greg muttitt presentation - Carbon Web · PLATFORM Production sharing agreements Surrendering Iraq’s resource sovereignty? Greg Muttitt, PLATFORM Presentation to al-Kindi Society,

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Production sharing agreementsSurrendering Iraq’s resource sovereignty?

Greg Muttitt, PLATFORM

Presentation to al-Kindi Society, 22 July 2006

Oil in Iraq


115 billion barrels of known reserves – 10% of world total.

70% of GDP; 95% of government revenue.

71 discovered oilfields, of which only 24 have been developed.

Oil law, 2006


• Now being written, to be voted on by Parliament by end 2006.

• To allow contracts to be signed with “the largest companies”

- most likely production sharing agreements.

• 4 (small) PSAs have already been signed by KRG.

Oil law – external influence


• Timescale set by IMF

• US Embassy officials and contractors major input into drafting

• Draft reviewed by US Energy Secretary last week on visit to Baghdad

• IMF to review draft in September.

What is a PSA?


• A contract between a multinational oil company and a host government, in which the corporation provides capital investment, in exchange for operational control over an oilfield, and access to a share of the revenues from it.

• Lasting usually 25-40 years - and sometimes indefinite.

• Precise terms depend on negotiation between state and company.

• A change of language, describing the state as "owner" and the foreign company as "contractor", but in practice mostly equivalent to concession agreements.

PSA - language


“A convenient marriage between the politically useful symbolism of the production-sharing contract (appearance of a service contract to the state company acting as master) and the material equivalence of this contract model with concession/licence regimes in all significant aspects … It gives to the government political and to the company commercial satisfaction. The government can be seen to be running the show - and the company can run it behind the camouflage of legal title symbolising the assertion of national sovereignty.”

- Professor Thomas Wälde, University of Dundee

Consequences of PSAs for sovereignty


1. Fixed economic terms

2. Loss of control of depletion rate

3. Undermine ability to legislate

4. Status of other laws

Fixed economic terms


• Product of negotiation

• Reflect bargaining power at time of signing

- Security situation and political risk

- Weakness of institutions

- Occupation

Lessons from former Soviet Union


“"We have drawn a conclusion that PSA terms for Sakhalin-2 are decidedly not beneficial for Russia."

-Mikhail Beskhmelnitsyn, auditor, Accounting Chamber of Russian Federation, January 2005

“I have these discussions with Kazakhs, with Azeris, ‘oh, well maybe you know we gave too much away, maybe we didn’t get enough government take, maybe the foreign investors aren’t paying fair share’… But if you turned the clock back to 1994 in Kazakhstan, and think about the significant political risk, not to mention the technical and economic risk…”

- Dan Witt, International Tax & Investment Center

Lessons from Iraq’s history


• 1925 concession contract signed when government was new and weak, and Iraq was occupied by Britain.

• Terms of contract reflected the weakness of the Iraqi state, but lasted for much longer.

• Unfairness of terms became clear over subsequent decades, but could not be changed.

Loss of control of depletion rate


• One of the most important economic decisions in an oil-dependent country.

• In a PSA, either left for foreign company to decide or specified in contract.

Impact on OPEC


• cf Algeria, Nigeria – OPEC members with major foreign company involvement.

Iraq cuts back on any oil production in public sector

Iraq weakens OPEC by overproducing

Iraq leaves OPEC

Undermine ability to legislate


Stabilisation clause:

Guarantees the investor’s profits against any change in future legislation.

New laws do not apply to PSA area

Foreign company compensated for loss of profits

INOC carries cost of change

Stabilisation clauses


• Loss of sovereignty

• Disincentive against regulation.

“A chilling effect on human rights”- Amnesty International

Over-riding existing legislation


• Contracts internationalised, through reference to bilateral investment treaty.

• Acquire status of a treaty – over-ride all other laws (except constitution) in case of conflict.

Over-riding existing legislation


Baku-Tbilisi-Ceyhan pipeline:

“BP representatives are requesting the Georgian Government to violate our own environmental legislation”.- Nino Chkhobadze, Georgia Environment Minister, November 2002

Minister could not change routing, because pipeline agreements made all other laws irrelevant.

Political costs of PSAs


• Impact on security situation.

• Impact on corruption.

• Impact on democracy.

Advantages of PSAs


1) Foreign company provides capital investment

2) Foreign company provides technical expertise

3) Foreign company takes risks

Useful where development costs high.

Useful where fields are marginal or complex.

Useful where high-risk exploration is required, or where profits are marginal.

What is done elsewhere?


Source: International Energy Agency

%age of world reserves by industry structure:

Iraq investment needs


• Technical expertise through technical service agreements.

• Investment required to develop major oilfields: up to $4 billion per year. 3 options:

1) Finance from government budgets

2) Borrow from international debt markets

3) Use foreign companies.

Range of contract options with less sovereignty implications than PSAs: eg buybacks, risk service contracts.

Conclusions


• Iraq’s oil sector needs investment – but should be cautious about what form it takes, and on whose terms.

• It is for the Iraqi people to decide how the oil sector should be structured.

• Before making such decisions, a thorough public debate and consultation is essential.

• It would be a mistake to negotiate long-term commitments at a time of weakness.

Recommendations


Long-term contracts should not be considered until Iraqi oil industry capacity has been rebuilt and Iraq is fully sovereign (ie foreign troops have left)

In the meantime, the priorities should be:

a) security,

b) fighting corruption, and

c) rehabilitation and development of known oilfields, using Iraq’s own resources.

greg muttitt presentation - Carbon Web · PLATFORM Production sharing agreements Surrendering Iraq’s resource sovereignty? Greg Muttitt, PLATFORM Presentation to al-Kindi Society,

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