Iraqi oil minister seeks investment, offers contracts

April 6, 2009
Iraqi Oil Minister Hussain Al-Shahristani, in a wide-ranging interview with Arab media in Paris, said his country’s oil industry needs $50 billion in investment over the next 5-6 years, with much of it expected to come from international oil companies (IOCs).

Iraqi Oil Minister Hussain Al-Shahristani, in a wide-ranging interview with Arab media in Paris, said his country’s oil industry needs $50 billion in investment over the next 5-6 years, with much of it expected to come from international oil companies (IOCs).

Iraq wants complete transparency in dealings with IOCs, Al-Shahristani said. And they will all be treated equally, he told the UK-based Al-Sharq al-Awsat newspaper in an exclusive interview.

The minister criticized the Kurdistan Regional Government (KRG) for concluding contracts with IOCs and blamed them for operating in Iraq without the central government’s approval (see map, OGJ, Oct. 1, 2007, p. 36).

The minister was in Paris heading a delegation representing 10 ministries “to explore the horizons of mutual cooperation with the French,” he said. “And there will be many more meetings with French officials and representatives of French oil companies.”

$50 billion needed

Commenting on the impact of fallen oil prices, Al-Shahristani said: “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.”

Iraq “depends 90% on its oil revenue,” he said, and “the low oil prices affected us badly. In the budget of 2009 we counted on an average price of $50/bbl.”

Dismissing the idea that oil prices would remain depressed, however, Al-Shahristani outlined plans to more than double Iraq’s current output over the coming decade.

“Our production at present is 2.5 million b/d,” he said, adding: “Our 10-year plan (2008-17) is to increase production to 6 million b/d. On a previous occasion we issued permits for six huge oil fields and two gas fields that would lead to an increase in production by 1.5 million b/d.”

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“Our position is clear—any contract concluded without competition and transparency is unacceptable and contrary to the laws and regulations in force. The concerned companies would not be allowed to operate on Iraqi soil; and if they do, they bear the responsibility for their actions.”—Hussain Al-Shahristani, Iraqi oil minister

He said “a second batch of permits was issued around the end of last year, which we expect to add another 2 million b/d, and thus make a total planned production of 6 million b/d.”

Asked where Iraq would get the necessary investment to develop these oil fields, the minister said: “We need an investment of $50 billion over the next 5-6 years. This money is not available locally.”

Moreover, he said, Iraq needs finance for the reconstruction process and for services such as housing, education, health, and basic infrastructure facilities. “That is why we are going to the international oil companies—all of which have expressed interest in investing in the Iraqi petroleum industry,” he said.

IOC contracts

“In order to facilitate negotiations with these companies we prepared a ‘standard contract,’ which we proposed to them,” Al-Shahristani said. “This contract abolishes the principle of partnership in production and replaces it with a ‘production services contract.’”

Under terms of such contracts, he said, “the foreign company would receive a fixed sum of money for every barrel of oil it produces from an oil field 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,” Al-Shahristani said, adding that IOCs “all expressed their will to compete on the basis of the services contract.

Al-Shahristani acknowledged that the KRG has signed contracts with oil companies but said 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.”

Citing current Iraqi law, he said, “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.”

The minister made clear what IOCs can and cannot do in his country, saying, “A company may drill or develop an oil well or construct pipes and storage facilities, but the oil produced cannot be exported or disposed of. Our view is that it should be surrendered to the Iraqi government to be exported through proper channels.”

Contracts with KRG

Regarding current operations in Kurdistan, Al-Shahristani acknowledged that there are “activities and drilling operations taking place, but no oil has been produced from these oil wells.” He added, “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.

“Our position is clear—any contract concluded without competition and transparency is unacceptable and contrary to the laws and regulations in force. The concerned companies would not be allowed to operate on Iraqi soil; and if they do, they bear the responsibility for their actions.”

Al-Shahristani dismissed the idea that any one IOC has a special place in negotiations with the Iraqi government.

“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,” he said.

“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,” he said.

“This will not happen in Iraq; companies wishing to compete have to submit their tenders, and they have all welcomed this Iraqi procedure,” he said.

Contracts acceptable

The minister claimed that long-standing partners, such as Total SA, are receptive to the idea of service contracts.

“They have no objection,” he said, referring to Total. “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 [that].”

Asked when the first production service contract would be signed, the minister said the first group of licenses may be signed by the midyear and the second batch of licenses by yearend. He said that “35 companies out of 120 applicants are qualified to tender” in the first license round.

The ministry is now receiving applications from companies wishing to be considered for tendering in the second round of licenses and Al-Shahristani said it will “soon announce the names of companies that we regard as qualified to tender.”