitution. If that’s what you’re going to do, then forget it. We need to boost production, we need to encourage investment, and therefore we need an appropriate framework to do it. If you’re only designing the law to control it yourself, and give to your national company and then control it there, I’m sorry this is not the game we want to play. This is what went wrong and we won’t be party to the same game again. Because the constitution says we should encourage a market economy not go down the road of control and nationalism.
Q. Do you think the hydrocarbon law is still needed?
A. Iraq needs a federal law, and other regional laws are required as well. People need to know under which law they invested, because investment can shy away very easily. Yes we need to encourage the investment law, but before that the revenue sharing law will be the key.
Q. The draft revenue sharing law exists and it’s part of a package of laws to be agreed.
A. Yes there is a draft and it is a good draft. It needs to go to parliament the minute there is a new parliament. It should be the first law.
Q. Without change?
A. It’s actually drafted according to the constitution. I think there should be more transparency in it, in terms of checks and balances, and distribution of revenues and to check how what is distributed is used. All of those things were in the first draft but unfortunately they were removed. What it says is basically that the revenue belongs to this system – and therefore it doesn’t matter what Ashti does or what someone in Basrah does, the revenue goes here and belongs to all of us and therefore we become just servants to increase production within the framework that we agreed on.
Q. Some might say there’s a contradiction here because you want to go it alone and do certain things your way and at the same time you want to be part of the whole when it comes to sharing revenue.
A. We are part of Iraq and we are working for Iraq. But if you mean that we should do nothing till everybody agrees, then I say we would have had a revolution in Kurdistan if we were still on two hours of power a day. What we are doing is according to the constitution.
Q. The constitution was drafted when Iraq was going through a transitional phase.
A. Iraq is going through exactly the same thing now.
Q. The ambiguities that were put there to allow it to be adopted have been an obstacle, and now there are clearer relationships as things have moved on in the past 5 years.
A. I’m sorry you cannot ignore your own constitution. What’s the ambiguity? It says all the revenue should go to one account and to be distributed according to the population, what’s the ambiguity in that?
Q. They say there are contradictions in the constitution that make it unworkable.
A. But that’s not up to me to sort out. The people of Iraq voted on that. For years you had all the arguments, about the constitution being ambiguous and ambiguity here and there, and there were calls for changing them and it all failed. The changes that everyone was trying to introduce were meant to have control centralized, and that has failed. Now I can tell you that chapter is closed because if you want to talk about the constitution being changed and amended, sorry Iraq cannot afford this discussion. You implement it and if through practice you discover that certain things can work better, you do that in the long run, like the US taking 200 years to improve its constitution. You cannot just say we don’t do anything for another four years until we agree on a better constitution. I’m sorry, better according to whose definition?
Q. But some might say that the Kurds were in a position of strength at the time to impose certain things in the constitution in their favor that they could not do in a normal situation, and hence your objections to amendments to clarify those ambiguities.
A. At the end of the day the constitution is there and if we have done anything unconstitutional, someone can take us to court and change it. We have no problem with that. We have always said it. We abide by and respect the constitution and all the laws of Iraq but you cannot ask us to remove our rights. The way I look at it is the same whether I’m sitting in Kurdistan or in Basrah, Mosul or Baghdad. I would still do the same thing for the region. I’m looking at it as a practice, a business model, a necessity to improve the lives of people. You cannot wait for bureaucrats to tell you what to do. It’s your duty to do your job within the framework available to you.