Tag Archives: contracts

Tullow sues Heritage – Uganda pays the price; court papers published for $300m oil trial

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Guestblog by Taimour Lay, Former Platform researcher, Uganda and DRC. Download the full court papers (30 megabytes)

A court case in London between Tullow and Heritage will reveal much of what went wrong in the battle over Uganda’s oil.

It is a long way from the shores of Lake Albert to the new commercial court building in central London, from fishermen and farmers in poverty, the heat and dust of Kaiso-Tonya, to £500-an-hour barristers and the concrete cold of a British autumn.

"Royal Courts of Justice" - London

But on Friday 18 November Tullow and Heritage, former oil exploration partners in Uganda, began their preparations for a $313 million legal fight. The case is about Uganda’s oil, Uganda’s tax laws and, ultimately, Uganda’s politics, but it will be decided by an English judge in an English court.

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Gulfsands ends payments to Assad’s cousin – but continues supporting Syrian regime with $8 million every week

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Documents revealed by the FT amid concerns raised by Avaaz show that

Gulfsands Petroleum, the London-listed oil and gas company, agreed to give a share of profits from its production activities in Syria to a company controlled by Rami Makhlouf, the first cousin of Syrian president Bashar al-Assad.

The company has also paid more than $1m in fees to Ramak, the Makhlouf family’s holding company, for services connected with its operations in the country.

Facing increasing public attention over its close relationships with the Syrian regime, Gulfsands today released details of its payments and engagement with Rami Makhlouf. This includes the 5.7% Al-Mashrek shareholding in Gulfsands, rental fees for an office in Damascus, and payments under the Ramak Services Agreement.

Ramak was apparently hired to “provide advice and to assist in identifying, evaluating and pursuing E & P opportunities in Syria, including in connection with the successful public tender for Block 26″. This is interesting, as Ramak is a holding company known best for its duty free stores, not for its expertise in the oil industry. However, the company is known for winning public tenders in Syria. Ramak was added to the Treasury Department’s Blocked Persons List precisely because of Makhlouf’s use of “access to high-level Syrian Government insiders to enrich himself at the expense of the Syrian people”.

Gulfsands claims now to have suspended all payments to the Makhlouf interests after EU sanctions imposed in May 2011. This is possible, but begs the question of why the company claimed in July 2011 that “business as usual” continued in Syria, with no reference to a severance of relations with a key partner. Today’s public statement came only in the context of increased questions in the media, undermining Gulfsands’ claims to be acting responsibly.

Today’s news release also gives the impression that Gulfsands has been complying with both EU and US sanctions:

“Gulfsands notes that the US and EU have imposed a number of sanctions against Syria and various named individuals and organisations. Gulfsands is fully compliant with all applicable sanctions”

This is a clever dodge – note the use of the word “applicable”. US sanctions are not applicable to Gulfsands – because it moved its headquarters from Houston to London. This enabled the company to continue payments to Ramak until now.

Under pressure, Gulfsands has distanced itself a little from Rami Makhlouf. But the company is pressing ahead with its record extraction levels. PLATFORM’s calculations show that Gulfsands is paying the Syrian regime between $4.5 million and $8.4 million in revenue and oil – every week. This provides Assad’s dictatorship a key capital lifeline to continue its attacks on the uprising.

The secret renegotiation of BP’s Iraqi oil contracts

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During the second half of 2009, Iraq held two auctions of its largest oilfields, awarding them to multinational companies such as BP, Shell and ExxonMobil to operate under 20-year contracts. Between them the oilfields account for over 60% of Iraq’s reserves. The contracts were service contracts rather than the companies’ preferred production sharing agreements, which had been proposed for Iraq but rejected as giving too much away.

Media reports of the auction focused on the headline remuneration fees. These sounded so low – between $1.15 and $5.50 per barrel – that many commentators questioned the profitability of the deals. But as always in oil contracts, the devil is in the detail. And whereas the auctions were billed by the Iraqi government as among the world’s most transparent contracting processes, this briefing reveals what subsequently happened behind closed doors to make the contracts much more attractive to the multinational companies, at the expense of the Iraqi people.

The first contract awarded, for the Rumaila field in southern Iraq, was privately renegotiated between the Iraqi government and the winning BP/CNPC consortium for more than three months after the auction. PLATFORM has obtained the renegotiated Rumaila contract, and can reveal its contents for the first time. The report “From Glass Box to Smoke Filled Room – How BP secretly renegotiated its Iraqi oil contract, and how Iraqis will pay the price” looks at this contract and finds that the terms changed significantly from the published model contract on which the auction was based.

Download the report ‘From Glass Box to Smoke Filled Room’ here.

Download the original contract here.
Download the leaked contract here.

And also have a look at the webpage for the book ‘Fuel on the Fire – Oil and Politics in Occupied Iraq’ here.

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Oil activist in DRC slams repression & Perenco secrecy during interview

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Pastor Jacques Bakulu has been campaigning against oil companies operating in western Congo for over 20 years. The secretive Anglo-French company Perenco took over Chevron’s concession in 2004 and claims to be producing 25,000 barrels a day. None of its four contracts are publicly available. In February this year Perenco were once again accused of pouring toxic waste into the Atlantic.

There are other companies looking to exploit onshore and offshore fields in the next few years, including UK-registered Surestream. On the other side of the country, two unknown companies have just been granted a license to explore at Lake Albert and the government has plans to carve up the massive cuvette centrale in the search for more oil.

Bakulu has witnessed at first hand DRC’s first foray into oil production and worries that Bas-Congo’s experience will be replicated across the country.

What are communities angry about in Bas-Congo?

Lack of jobs. Always. We know the oil is there and for twenty years it has been coming out of the ground but there are no jobs and there is no development. There is no electricity in Moanda [the capital of the province]. The environment is being damaged every day. Gas flaring happens all the time and the air is polluted. And it’s all kept secret.

What have you seen of the contract Perenco is operating under?

We have never seen the concession contract! We are still trying to see it after all these years. But we know the type of contract is the first mistake. With the concession arrangement the government only receives tax, we don’t know the real amount of oil and the company says they have no obligations to the people. We have always asked ministers to change the contract to a Production Sharing Agreement (PSA). We’d have more control that way. But the problem remains that we still don’t have an oil law! It’s with Parliament only now. And the government is incapable of making contracts and negotiating.

DRC does not have a national oil company; not really. Cohydro trades, that’s it. That’s why all our technicians are in Cabinda or Angola. We need to build expertise.

A PSA would not necessarily be that much better, depending on the terms. Many PSAs are actually thinly disguised concession agreements.

Well, I once said to Perenco, ‘We want a PSA’ and they said to me, ‘Sure, we have no problem with that, we and the government will have the same rights as now. It’s no different!

How do people protest?

It’s difficult because there is so much poverty. Also, oil is offshore as well as onshore. Our organisation CEPECO is always with communities seeking to build awareness and encourage opposition. There have been many demands for jobs. People have blocked roads for a day and the technicians have not been able to get to their platforms. In January 2010, in Boma people protested inside an installation itself demanding work. The company actually invited people inside for a meeting but when they got in they were put in cars and taken to the police. 16 people were arrested.

Do people also protest specifically about the environmental damage?

Yes, they do. But people do want the oil to be produced. I can’t be against oil completely. We need it. It’s the only way out of poverty for Bas-Congo because we have nothing.

This interview was conducted by Taimour Lay with Pastor Jacques Bakulu in Kinshasa in May 2010.

Wikileaks cable shines light on ENI corruption in Uganda; Heritage offered to pay bribes in Congo

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• SECRET US CABLE SHINES LIGHT ON ENI CORRUPTION IN UGANDA
• HERITAGE OFFERED TO PAY BRIBES IN CONGO

‘’If Tullow’s allegations are true – and we believe they are …”
US Embassy, Kampala, 17 December 2009

A secret United States diplomatic cable (below and here) published by Wikileaks last week has exposed the real politics of oil in Uganda, confirming that the Americans believed that corruption was endemic at the highest level of decision-making. The December 2009 report sent by the US embassy in Kampala confirms that:

- The Americans believed the allegations that Italian oil major Eni was trying to bribe its way into Uganda’s oil fields in late 2009 by making payments through the security minister (and ruling party secretary-general) Amama Mbabazi , using a holding company, TKL Holdings
- Tullow believe Tony Buckingham’s Heritage Oil – the very company it was partnered with -had also ‘compensated’ Ugandan politicians in order to facilitate a deal with Eni and assist Heritage’s exit from the country
- Heritage also offered to ‘take care’ of Congolese officials on behalf of its partner Tullow to get exploration moving on the other side of the lake

The cable, which largely reports a conversation between Tullow Vice President Tim O’Hanlon and the US Ambassador Jerry Lanier, was written at a crucial time: Heritage was seeking to sell its Lake Albert oil licenses to Eni; its then partner Tullow wanted them too. The three-way tussle resulted in weeks of secret negotiations in Kampala in which senior politicians lobbied on behalf of different corporate interests and money was widely rumoured to be changing hands.

Platform was handed a Ugandan intelligence document in January 2010, two months after the US cable was sent, outlining the ENI bribes – naming Mbabazi, the use of TKL Holdings, the role of frontmen Mark Christian and Moses Seruje, and the presence of Eni ‘broker’ Oded Mayer in Kampala.

No concrete evidence ever emerged. Heritage ultimately sold to Tullow, not Eni, and skipped the country without paying $400m in capital gains tax on the $1.3bn it received in the deal. Mbabazi remains one of the most influential of the National Resistance Movement old guard, close enough to President Museveni that few think he would have coordinated bribes without his boss’ sanctioning. It was reported at the time that Eni were furious that their payments had yielded no result.

Key questions remain:
- On what basis did the US embassy believe the allegations to be true? Had they conducted their own investigation and why were their concerns not shared?
- Why was evidence not shared with the US Securities and Exchange Commission, which was then investigating ENI for violating the Foreign Corrupt Practices Act for bribery in Nigeria?
- Do the United States or other embassies have evidence of other payments made by oil companies in Uganda? Has Tullow sanctioned bribes or has it turned a blind eye to payments facilitated by its new partners, Total and CNOOC?
- Why have repeated Freedom of Information requests made by PLATFORM to the United Kingdom Foreign and Commonwealth Office produced no answers when these matters are almost certain to have been under discussion? Especially given that the US cable documents O’Hanlon specifically asking the US Ambassador to work “in concert with the British High Commissioner” to raise concerns over the Heritage-ENI sale.

The leaking of the cable has caused a storm in Uganda, with just weeks to go before the Presidential election and with Tullow still fighting for government approval for production to start alongside Total and the China National Offshore Oil Company. The decisions taken in 2009/2010 – and the process by which Tullow ultimately won the battle of the companies – are still cloaked in secrecy.

ENI have issued a spluttering denial. ”ENI denies the serious allegations which are completely without foundation and has instructed its lawyers to initiate legal proceedings to compensate for any damage caused to the company’s reputation,” a spokesman said.

Meanwhile, Tullow’s O’Hanlon wrote to President Museveni two days ago, denying the conversation with the American Ambassador and desperately trying to smooth out the situation. Tullow are already unpopular with Ugandan politicians – these revelations so close to the election will sour relations further.

He wrote: “No doubt you have been made aware of the illegal theft of confidential communications from various US Embassies around the world including that in Kampala and the publication of selected and often doctored elements of these on the internet.

In one such release, I have been mentioned as accusing your Honourable Ministers ONEK and MBABAZI of involvement in corruption during a meeting I had with the US ambassador last year. This is absolutely false.

Of course, I never made such a claim to the US ambassador but merely discussed with him at our meeting in December 2009 the detailed stories published in the previous week’s local press and the associated rumors circulating in Kampala at that time. I have no evidence to present implicating the Honourable Ministers in corruption and have no reason to believe that the rumors sweeping Kampala at the time were actually true.

I can assure Your Excellency that we will continue to monitor these matters closely and will work in any way we can with the two Ministers involved to help clear their names. I remain available in Kampala and welcome any advice you may have to offer in this regard and sincerely regret this entire unhappy episode.

Respectfully Yours

Tim O’HANLON 
Vice-President, African Business

HERITAGE OFFER TO PAY BRIBES IN DRC

The cable also quotes O’Hanlon bemoaning the company’s lack of progress with its license on the other side of Lake Albert, in the Democratic Republic of Congo.

‘O’Hanlon said TULLOW’s exploration efforts on the DRC side of Lake Albert are hampered by TULLOW’s refusal to pay off key Congolese officials, including President Laurent Kabila. O’Hanlon added that Heritage recently offered to help TULLOW “take care” of problems on the Congolese side in order to begin exploration. TULLOW refused, according to O’Hanlon.’

Platform was handed a letter in Kinshasa in May 2010 confirming that Heritage had handed over legal “rights of negotiation” to its partner Tullow two years before. The two companies had signed a disputed Production Sharing Agreement in 2006 (leaked to PLATFORM and available here) and had been lobbying for exploration to start since then. The cable now reveals that Heritage did in fact still have a presence in Kinshasa which it was willing to exert on behalf of its partner – but behind the scenes. In the cable, O’Hanlon says Tullow refused this help. But Congolese are still asking:

- Why were Heritage and Tullow granted their original PSA in 2006? What payments were made then?
- If Tullow was officially handling negotiations with Kinshasa in 2009, why were Heritage still in a position to ‘take care’ of problems?
- Does Tullow now admit that it believed its DRC partner was prepared to offer bribes?
- Did the British Embassy in Kinshasa know about Heritage’s proposal to pay bribes? If so, why have the FCO, UK Trade & Industry and BIS not restricted their diplomatic support for the company, including its operations in Iraq?
- If the British Embassy was not informed by Tullow about Heritage’s offer, will it now – in light of these revelations – re-evaluate its close relationship with Tullow?
- Given the allegations about Heritage’s willingness to pay bribes, has the British Embassy in Kinshasa now passed all relevant information to the Serious Fraud Office in London?

The leaked cable only provides a first, partial picture of how companies and governments are colluding at Lake Albert to enrich themselves and the lengths oil executives will go to in order to secure contracts. Many other examples of corruption are well known to local journalists and communities at Lake Albert but cannot be proved without tracing the money or catching intermediaries red-handed. In many cases, evidence will only emerge much later, or when particular politicians and companies fall out of favour. But we are already getting glimpses of the dirty deals and dishonest politics that lie behind the promises and public relations. Heritage have left Uganda and DRC with $1bn in their pocket. But the nature of their relationships in both countries must still be the subject of urgent investigation.

This blog piece was written by Taimour Lay, Former PLATFORM researcher, Uganda and DRC

For more information on the history of Tullow and Heritage in Uganda and DRC, see PLATFORM’s reports athttp://www.carbonweb.org/uganda and http://www.carbonweb.org/drc



PLATFORM reveals Congo oil contracts that threaten resource wars and $10 billion rip-off

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Tullow & British Embassy push disputed deal that could cut Congo’s revenues by $10 billion

Confidential oil contracts held by UK companies Tullow and Heritage in the Democratic Republic of Congo were leaked today, revealing the danger of economic rip-off and rights abuses in one of Africa’s most unstable countries.

The Production Sharing Agreements (PSAs) are accompanied by a legal analysis, ”A Lake of Oil – Congo’s controversial contracts compromise rights, environment & safety”, published in English and French by PLATFORM in partnership with the African Institute for Energy Governance (Afiego).

As the dispute between Tullow/Heritage and the South African-led Divine Inspiration consortium over lucrative oil licences on Lake Albert comes to a head [2], the contract terms have been released for the first time. [3] PLATFORM’s analysis compares revenues delivered by two competing contracts, revealing that:

* Both Tullow/Heritage & Divine/H Oil’s contracts guarantee excessive profits, at the expense of Congo’s poor
* Tullow’s contract terms reduce the Congolese take by around 15%, compared to Divine’s.
* If recognised, Tullow’s contract will cut Congolese government revenues by over $10 billion – a figure equivalent to the country’s entire national debt. Tullow and the British Embassy in Kinshasa have been lobbying hard for these contract terms. This represents a significant transfer of wealth from some of Africa’s poorest to British and Irish investors.

In ”A Lake of Oil”, PLATFORM also raises concerns about:

* Co-operation between oil companies and military groups and the likelihood of escalating resource-driven war in eastern Congo.
* The legal rights granted to flare natural gas
* The complete absence of penalties for environmental damage
* The ‘stabilisation clause’, which will restrict DRC’s ability to improve its environmental protection and human rights standards in the future

Alfred Buju, head of the Justice and Peace Commission in Ituri, DRC, at the heart of Exploration Block 2, said: “This report reveals the contracts that will affect our communities and raises serious concerns about who will benefit from oil extraction in Ituri. We need the government and international companies to be honest and clear – will our environment be protected? The history of natural resources in eastern DRC makes us worry that oil will lead to more conflict.”

PLATFORM Campaigner Mika Minio-Paluello said, ”The reality is that extracting Congolese crude will escalate resource wars, transfer wealth from Congo’s poorest to London’s richest, create new health problems for local communities, increase corruption and pollute the land, water and air. It is up to social movements and civil society to create the pressure to defend rights, livelihoods and Congo’s rich environment.”

PLATFORM Researcher Taimour Lay in Bunia, Congo DRC, said “The confidential documents we have published make clear that the British government and oil companies have been lobbying for terms which leave Congo significantly worse off than another contract already on the table. This shows a wanton prioritisation of profit and British control of African resources over all else.”

Taimour Lay added, “Tullow’s statements demonstrate strength in corporate responsibility rhetoric. Yet their practice here on Lake Albert tells a different story – one of arrogance, environmental damage, collusion in secrecy and indifference to human rights abuses.”

Nigerians challenge Shell over meddling in internal affairs

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After Shell’s highly-publicised “threat” to leave Nigeria given a current Petroleum Bill being discussed in Parliament that would re-assess excessive corporate revenues, Environmental Rights Action based in Benin City and Port Harcourtresponds:

“The foremost environmental rights advocacy organization in Nigeria, Environmental Rights Action (ERA), has accused the Anglo-Dutch oil and gas major, Shell, of not being a good corporate citizen in the country.

ERA claimed in a statement on Monday that the warning by Shell that Nigeria’s declining oil output will be aggravated if the Petroleum Industry Bill (PIB) is passed into law was an attempt to frustrate the move by the country to bring sanity into the sector and recover some level of sovereignty in relation to the resource.

The oil majors prefer to perpetrate the existing unfair relationships, remain unaccountable, operate in impunity and evade taxes and public scrutiny. “Shell’s ploy should be disregarded by the Federal Government”, ERA said in a statement wired to our correspondent by its Media Officer, Mr. Philip Jakpor

The group’s position is coming in the wake of widely publicized reports in the media indicating that Shell is suspending new investments in Nigeria, especially in the deep offshore where the PIB stipulates conditions that will benefit the nation.

Along with the American oil giants, ExxonMobil and Chevron, Shell has voiced its opposition to key sections of the PIB which ERA says allow the Federal Government to renegotiate old contracts, impose higher costs on oil companies and reclaim oil fields that oil companies are yet to explore.

“The companies will also be forced to give back unused land from existing oil licenses to provide new investors an opportunity to operate in Nigeria”, the group said.

Ann Pickard, Shell Regional Executive Vice President last week in Abuja warned that proposals to impose tougher terms on oil companies as part of the sweeping reforms in Nigeria’s oil industry designed to reverse years of stagnation would be ruinous. This has always been her sign song and is nothing new.

But ERA is depicting the warnings as “sinister, selfish and well-timed” and targeted at forcing the Nigerian government to back down on legislations that will guarantee improved revenue, transparency and accountability.

“We refuse this attempt to meddle in our internal affairs. Shell’s sloganeering on Nigeria’s declining oil output and the sustained publicity blitz on plans to divest from the country is a calculated arm-twisting tactic to get the Nigerian government to back down on laws that will make the oil companies accountable to the Nigerian people,” said ERA Executive Director, Nnimmo Bassey.

assey posited that: “Oil majors operating in Nigeria’s oil industry have always been economical when it comes to disclosure about oil revenues, gas flaring and environmental justice in host communities. ERA strongly commends the courage of community people, civil society groups and some of our lawmakers at the National Assembly whose resilience in reversing the status quo has resulted in this attempt to blackmail the nation economically.”

According to Bassey, Niger Delta communities are particularly irked that there is a conscious attempt by Shell and a profiteering cabal in the oil industry to ensure that provisions in the PIB do not allow for communities to be notified of risks or seek their endorsement of environmental management plans.

“The National Assembly must refuse this distraction and speedily pass the PIB, taking into account civil society inputs reinforcing sections pertaining to Health, Safety, Environment and community participation. This section must reflect clearly and unequivocally that without the communities, environmental plans are superficial and defensive only of the interests of business concerns.”

He explained that ERA’s position also aligns with that of well-meaning Nigerians who have said there is also need for redrafting of the section on Environmental Remediation Levy which requires states and local governments to pay one and 0.5 per cent of their annual derivation allocation into a Remediation Fund to restore the environment in cases of damage resulting from sabotage since oils spill are not as a result of sabotage, but a result of negligence of the oil companies.

“We totally reject Shell’s media whitewash on declining oil revenues. The PIB should be expeditiously passed into law and applied in operations in the oil and gas sector. This will help ensure better environmental protection, better revenue returns and accountability. For us, the PIB is primarily about the management of existing fields while Nigeria rapidly moves to a post-petroleum regime with a halt to new oil field activities that have so far been the alchemists pot brewing corruption, violence and unimaginable degradation of the Niger Delta,” Bassey stressed.”

PLATFORM leaks Uganda’s oil contracts – not such a rosy deal after all

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Held secret by the Ugandan government and oil companies Tullow Oil and Heritage Oil, PLATFORM today is revealing the terms of the contracts for oil operations by Lake Albert on the Uganda-Congo border, and their economic implications.

For the first time, one of Uganda’s Production Sharing Agreements is available to the public to read, after a leaked copy was placed online. PLATFORM’s analysis of the contract reveals that the repeated claims by the Ugandan government and the oil companies that Uganda has received a very good deal and the best in the region are not only a fiction, but were reliant on the real terms of the contracts being kept secret. While the contracts will deliver vast profits to Tullow Oil and Heritage Oil, the contracts will prevent the Ugandan people from receiving their due benefits. The terms of the contracts and the lack of openness are placing Uganda on a track set for the “resource curse”.

Download:

“A Bad Deal Made Worse – How the PSAs are ripping off Uganda” - PLATFORM’s preliminary economic assessment of the contract

(A full qualitative and quantitative analysis will follow at a later date)

Leaked copy of Heritage’s Production Sharing Agreement for Block 3A signed in 2004: Part 1 Part 2

Summary of “A Bad Deal Made Worse – How the PSAs are ripping off Uganda”

* There is currently no transparency over Uganda’s oil contracts, on the part of the Ugandan government or the foreign oil companies. This will prevent positive development outcomes while enabling corruption and environmental degradation on the part of the oil companies. Past experience indicates that without public debate and accountability, the “resource curse” is largely inevitable.

* The Production Sharing Agreements signed in Uganda do not represent the great deal publically claimed by the government. Internal figures modelled by the government indicate that the state will receive 67.5% – 74.2% of total revenue. A Credit Suisse analysis of Heritage Oil predicts government take of between 55% and 67%. PLATFORM’s assessment indicates the government will received between 47.4% and 79.5% of revenues, depending on the price of oil, size of fields, development costs and other factors. The highest figures will only be achieved if the government takes up the possible 15% state participation. These figures are all below the 80+% regularly trumpeted by the government and the oil companies.

* The contracts are highly profitable for the participating oil companies. In the most likely scenarios, Tullow Oil could make a 30-35% return on its investment. This represents a very high profit level for the oil industry, even for risky projects, and indicates excessive profit-taking at the expense of the host government. Even in the least promising (and less likely) scenarios, Tullow would received a 12-14% return – a comfortable profit margin.

* Compared to contracts in other countries, Uganda is receiving a worse deal. Modelling the same field under the terms of Heritage’s contract in Iraqi Kurdistan (a more dangerous environment) indicates that the Kurdistan Regional Government will receive a greater proportion of revenues than Uganda, while Heritage will receive a higher rate of return in Uganda.

* Uganda’s contracts fail to capture increased rent as the oil price rises. This is a major flaw, especially in light of the recent high oil prices. As prices rose through the 2000s, there was a recognition amongst producer governments that the state has a duty to its citizens to capture the rent from higher prices and that the private companies do not have a right to excessive profit-taking. As the oil price rises, the oil companies make a higher and unlimited profit. However, the state take plateaus at under 80%. Thus the oil companies will take close to one quarter of oil revenues, whether the oil price is $70 or $200 – raking in enormous profits.

* Most of the risks lie with the Ugandan state, not the private companies. Price risk lies primarily with Uganda, with the private companies virtually guaranteed a profit even at low prices. While project risk (eg increased costs) are shared between both, Ugandan revenues will fall significantly further if the project runs over-budget.

Iraq: New contracts will undermine Iraqi independence

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The mega-oil deals signed and pledged in Iraq in last week have been major news, marking another step by the oil majors back into a country that liberated itself from the “robbery and exhaustion practiced by the monopolistic oil companies” in 1972. But the full consequences of the agreements have been hard to untangle.

BP and Chinese CNPC last week signed the full contract to develop the Rumaila field, which was awarded to the consortium in July. Rumaila is a supergiant field, with 17-25 billion barrels of recoverable reserves – 3 times Azerbaijan’s total. BP’s contract pledges to increase Rumaila’s oil production from under one million barrels per day to 2.85 million. On 4th November, Exxon and Shell were awarded the right to develop West Qurna-1, proposing to raise extraction from 270,000 barrels a day to 2.35 million. Eni will similarly increase Zubair’s production from 200,000 barrels.

Iraqi Oil Minister Hussein Shahristani has been claiming victory in the negotiation battle, presenting an image of having withstood oil company demands (and US government pressure) for better terms. In July, Baghdad insisted that $2 was the maximum it would pay as a “remuneration fee” per barrel of crude extracted. Apart from BP/CNPC, all the oil companies walked away, grumbling that they deserve higher profits. Now they’re back, signing what appear to be the same contracts. E.g. Exxon/Shell’s fee for West Qurna-1 is for $1.90 per barrel.

However, there are various reports indicating that the terms were sweetened to tempt the oil companies back. Referring to Eni’s deal for Zubair, Carola Hoyos writes on the FT blog :

“Privately, oil executives say Iraq sweetened other fiscal terms that brought the entire project’s economics to about half way between the minimum Eni was willing to bid and the maximum $2 Baghdad was willing to pay during the June auction, in which every western oil company except BP walked away complaining about Iraq’s unrealistic terms. In June Eni was willing to accept no less than $4.80 a barrel. The new terms make the deal equivalent to the Iraqis paying about $3.80, one executive said.

Others claim that the oil companies had misunderstood the 35% corporate tax rate – that it only applies to the fee paid per barrel, not to net profits, thus improving their rates of return.

Either way, a recent interview with BP Chief Executive Tony Hayward in Petroleum Intelligence Weekly indicates that the oil companies will still be taking major profits from Iraq’s oil:

“Q. You’ve made a very bold move with the Rumaila contract in Iraq. Why did you go so low and isn’t the margin so small that it’s almost immaterial to you as a company?
A. It’s a 65 billion barrel oil-in-place field, the third or fourth largest in the world, of which 12 billion bbl have been recovered and we estimate there’s probably 20 billion bbl to be recovered — the range is probably 17 billion-25 billion bbl. Over the last five years we’ve worked with the South Oil Co. (SOC) exclusively, providing technical support to the field, so we know a lot about the reservoir. That’s the first thing — we understand the rocks. We are confident that the returns from this investment will be compatible with other opportunities in our portfolio. That means a 15%-20% return. […]
Q. A return of 15%-20% even with this fee-based structure of $2 per barrel?
A. Yes. It’s material because it’s a small margin times very many barrels. We are going to take the field from around 1 million barrels per day to nearly 3 million b/d, so 2 million b/d will be incremental production and that adds up to a lot — it’s material for BP.”

 

The interviewer was surprised at Hayward’s response, as a 10-12% rate of return provides comfortable profit levels. So 15-20% is not what you’d expect given the repeated complaints from Western oil companies and governments that Iraq wasn’t giving them fair terms. Furthermore, it reveals the greed behind the previous demands for $4 fees per barrel or Production Sharing Agreements and the lies spun in arguing that these were the minimum terms possible.

Interestingly, Hayward also points to something else important – that BP have been “providing technical support to the field, so we know a lot about the reservoir”. Greg Muttitt of PLATFORM warned about this in 2005, that Shell and BP were providing “technical assistance” for various fields to get access to all the geological data. By “understanding the rocks”, the companies are able to make a well-targeted pitch for the development licence and beat off competition.

However, the real clincher on why BP will be able to make such high profits is in Haywards’s next statement:

“The field is already in production. As you get cost recovery immediately you never have to make very large investments, so even to go from 1 million to nearly 3 million b/d the amount of capital we have to expose at any one moment is not very great as we’re getting our money back as production grows.”

 

 

Iraq’s oil, especially in mega-fields like Rumaila, is cheap and easy to get out of the ground. You don’t need to invest much to begin receiving large revenues in return. The current comparatively low level of output from these fields is due to the legacy of war and sanctions, which means that boosting production is simple. Former Oil Minister Esam Chalabibelieves that

“During the first months, BP and CNPC will not do much work, because they have to raise output in Rumaila by 10% in three years and that is an easy job for them. The first phase of the Rumaila contract does not need a lot of cash or much effort. South Oil Company did a good job recently, but BP and CNPC will collect the fruits.”

 
BP and CNPC are only committed to spending $300mn in the first 33 months, a small amount for oil majors and a very comfortable length of time in which to guarantee the production increase.

Hayward also inadvertently refers to an issue that has caused much opposition in Iraq:

”Now, people don’t really understand the contract and we haven’t sought to explain it because we haven’t signed it yet. When we have concluded it we will explain it to the investment community.

 

 

Hayward is focused on the investment community – BP’s true stakeholders. But it doesn’t seem to occur to him that the Iraqi people might want to understand a contract that governs 20% of Iraq’s proven reserves. With oil making up 95% of Iraqi government revenues, Rumaila alone could be responsible for one fifth of government income.

The lack of full transparency around the terms of the contract, including revenues and who controls development, undermine accountability of the Iraqi government and the ability of civil society to challenge problems with the contracts. This has led to opposition within Parliament, with MPs insisting that oil contracts require Parliamentary oversight. Noor Adin al-Hadyi, an opposition member of the Parliament’s oil and gas committee, said the committee could decide to take the issue to court to ask that the contracts be cancelled.

This licence round previously caame under major criticism from both the oil workers’ union and the management of the South Oil Company. The Iraqi Oil Ministry went as far as firing Fayadh al-Naama, head of the South Oil Company, in late July for opposing the current contracts.

As neither BP nor the Iraqi government have sought to explain the terms of the deal, it has been particularly difficult to assess the impacts on management and control over Iraq’s oil industry. Iraqi oil analyst Munir Chalabi has raised particular concerns over how the contract creates “field operating divisions” (FODs), which exist as legal entities and give BP/CNPC a major role in “their decision-making, control, management, development and operation of all the giant fields.” Chalabi feels that these FODs would also would “mean the fragmentation” Iraq’s North Oil Company and South Oil Company, which currently produce Iraq’s total of 2.4 million barrels per day. Having operated Iraq’s oil & gas fields through 30 years of sanctions and war and built up enormous experience, “their role will be reduced to no more than sub-holding companies for the giant oil fields, and limited in their management to distant and marginal fields.” The contracts undermine the national oil companies, creating greater pressures towards privatization, threatening a situation where Iraq is no longer able to produce its oil autonomously.

These fears about the carving up of the Iraqi oil companies appear to be confirmed by a further comment by Hayward:
“The model we have agreed with the Iraqis is to carve out of SOC [South Oil Company], which currently operates the field, the operating part for Rumaila. We are going to create a Rumaila operating company which will be principally Iraqi staff into which we are going to put BP technical specialists, much as we did in TNK-BP. So, sprinkle BP and CNPC technical specialists and then have the leadership populated between BP, CNPC and Iraq. It means we get an enormous amount of leverage from not having many people there. So we don’t have to deploy hundreds of people to Iraq. The model is exactly what we did with TNK-BP, particularly what we have done at Samotlor.”

So BP will maintain “an enormous amount of leverage”, while removing Rumaila from the existing Iraqi national oil companies. The state will only retain a minority 25% stake in the Rumaila operating company, down from an originally proposed 51%, leading to further marginalisation.

Hayward’s unfortunate example of TNK-BP formally operates as a private company pursuing corporate interests (of BP and its Russian oligarch shareholders), without regard for Russian public interests or needs. The arguments between BP and its rivals over control of TNK-BP can in large part be traced to the Russian shareholder’s unhappiness with the level of leverage available to London.

Hayward’s comment indicates that BP sees this model as a recipe for success. Increased leverage for BP means reduced leverage for Iraqi national oil companies, the Iraqi state, Iraqi workers and the Iraqi public.

The fact that these contracts are not Production Sharing Agreements is a testament to the successful campaigning and resistance on the part of the Iraqi oil workers and the international solidarity behind them.
However, in their current form, BP and Shell’s new deals signal a major threat to Iraq’s future ability to control extraction of its natural resources.

Iraqi Opposition to BP’s Rumaila Contract

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Iraqi oil workers have come out in strong opposition to BP’s new contract for the super-giant Rumaila oil field, saying they will not allow foreign oil companies

Signed in early July as part of the first bidding round for Iraq’s oil, the 20-year contract gives BP and Chinese oil companyCNPC significant control over production from Rumaila, which holds reserves of 17.8 billion barrels – more than twice Azerbaijan’s total, and over 10% of Iraq’s proven reserves.

Hassan Juma’a, president of the Iraqi Federation of Oil Unions (IFOU) said that: “We think that these contracts are illegal and illegitimate” and that “We oppose the position of the (Ministry of Oil) that signed the contracts, but we also oppose the position of the foreign companies that signed illegitimate contracts without looking for gaps such as the role of the oil union.”

Faleh Abood Umara, the General Secretary of the Union, said that the union: “will arrange protests and strikes if the foreign companies have entered Basra.”

Clear opposition to BP’s newly signed contract also came from the current and the past management of the South Oil Company, the Iraqi state company that currently produces from the field. They feel the Iraqi Oil Ministry could have focused on allowing the state companies to fix existing infrastructure to increase production, rather than being pre-occupied with opening up known fields to foreign oil companies.

Both the workers and the management are open to foreign oil companies playing a role in Iraq – but preferably as service contractors — providing technical experience while allowing Iraqis to control their own oil. Hassan Juma said: “What we want from the foreign companies is to give their efforts to serve the interest of the Iraqi people and not to just increase the oil production or develop the oil fields.”

Iraqi oil analyst Munir Chalabi has produced an analysis of BP/CNPC’s contract, concluding that while the 20 year technical service contract is not in itself privatization, it represents “a very dangerous move, leading to the dismantling of the Iraqi national oil and gas industries.”

Particular concerns include the “field operating divisions” (FODs), which exist as legal entities and give BP/CNPC a major role in “their decision-making, control, management, development and operation of all the giant fields.” Chalabi feels that these FODs would also would “mean the fragmentation” Iraq’s North Oil Company and South Oil Company, which currently produce Iraq’s total of 2.4 million barrels per day and employing 20,000 people. Having operated Iraq’s oil &gas fields through 30 years of sanctions and war and built up enormous experience, “their role will be reduced to no more than sub-holding companies for the giant oil fields, and limited in their management to distant and marginal fields.” The contracts undermine the national oli companies, creating greater pressures towards privatization, threatening a situation where Iraq is no longer able to produce its oil autonomously.

Chalabi argues that the question for those concerned with the impacts of privatisation of Iraq’s oil is not merely “will there be Production Sharing Agreements?” The signed and proposed contracts in the current bidding rounds are undemocratic, damaging to the rights of oil workers and undermine Iraq’s economic future. Chalabi argues that the “Heads of Agreement” which gave Shell a virtual monopoly over gas production in Iraq’s south is “as disastrous to the future of Iraq’s economy and political independence as any PSC contract, if not worse”.

Various oil producing countries have allowed foreign oil companies in after years of self-production — Russia, Azerbaijan and Algeria in the 1990s, Libya and Iran in the 2000s. However, Iraq’s attempts to sign 20 year contracts for 80 billion barrels of its reserves in less than a year is unheard of.