Preliminary assessment of the GSDPC
Ahmed M. Jiyad
Norway
Email: mou-jiya@online.no
This assessment is
primarily of and based on the text of “Model Gas Service Development and
Production Contract “GSDPC” dated May13, 2009”, presumably finalised by the
Iraqi Ministry of Oil-MoO, and was communicated to me on 19th June
2009 by colleagues within the internet circle.
I should emphasise at
this stage the following:
1- The GSDPC is supposed to be about gas fields,
but most provisions therein are more related to Oil fields than to Gas fields.
This render the text of GSDPC weak in substance and structure to be a base for
“contractual obligations”;
2- The format of the document is in MS Word, and
not in Pdf. I assume, therefore, the text as real, original and authentic
unless MoO confirm otherwise;
3- My opinions expressed hereunder, can be
interpreted to be applied to both type of fields- oil and gas- unless specified
differently;
4- The date the GSDPC was finalised was May13, 2009.
Had MoO made it available for evaluation then, many concerned Iraqi oil
specialist we could have studied it carefully and provide constructive opinions
on it;
5- The prime purpose and intention of this
assessment is to provide professional, comprehensive and impartial assessment
of the contract but I will be guided by the Constitutional core principles of
“ownership” and “best interests of the Iraqi people”
In this assessment I
will focus on the main issues following the structure of the contract.
I have argued during
the last two years that the “executive branch”, i.e., the Council of Ministers
and MoO are not constitutionally empowered to “inter into force” such
contracts, and only the Parliament/ Council of Representatives-CoRs has such
authority. Legal opinion submitted recently, 4th June 2009, to CoRs
on this matter by three Iraqi Lawyers is in line with such understanding.
Therefore, the coming
into force of this contract, and any other contracts, by an approval from CoM
pursuant to Article (§) 39 of the contract can be contested on grounds of
illegality and unconstitutionality.
Furthermore, the fact
that the English version of the contract prevails over the Arabic version in
case of dispute, pursuant to § 2.1 and § 35.1, would make any approval by CoM,
based on the Arabic text of the contract and/or Arabic correspondent, by MoO to
CoM, related to seeking such approval, was NOT constructed on the effectively
governing text, and thus could be ill-informed, by will or negligence or
incompetence.
Conclusion: CoM
should read and read carefully the English text of the contract before
authorising any body to “sign” it. Similarly, CoR should read and read
carefully the English text of the contract before “approving” it, and “enacting”
it by Law.
The duration of the contract could be open-ended but not
less than 20 years, pursuant to § 3.2, expandable by 5 years, pursuant to §
3.3, and extendable in consequence of different circumstances mentioned in §
12.2 (f); § 12.6; § 31.4 and § 41.17.
The word “basic”, in § 3.2, could imply minimum, and thus
the period could be 20+. Also “basic” cannot be interpreted as “up to” which
has been reported in the media.
While recognizing the usefulness
and needs to have a reasonable duration to attain the stated production
capacity objectives the duration of 20+years is indeed unjustifiable, and
should not be acceptable especially for the discovered oil fields included in
the 1st bidding round, especially when compared to the range of less
than 9 years for such service contracts.
Conclusion: the period
of 20+years envisaged in the contract are too long for Service Contract, and
with the possibility of unfavourable conditions as spelled out hereunder of
this contract such along period could
work against the best interest of the Iraqi people.
In addition to the
unusually and unnecessarily long duration, the contract offers, in § 2.3, the
contractor the
“exclusive right to negotiate a separate agreement to explore for and develop
the undiscovered potential reservoirs”.
Apart from the likelihood that such exclusive rights could
prolong the presence of the “contractor” for similar duration as discussed
above, such formulation of “exclusive right” could generates three detrimental
consequences. First it weakens the negotiation position of the Iraqi side to
deal with these “undiscovered potential reservoirs” during the 6 year period
mentioned therein; second, it will “tied-up” more of the petroleum resources, and
third, the “rights exclusivity”, in addition to long duration looks like “book
reserves” of the Production Sharing Contracts/Agreements PSCs/As type.
There is no strong and convincing justification to offer the
contractors with such “exclusive right” to future discoveries. If need be and
in order to provide incentives for the contractors, then the said article be
redrafted to eliminate such exclusive right.
Conclusion: the contract
should not offer explicitly and implicitly any “exclusive right” to any IOCs to
future discoveries.
According to § 4.2 the signature bonus
paid shall be considered Supplementary Costs and shall be recovered by 20
Quarterly payments beginning with the ninth Quarter following the Quarter of
the Effective date (§ 19.2 (a)) and shall bear
interest at LIBOR plus one percent (1%) (§19.2 (e))
The wisdom of the decision to convert signature
bonuses into interest-bearing loan is questionable since it causes serious
financial losses and tantamount to giving away what should have been financial
revenue and, moreover, create financial burden with its own complications and
sever detrimental ramifications on the economy at large.
As it is well known the bidding fees, signature
bonuses, and various rental fees are among the “pre-production” fiscal terms in
petroleum upstream contracts between the host government and the IOCs. The
purpose is to allow a host government to earn revenues even before
discovery/production occurs. Furthermore, and to maximise such revenues also,
it can be used as a bidding parameter when there are many competitors.
It is worth mentioning in this juncture that
record high signature bonus of $2.2 billion was paid by the Chinese company
“Sinopec” in 2006, to outbid its competitors to get the rights for oil and gas
exploration in two blocks in Angola.
Two exploration blocks, with all risks involved,
in Angola generate $2.2 billion in signature bonus revenues, while 6 producing
oil fields (currently producing over 2 million b/d, according to MoO “Information
on Contract Areas”) and 2 known gas
fields in Iraq generate nothing in signature bonuses! But this is not the end
of the story.
It is therefore, very regrettable that instead
of including signature bonus among the bidding parameters that could have generated
financial gains to Iraq at this financially critical time, MoO not only gave
them away but converts them into debt.
And this takes me to the second issue, the
interest rate on the recoverable signature bonus.
The rate of interest at LIBOR plus one percent (1%)
should not have been accepted even considered let alone accepted for the
following reasons:
First, we are dealing
with IOCs not bankers or short terms trade suppliers. IOCs, should be more than
happy to have an access to lucrative business opportunities with significant
strategic worth and implications;
Second, the margin of
(1%) over LIBOR is very high, and thus unacceptable indeed. During the worst
time of the 80s we accepted to pay such a margin for tow occasions only, but
not related to “project financing”, and we suffered a lot from that until Iraqi
negotiators managed to reduce it much lower than that.
Third, the LIBOR
itself is not suitable as interest rate threshold and it generates uncertainty.
Today it might be low but 7 years ahead it could go up and thus could to heavy
financial burden;
Fourth, considering
the recent decision by CoM to seek “deferred payment” possibilities to finance
projects, offering LIBOR plus one percent (1%) in oil and gas contracts sets
dangerous presidence and could either de-rail these “deferred payment”
orientations or make them very costly.
Conclusion: The rate of interest at LIBOR plus one
percent (1%) on signature bonus is totally and emphatically unjustifiable, and
if need be these signature bonus should be interest-free.
Many provisions in the
contract would vest major decision making powers in the hands of the Operator,
the Contractor, the Joint Operating Company-JOC, Join Management Committee-JMC
and Board of Directors-BOD, with regards to matters related to Work programmes,
Budgets, all types of Development Plans (§ 9; 11; 12 and 13), without specific
reference to MoO.
In all these matter the
MoO has absolutely no role to play. This could very well lead to weakened
national control regarding approvals of Work programme, Budget, Development
Plans, and thus weakening any potential for national petroleum policy and
management of the petroleum sector.
Furthermore, this
contravenes most related provisions of the draft Federal Oil and Gas Law-FOGL.
If and when this FOGL is enacted there will be very serious conflicts between
the provisions of the contract and FOGL. (See also, The financial interests of
the IOCs hereunder)
National sovereignty
regarding, for example, any production management and for whatever reasons will
be restricted by the provisions of (§12.5 (d); §12.6 and §19.7). This should be
rejected since government curtailment of production for whatever reason is an
act in and for the national interest.
The Contractor, under §9.11, have the right to review previous commitments made by National Oil Company-NOC (and
for that mater SOC, NOC and MOC in other contracts) and may terminate them.
On financial maters the possibility of breaking-down or splitting
major contract into many sub-contracts would be suffice to avoid any approval
from higher level in the hierarchy. The Operator, for example, can avoid the
approval by JOC according to (§9.19
c(i)); JOC
can avoid the approval by JMC or BOD according to (§9.19 c(ii)); and JMC or BOD can avoid the approval by NOC according to (§9.19 c(iii)). The amounts involved in these
three levels are $20, $30 and$50 millions.
Furthermore, the legal
nature and character of JOC is not well explained in the main body of the
contract. Will it be established and function pursuant to the Iraqi Private
Company Law?
These financial matters
related to contracts wards suffer from serious oversight gap that could results
in significant financial implications, which eventually could shoulder the
Iraqi side with heavy burdens. Yet, MoO has no say in such contracts at these
three levels of decision making.
Conclusion: the contract comprises many provisions capable of
restricting, eradicating and weakening the role of any federal or national
entity or authority in its pursuit to develop national petroleum policy,
exercise sovereignty or financial oversight.
Maters related to “Valuation of
Petroleum” (§18) could leads in the
Contractor’s interference in SOMOs
pricing mechanism and procedure (§ 18.3), or
requires SOMOs involvement in the
substantive and verification purposes for deemed value of gas (§ 18.4). Worst still the contract even make it
mandatory on SOMO, to accept the cooperation of the Contractor in matters of
particular domain of SOMO, pursuant to § 18.5, and the cost of such participation are to be
considered “Petroleum Cost”.
The issue of payment in
cash or in kind is relevant matter here as well. The options of payment in cash
or kind, in oil, should remain always as an option for the Iraqi side to decide
at any time it sees fit, and thus (§19.3) is not acceptable and thus should be
amended accordingly. The same applies to (§19.8)
If all contractors
given such privilege and opportunity to involve them with SOMOs work then SOMO
will not continue to exists, and this is further testimony that these contracts
would dismantle national sovereignty slowly but surely.
Conclusion: the role
and function of SOMO could be seriously hampered and malfunctioned by the
privileges given to the contractors under these contracts. All provisions of
particular reference to SOMO should be redrafted in such a way that SOMO, not
the contractor, should have the prerogative to decide matters relating to SOMO. Furthermore, all payments, as a basic rule,
should be an option and at the discretion and election of the Iraqi concerned
side.
Remuneration fee is a
major cost item, which has direct implications of field development capital requirements
and production cost of petroleum. The Remuneration Fee per Barrel of Fuel Oil Equivalent shall be
determined on the basis of the R-Factor according to (§19.5(d)).
However, while we could
accept the “Remuneration Fee Bid-RFB” as the base when R-factor is less than
(1.0) we could pose the following questions: what are the justification of
these high percentages, 80 % (as cap)
down to 30% (floor), which they could result in higher remuneration fee? Why
not having, for example, 50% (as cap) and 15% (as floor)? The second question
is why these percentages were not used as “bidding parameter”? Had MoO used
them used as bidding parameters then IOCs would compete on Remuneration Fee Bid
(RFB) and the reductions on it as function of the R-Factor. Substantial savings could be made had we
adopted this alterative method. Finally, the 8 oil and gas fields offered in
this bidding round have different potentials. The Minimum Plateau Production
Target (MPPT/bd) varies between 220,000 b/d for Bai Hassan oilfield to
1,750,000 b/d for Rumaila oilfield. It could have been much better and more
rewarding for Iraq had MoO adopted differentiated approach depending on the
potential of each field.
Conclusion: method
used for remuneration fee is not adequate and could leads to Iraq losing
significant financial sums, in comparison with alternative methodology of
differentiation based on the field potential on one hand and use two, instead
of one, bidding parameters.
Service fee is another
major cost item in these types of contract. Provisions in this contract
relating to invoicing these fees and other fees cause serious concern.
The date of submission
of an invoice should not be consider as the date of entitlement, rather the
date of final approval after due verification, in accordance with sound and
acceptable accounting procedure, should be taken as the date of entitlement.
Accordingly §19.8 is not correct and has to be drafted accordingly. The same
applies to similar matters throughout the contract.
Another provision
obligates NOC to pay any costs, expenses or fees as reported and invoiced by the
Contractor even when NOC dispute
all or any of these costs, expenses or fees. NOC can use dispute settlement
mechanisms, mentioned in the contract to settle the matter (§20.8)
This is rather
unreasonable since the Contractor can invoice any amounts and NOC has to pay it
regardless of its objection. What if the arbitration or expert opinion came in
favour of NOC years later? Matters related to when and how the contractor
reimburses NOC and whether the contractor pays interest on the amount involved
etc is not addressed. This requires serious revision and redrafting of (§20.8). The same applies to similar matters
throughout the contract.
Conclusion: Book
keeping, accounting procedure, auditing requirements, financial reporting and
all related maters in the contract has to be reviewed professionally and
carefully.
The contract in its §29.4 provide protection for any “change to the Law, , or by
revocation, modification, or non renewal of any approvals, consents or
exemptions granted to Contractor, , in order to maintain Contractor's financial
interests under this Contract reasonably unchanged.”
This is stabilization
or pre-emptive regulatory capture clause and could have devastating recourse
effects with substantial financial on the Iraqi interests. With contract
duration of 20+ years any government decision or legal instrument over this
long period could affect the financial interest of the contractor one way or
the other. Therefore, the final cost of the contract will depend entirely on
the number and magnitude of claims that could be made by the contractor and the
outcome of the arbitration process.
Conclusion: this is
very serious clause with highly detrimental consequences on Iraq. Deleting this
clause is priority, or redrafting it to reduce its impacts to the absolute
minimal.
The Impact on
Iraqi companies and entities.
The contract mandates
the contractor and the operator to use the principle of “competitive basis”
with those
available in the international market
regards local goods and services (§ 30)
Emphasising
competitiveness would undoubtedly end the prospects of any development in local
industries and service providers and could de-link the upstream oil sector from
the rest of the economy. This could have, also, direct detrimental consequences
on oil-related companies both public and private and thus weakening them and
the prospects of their development. Through income factor effects, the
competitiveness practises would exacerbates the “Dutch disease” impacts on the
national economy.
The contract, though,
provide limited possibilities in supporting Iraqi entities, such as date processing or
laboratory examination or analysis
(§ 14.3 & § 14.5), but no specific actions were mentioned.
In development
terminology the backward and forward linkages of the upstream oil sector will
be degraded contributing to imbalanced and enclaved local economy. If all contracts
in 1st and 2nd bidding rounds do the same then the
negative impacts expand from local to national level.
Conclusion: the contract could weaken existing
oil-related Iraqi companies and hinder the development potential of new ones,
thus limiting the sustainable development local communities and national
economy.
Assignment and Pledge of Rights
The contract through a very complex article (§ 28) gives the contractor and, for that matter, all foreign
partners the possibility of assigning and pledging their rights. This is
subject to a written approval by NOC.
The implication of this article is similar to the justification given
for “booking reserves” under PSAs, and such understanding is substantiated by
the length of the contract.
Conclusion: Article 28 could produce a “booking reserves” effect,
therefore NOC should be extremely careful and should consult legal expert
before giving any written approval pursuant to this article. It is much better,
though to delete this article all together.
Though the contract envisages under (§ 26.2) the establishment of TTSF. The Fund shall also be used for
supporting oil and gas related technology and research including the
establishment or upgrading of research institutes inside the Republic of Iraq.
The Fund payment shall not be recoverable as Petroleum Costs (§ 26.3).
This is true, however, this expense is included as Expenditure for purposes of
determining the R-Factor (§19.6 (ii)), and the
Remuneration Fee is a function of the R-factor.
Conclusion: the TTSF
which appears to be unrecoverable could be recoverable partially. Therefore,
deleting (§19.6 (ii)) would make TTSF fully unrecoverable. Specific reference to
Iraqi Universities and related academic entities should be incorporated here.
Ø
Employment issues
Iraqization programme should be more assertive (§9.21 and §26.2);
Ø
Matters related to
JMC (§13), needs clarification
regarding the 4th member, location of meetings, time-limit for
sending documents to JMC members; quarterly meetings;
Ø
Annual reports by
the Contractor
and Operator (§5 ) should be more
comprehensive to include other important issues such as environmental
incidents, progress in Iraqization programme, etc;
Ø
Site inspection (§16)
this could affects the purpose, conduct and the outcome of the inspection to
begin with;
Ø
§18.7 needs clarification something missing
(multiplying by what?);
Ø
There are many
inaccurate cross referencing to articles;
Ø
CBI should be
consulted regarding (§21.3) concerning payment in foreign currency for
good and services acquired inside Iraq.
Ø
(§ 24.4) is unacceptable especially in case of “Gross Negligence or
Wilful Misconduct”;
Ø
Force Majeure. This
implies these (security conditions in Contract Area, the political and security
conditions generally prevailing in the Republic of Iraq) are Force Majeure
in any other days after the date of signing (§31.5)
Ø
Contractor’s office in Baghdad is an obligation on NOC why? (§36.2);
Final conclusion:
considering the above and their possible implications it seems this contract
and all other contracts related to 1st bidding round do not and
could not deliver the best interest for the Iraqi people.
Ahmed Mousa Jiyad,
Norway.
22nd June
2009.