Iraq’s fifth bid round launched last year has fallen victim to national electioneering. After missing the first deadline in the timeline announced end of November to conduct a roadshow for the tendered exploration blocks by early February, technocrats at Iraq’s oil ministry received sudden instructions to cut through the usual process and prepare to award exploration and development contracts by April 15. Just like the Iraq National Oil Co (INOC) law, which was hastily passed by Parliament in March despite being full of loopholes, personal and partisan interests are taking priority over national interest. The objective of the exercise aims doubtlessly to portray the ministry – and the minister – as aggressive in developing the nation’s resources ahead of the May 12 national elections.
At a hasty roadshow organized in Baghdad March 29, the director general of the Petroleum Contracting and Licensing Department (PCLD) Abdul Mahdi Al-Ameedi unconvincingly presented the new timeline, scrapping the previous one which included the usual stages of discussions with IOCs over the draft model contract before the issuance of a final tender protocol (FTP) and a final contract. When pushed on the impracticality of analyzing technical data, studying the contract and preparing commercial bids, within a couple of days ahead of the bidding day, the official just said: “It’s a minister of oil decision, not a PCLD decision”.
This bidding round was initially meant to focus on nine exploration blocks near the borders with Iran and Kuwait, with the aim of increasing Iraq’s proven reserves. Now four green gas fields lumped in two sets are added to the blocks on offer. These are Galabat and Qumar, and Khashm Al Ahmar and Injana, all in Diayala province. The first three were already tendered in the second bid round in 2009 but did not draw any interest from bidders at the time.
Drawing on lessons from shortcomings and loopholes in the technical service contract (TSC) signed in previous bid rounds, PCLD revealed new terms and features it’s introducing to the revised TSC that will be signed in this new round. The revisions have long been in the working and some have already been introduced as amendments to existing TSCs from previous rounds. They aim, according to PCLD, to reduce development costs and achieve greater alignment between the contractor and the state.
The major divergence from previous contracts is the bidding parameter. Instead of several bidding parameters (remuneration fee, production plateau target), IOCs will now bid on a single one: the Net Revenue Share. As a result, an operator will not be paid a remuneration fee per barrel produced in addition to recovering cost, but rather will share the net revenue, i.e. profit, with the government. Sharing the profit with the government is meant to incentivize operators to reduce costs, unlike current contracts which failed to set a ceiling for expenditures and gave the operator no incentive to try and keep those under check.
Another important amendment to previous contracts is the introduction of a formula linking the cost recovery provisions to the oil price. Iraq’s finances suffered when the oil price crashed in 2014 as monthly payments to operators started eating into the state’s monthly income, as a result of allocating a larger volume of its export oil to pay its dues each month. However, the challenge it faces now is how to implement this formula without impacting the cashflow of the operator and consequently the economics of the contract. To mitigate this, the new contract raises the ceiling for cost recovery to up to 70% of the deemed revenue (as opposed to 50% in existing contracts) for exploration blocks and up to 65% for the green gas fields that were just added to the tender. The R-factor concept will also be removed from the new contract.
The new contract introduces the concept of royalty even though this fundamentally existed under the previous contract, all but by name. Existing contracts stipulate that up to 50% of deemed revenue can be allocated to cost recovery (in addition to 10% for supplementary cost payments), reserving the remaining 50% for the state. That reserved share is now preserved under the name of royalty.
PCLD’s Al-Ameedi said the existing contracts had loopholes that complicated the operations and prevented a smooth implementation of the terms. Drawing on the lessons learnt over the past years since the first bid round in 2009, several clauses were clarified in the new TSC with more precise language to avoid grey areas that could have multiple interpretations. One such clause is the lack of clear specifications for the crude, dry gas and liquefied petroleum products (LPG) delivered by the operators in the current contracts. Buyers of Iraqi crude have for a long time complained about the high water content in delivered export oil. The oil ministry and SOMO had no means to impose on operators to respect the specs in the crude Assays. The new contract now specifies that the ministry will not take delivery/pay for out of spec crude, gas or LPG.
Other modifications include the reduction of the ceiling of financial authorization awarded to the joint management committee (JMC) or to the operator from $100 million to $20 million for the former, and from $20 million to $5 million for the latter. This, according to Al-Ameedi, to make sure that the awarding of tenders to sub-contractors also serves the interest of Iraq as well as the operator’s. In its attempt to have more say in the award of contracts to sub-contractors, new clauses are being introduced giving priority to Iraqi service providers and sub-contractors, and only qualifying foreign sub-contractors who specifically employ Iraqis. There are also new amendments to insure a certain percentage of local content in the operations and within a specified timeframe. Another amendment is the elimination of the Specific Services concept and the contractor’s right to directly award contracts to affiliated companies, which is currently popular among Chinese operators and where the ministry has little say.
Other amendments in the new TSC model contract aim to reduce the costs to Iraq by eliminating clauses which might have appeared necessary nine years ago when the first IOCs stepped into the country but are not justified today, such as paying for offices of operators outside of Iraq. Furthermore, the ministry said that no overhead charges would be assessed on petroleum costs; that salaries, allowances and benefits of expat personnel should be approved by the JMC; that it will apply no tax deduction on Training Fund contributions if they are included in the cashflow; that it will eliminate the Supplementary Cost concept and its LIBOR plus interest uplift.
Drawing on lessons learned from previous contracts where provisions related to the capture and processing of associated gas allowed contractors a leeway to postpone or skip the construction of gas facilities leading to an increase in gas flaring as oil output increased, the new contracts will set out timelines for the construction of gas plants. Furthermore, to avoid delays in payment of costs to contractors which have plagued the early years of the previous contracts due to disputes over what is considered a petroleum cost, and unlike previous provisions where the ministry had to pay the disputed costs first and solve the dispute later, the new contracts will now state that only undisputed costs will be considered Petroleum Costs.
By the time the final contract is drawn and sent to the participating IOCs, it will most likely undergo further changes and clarifications, adding or amending provisions to rise up to the challenge of creating a win-win formula. The substitution of the remuneration fee principle with a share of profit creates a hybrid between a service contract and production sharing terms. The big question is: what is the maximum net revenue share the oil ministry will have in mind when (and if) IOCs bid with their best net revenue share offer.
26 International Oil Co were qualified to participate in Bid Round 5, 13 paid a participation fee and acquired the data package. These are:
- Crescent (UAE)
- Dana Gas (UAE)
- Dragon Oil (UAE)
- Exxon Mobil (US)
- ENI (Italy)
- Gazprom (Russia)
- Lukoil (Russia)
- Zarubeshneft (Russia)
- United Energy Group (China)
- ZhenHua Oil (China)
- Geo-Jade Petroleum (China)
- CNOOC (China)
- Total (France)
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