In retrospect, and despite what was considered at the time a ridiculously low fee, producing oil fields awarded to international oil companies in the first bid round turned out to be the most lucrative in terms of the service fee they will be paid. That’s excluding the three fields that will be producing less than 200,000 b/d (see table below). Even with the protracted negotiations over amendments to the final producing field technical service contract (PFTSC) with both Eni and Exxon Mobil, the final contractual terms are admittedly balanced and fair to both sides.
There were 18 amendments that were proposed by the cabinet’s legal advisor Fadhel Mohammed Jawad, to both Zubair and West Qurna – phase 1 contracts. The fact that the legal department of the oil ministry took up all 18 points and integrated them in the final contract used for the non-producing fields in the second bid round, the development and production service contract (DPSC), means clearly that they were fully justified.
One amendment to the Zubair and West Qurna – phase 1 contracts removed the “exclusive” right of the contractor to negotiate a separate agreement to explore for and develop the undiscovered potential reservoirs during the first six-year period from effective date. Another allowed only the auditing costs by an international company to be considered as petroleum costs, but not the costs of auditing of the company’s branch in Iraq or the audit fees of the Iraqi supreme auditing board. Other amendments made the assignment of parts or all rights or obligations as well as the withdrawal from the contract once the minimum work program is fulfilled subject to prior written consent of SOC. Outstanding balances on supplementary costs now bear interest from date invoiced not from date costs are incurred.
Further amendments to clauses sought to relieve the Iraqi side of responsibilities over defaults it could not control, making it such that “state partner can in no circumstances be considered in default”, or that SOC’s responsibility in providing or procuring provisions of any approvals or consents or reviews are subject to what is “permitted by the law”. Another removed SOC’s responsibility vis-a-vis tax liabilities of the contractor.
Changes to forms of guarantees now require that “the ultimate parent company of the company that signs the contract” guarantees the company in the performance and fulfilment of its obligations under the contract. Furthermore, all references to the rights and obligations under the contract being commercial as opposed to sovereign rights were deleted from all articles in the final contracts.
However, there was one amendment requested which the ministry could not impose at the end and which was considered a “sticky point” in the negotiations over Zubair for several weeks. The legal advisor had requested the deletion of an article stating that “in the event of the contract being declared by any competent Iraqi authority invalid or voided under the law, SOC would indemnifies and holds contractor harmless for any and all costs actually incurred but not recovered and remuneration fees accrued but not paid at the date the contract is declared invalid or voided”. Ministry officials rightly argued that such compensation should be considered fair for the companies who were pioneers in taking risks of signing such contracts in the absence of an oil and gas law.
BP’s contract for Rumaila did not include those amendments since the legal advisor at the time the contract was ratified did not make an issue of it, and because it was a nascent experience being the first such contract to be signed for decades.
Should the BP contract be re-negotiated to make it in line with others? In my opinion, No. It should not. Iraq should set it as an example of its respect of the sanctity of contracts it signs.
Field FEE PLATEAU OPERATOR
Ramaila $2 2.85 BP
Zubair $2 1.125 Eni
WQ1 $1.9 2.325 Exxon Mobil
Gharraf $1.49 230,000 Petronas
Halfaya $1.4 535,000 CNPC
Majnoon $1.39 1.8 Royal Dutch-Shell
WQ2 $1.15 1.8 Lukoil
Najma $6 110,000 Sonangol
Badra $5.5 170,000 Gazprom
Qayarah $5 120,000 Sonangol