Iraq’s Oil Ministry’s Plans Seem To Be Falling Apart

At the end of 2007, Iraq’s Oil Ministry announced its plans to open up the country’s oil fields to foreign investment. First, the government offered six, two-year Technical Support Agreements (TSAs). Each deal was worth around $500 million. Under the agreements, companies would only be paid for consulting. Oil Minister Hussain al-Shahristani said he wanted all the deals signed by June 2008. Long-term contracts that would involve actual oil production were to be offered later, with Shahristani saying he wanted those finished by June 2009. Together, the Oil Ministry was hoping that these deals would boost production from around 2.4 million barrels a day in the summer of 2008, to 4.5 million barrels a day. Shahristani opened up these negotiations despite the fact that parliament had not passed a new oil law.

Iraq began negotiating with Shell, BHP, Billiton, BP, Exxon, Chevron, Total, Anadarko, Vitol, and Dome for the TSAs in December 2007. Many of these were the same companies that made up the Iraq Petroleum Company that controlled the country’s oil from 1927 to 1972. By August 2008 however, there were reports that the talks were breaking down. The major problem was that the oil companies did not want to sign service agreements. A study sponsored by the Kurdish Regional Government, who disagreed with the Oil Ministry’s approach, found that TSAs are not very effective because they pay the same fee no matter what happens, thus giving no incentives to the companies. The government also shortened the TSAs from two-years to one, angering some of the companies. The oil corporations were also hoping their negotiations for the TSAs would give them preferential treatment for the long-term deals, but the Oil Ministry refused to promise that. Things were going so badly that the U.S. Economic Affairs officer at the U.S. Embassy in Baghdad told the Wall Street Journal that he didn’t think any deals would be signed. The Andarko company has already dropped out.

Seeing these talks fall apart, Minister Shahristani changed course and opened up an eleven-year old deal with China for a TSA. The original deal, signed in the 70s under Saddam Hussein, was for production sharing, but the Oil Ministry is refashioning it for just consulting. The move appeared to be a face-saving one as it involves only one field, not the original five Shahristani wanted.

The inability of the Oil Ministry to sign the original TSAs they wanted places its oil investment plan in jeopardy. With the talks over the short-term contracts falling apart, there’s no telling what will happen with the more important long-term ones. The point of the oil strategy was to get foreign investors to help modernize the country’s aging infrastructure, open up new refineries, and boost output. Now there’s no telling when this might happen. Iraq has increased production slowly but surely to 2.43 million barrels a day during the first quarter of 2008, but that’s still below the pre-war level of 2.58 million barrels a day, and the U.S. benchmark of 3 million barrels a day. The whole process could move forward in an ad hoc fashion as appears to be happening with the China deal. Lucky for Iraq, the price of oil is so high that they are expected to earn between $73.5-$86.2 billion by the end of the year, twice the average earned from 2005-2007, without any real new foreign investment.

SOURCES

Chon, Gina, “Iraq, Foreign Companies Stalled in Oil Negotiations,” Wall Street Journal, 8/13/08

Kurdistan Regional Government, “International expert finds KRG oil contracts ‘in the national interests’, ‘far superiod’ for Iraq than model contract proposed by Baghad federal oil ministry,” 7/1/08

Reuters, “Iraq MPs say no-bid oil deals could be in doubt,” 7/3/08
- “Iraq opens oilfields to long-term contracts,” 6/30/08
- “US says Iraq may drop short-term oil deals,” 8/17/08

Robertson, Campbell, “Iraq Poised to Revive Oil Contract With China,” New York Times, 8/19/08

Salaheddin, Sinan, “Iraqi cabinet OKs deals with oil giants,” Associated Press, 3/5/08

Special Inspector General for Iraq Reconstruction, “Quarterly and Semiannual Report to the United States Congress,” 7/30/08

United States Government Accountability Office, “Progress Report: Some Gains Made, Updated Strategy Needed,” June 2008

Walt, Vivienne, “What Oil Companies Will Get in Iraq,” Time, 6/20/08