As published on AKnews
Discussions among politicians and investors over the best type of oil contracts for Iraq are heating up, but a lack of consensus continues. The Kurdistan region has granted Production sharing Agreements (PSA) and Production Sharing Contracts (PSC) to over 37 foreign oil exploration companies since the fall of Saddam. Most companies have been successful and hit oil. Austrian OMV Group and Canadian Westerenzagros (WZR) doing so in the last two weeks. However, the Iraqi government is still refusing to accept the validity of the contracts.
Oil policy in Iraq has been lead by the deputy prime minister for energy, Hussian Shahristani. He has been at the forefront of the political confrontation with Kurdistan Regional government (KRG). Shahristani believes that all oil contracts in Iraq should be granted as Technical Service Contracts (TSC) where the state keeps control of the oil and the company gets payment for its services. It is true that service contracts favor the state rather than the commercial companies involved in the exploration of the oil. Nevertheless, the Kurdish region has already signed many PSCs, where the company is given the rights to the oil, contrary to shahristani's wishes.
PSCs are not the best type of contracts for all situations or countries and it is estimated than less than 15 per cent of oil contracts worldwide fall under this category. It is not possible to have one type of contract to fit all sizes. Governments and companies chose what contracts they enter according to location, condition and above all the politics in the case of Iraq. The US and UK as well as other major oil players in Iraq have been pushing the Iraqi government to adopt the PSA and PSC. This type of contracts would be very lucrative for the oil companies especially if they win a bid for one of many Iraq's giant oil & gas fields. Iraqi government is set to lose a substantial income if it grants PSAs rather than TSCs; therefore, the politics of this decision is playing out and confrontation is inevitable.
Judging from the political fallout it is clear that Iraq's public opinion is strongly oppose PSCs as they see it as handing over the Iraqi oil to the "invading" US forces and their European partners. Many Iraqis see letting foreign companies in, as a privatization of their oil and so far it has not gone down very well with them. While this debate is raging, the main issues has been ignored - which is boosting production and investing in the future of the country.
Kurdistan’s oil situation is different from the rest of Iraq, as the region is not yet fully explored and reserves are not proven. Although it has been said that it is harder to find water than oil in Kurdistan and indeed Iraq as a whole, accessibility and infrastructure remains an issue for the oil companies. Kurdistan Region is landlocked and it is at the mercy of its neighbors if it wants to sell oil to the international markets. Companies operating in Kurdistan have been aware of the risks and if it were not large rewards, many would have not entered the contracts.
To date, the oil discoveries in Kurdistan Region has been on the smaller side compared to other parts of Iraq with the exception of couple of large discoveries. If the trend continues and the oil and gas are patchy, KRG would be proven right and the PSC's granted would be deemed as a good judgment by them. If the contrary were true, it would be a monumental failure and large scale squandering of the region's wealth.
Due to its complexities and being subject to commercial confidentiality, PSC and PSA's are not very transparent. The lack of transparency has been the main issue for KRG and the companies involved. Many Kurds, including senior ministers and opposition leaders, do not have any idea about the content of these oil and gas contracts, therefore many see the deals as shady and opaque. Furthermore, the constant allegations and rampant corruption within KRG does not persuade the public to trust the Kurdish politicians to work for their best interest.
It is hard to find accurate figures as to the amount, which Kurdistan Region would lose by having entered PCS's. However, estimates for Iraq are about two to 10 times of countries annual income. This makes it clear that PSA's are not a very attractive option for the Iraqi government to adopt. Shahristani and the Iraqi government have so far resisted the temptation to rush into granting contracts in favor of the oil companies. In the last three years, interest in the auctioning of Iraq's larger oil fields has been somewhat subdued as the big players are waiting for the Iraqi government to be persuaded to sign PSA as an alternative to service contracts. Only recently, many oil companies operating in Iraq have complained that the return from such contracts is less than two US dollars. In a U-turn recently, the Iraqi oil minister admitted that government is trying to find ways to encourage companies to boost productions by possibly extending the TSC from the current 20-year term.
It is becoming clear that the contracts awarded in Kurdistan may not be the most financially rewarding. But the rationale behind KRG's attempt to grant PSCs and PSAs on more generous terms than of Iraqi government was to lure as many foreign investors to the region as possible. The Kurdish Region has been very successful in doing so and by adopting this policy the KRG has made sure that they have a big role in Iraq's oil policy and have the possibly of securing independent funding for the region in the future. Moreover, Kurdistan Region has long-term ambitions of becoming an independent state, and controlling its energy sector would put it in good stead. While the KRG is set to lose out by entering PSCs, one can argue, it is a fair price to pay for Kurdish sovereignty and an end to the long standing label of being the largest nation in the world without a state.
By Shwan Zulal